A Guide to Foreign-Derived Intangible Income

Foreign-derived intangible income is any income that your company receives from exporting products tied to intangible assets like patents, trademarks and copyrights that are held in the US. The term was defined and explained further in the 2017 Tax Cuts and Jobs Act. While determining what foreign-derived intangible income (FDII) you need to count can be complex, MKS&H is here to simplify things as much as possible.

Foreign-Derived Intangible Income and Your Taxes

Congress lowered the tax rate for FDII in the aforementioned Act to 13.125% instead of the previous 21% rate. This move was designed to encourage companies located in the United States to export goods and services while still holding their intangible assets like patents in the US.

When calculating foreign-derived intangible income, you should keep in mind that it is designed to just be an approximation of your income from the international sale of goods and services that are related to US-based copyrights, trademarks and patents. In the Act, income beyond a 10% return on its depreciable physical property is taxed at a reduced rate.

What Income Is Excluded from the FDII Calculation?

The following categories are excluded from qualification as foreign-derived intangible income:

• Amounts that were included in gross income under §951(a)(1) (subpart F and investments in U.S. property)
• FDII that was included in gross income
• Financial services income
• Domestic oil or gas extraction income
• Foreign branch income

If you are unsure of whether or not your income is eligible, contact your tax professional at MKS&H.

What Does This Look Like?

For example, think of an American company that earned $100 million. This company had $200 million in tangible assets for the related tax year. 10% of $200 million is $20 million, or the deemed return on the company’s tangible assets. Next, the company would subtract that figure from the amount of income ($100 million) for a total of $80 million. $80 million would then be taxed at a reduced rate of 13.125% instead of the traditional 21% tax rate.

Currently, there are no plans to raise the foreign-derived intangible income tax rate until 2026. For the 2026 tax year, the rate will increase from 13.125% to 16.83%.

Prepare Your Foreign-Derived Intangible Income Taxes with Help from MKS&H

MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to explore the many tax benefits of investment properties and assess your real estate portfolio. Contact us today for a consultation.