IRS Form 8993: Understanding FDII and GILTI Deductions

February 13, 2025
IRS Form 8993: Understanding FDII and GILTI Deductions

Introduction


The Tax Cuts and Jobs Act (TCJA) introduced several international tax reforms that impacted U.S. corporations with foreign operations. Among them were two new provisions: the Foreign-Derived Intangible Income (FDII) deduction and the Global Intangible Low-Taxed Income (GILTI) deduction. IRS Form 8993 is used to calculate and report these deductions. This article explains how the form works, who needs to file it, and how these deductions influence a company’s tax obligations.

 

What Is IRS Form 8993?


Form 8993 is titled “Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).” It is used by domestic corporations to determine the allowable Section 250 deduction on:

  • Qualified FDII generated from the sale of goods or provision of services to foreign persons
  • GILTI that a U.S. shareholder includes in income from controlled foreign corporations (CFCs)

The form must be attached to the U.S. corporate income tax return (Form 1120) if the corporation claims either or both deductions.

 

Who Must File Form 8993?


Only domestic C corporations that are eligible for the Section 250 deduction are required to file Form 8993. These typically include:

  • U.S. parent corporations with foreign subsidiaries
  • Multinational businesses with sales to customers located outside the U.S.
  • Companies subject to GILTI inclusions from foreign-owned CFCs

Partnerships, S corporations, and individuals are generally not eligible to claim these deductions directly.

 

Understanding FDII


FDII provides a deduction for U.S.-based corporations that earn income from serving foreign markets. Qualifying FDII income includes:

  • Sale of property to foreign persons for use outside the U.S.
  • Provision of services to foreign persons or regarding property located outside the U.S.
  • Licensing or leasing intellectual property to foreign entities

The FDII deduction incentivizes U.S. companies to keep their valuable intangibles (e.g., patents, know-how) in the U.S. rather than shifting them offshore.

 

Understanding GILTI


GILTI is designed to capture income earned by U.S. shareholders from low-taxed foreign subsidiaries. It acts as a minimum tax on foreign earnings to discourage profit shifting. However, corporations can deduct a portion of this income under Section 250.

Key features of GILTI:

  • Applies to U.S. shareholders with at least 10% ownership in a CFC
  • Calculated annually based on the net tested income of all CFCs
    Allows a deduction (typically 50%) to reduce the effective U.S. tax rate on GILTI
     

Deduction Calculation and Limitations


Form 8993 includes complex formulas and requires detailed income classification. The deductions for FDII and GILTI are limited by:

  • The taxable income of the corporation (deductions cannot exceed this amount)
  • Potential adjustments under Section 163(j) for interest expense limitations
  • The corporation’s overall foreign tax credit limitation

For tax years beginning in 2025, the FDII deduction is generally 21.875% and the GILTI deduction is 37.5%, though these percentages may be subject to change based on legislative updates.

 

Importance of Accurate Filing


Because FDII and GILTI calculations are intricate and interrelated, errors in Form 8993 can lead to:

  • Overstated deductions and future audits
  • Underclaimed benefits and excessive tax payments
  • Disallowance of foreign tax credits if improperly coordinated

Proper filing also requires consistency with other forms such as Form 5471 (for foreign corporations), Form 8992 (for GILTI inclusion), and Form 1120.

 

Conclusion


IRS Form 8993 is a critical compliance requirement for U.S. corporations engaged in global operations. It enables eligible businesses to take advantage of the Section 250 deductions on FDII and GILTI, helping reduce the overall tax burden on foreign income. However, the complexity of the rules demands accurate reporting and strategic tax planning.

 

This article is written for educational purposes.
 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

 

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