What Is IRS Form 8993?

From AIM Financial | Tax Preparation Services in Grand Rapids, Kentwood, Wyoming, and West Michigan

Businesses that sell products or provide services to customers outside the United States may qualify for a specialized federal tax deduction. Certain U.S. corporations with qualifying income from foreign markets may be eligible to claim a deduction under Section 250 of the Internal Revenue Code.

IRS Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI), is used to calculate the allowable deduction under the applicable rules.

Although the form’s name refers to intangible income, eligibility is not limited to companies selling patents, software, or other intellectual property. Qualifying income may also arise from certain sales of tangible products or services to foreign customers.

For businesses in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan, understanding Form 8993 may be important when planning international sales, reviewing corporate tax deductions, and preparing a federal business tax return.

Who Can Use Form 8993?

The deduction under Section 250 is generally available to eligible domestic C corporations and certain U.S. individual shareholders of controlled foreign corporations who make a Section 962 election.

The deduction is not generally available to S corporations, regulated investment companies, or real estate investment trusts in their capacity as domestic corporations under these rules.

A business does not automatically qualify simply because it sells goods overseas or receives income from an international customer. The company must meet the applicable requirements, calculate qualifying income, and maintain the necessary supporting records.

Partnership interests and foreign corporate ownership can introduce additional rules. Businesses should evaluate their entity structure before assuming a deduction is available.

What Is Foreign-Derived Deduction Eligible Income?

One important concept associated with Form 8993 is Foreign-Derived Deduction Eligible Income, commonly referred to as FDDEI under the 2025 instructions.

Generally, qualifying income may arise from:

• Selling property to a foreign person for qualifying use outside the United States.
• Providing services to a person located outside the United States.
• Providing services connected with property located outside the United States, when the applicable requirements are satisfied.

For example, imagine a qualifying U.S. corporation manufactures certain products in Michigan and sells them to an unrelated foreign customer for use overseas. Some income from that transaction may qualify, depending on the facts and documentation.

By contrast, a sale to a foreign intermediary does not automatically qualify. The company must establish the required foreign use, and special rules apply to related-party transactions.

The IRS also requires taxpayers to distinguish qualifying income from excluded income and to allocate relevant business deductions properly.

How Is the Deduction Calculated?

Form 8993 requires several calculations. Under the 2025 instructions, these include:

1. Determining Deduction Eligible Income, or DEI.
2. Calculating the Deemed Tangible Income Return, or DTIR.
3. Determining Deemed Intangible Income, or DII.
4. Calculating Foreign-Derived Deduction Eligible Income.
5. Determining the foreign-derived ratio and the amount of FDII.
6. Calculating the allowable Section 250 deduction, including applicable limitations.

These calculations can require corporate financial statements, sales records, customer information, expense allocations, and details about qualifying tangible business property.

The form also addresses the Section 250 deduction associated with certain GILTI inclusions. This portion may be relevant to eligible domestic corporations and qualifying individuals making a Section 962 election.

Because the calculations are interconnected, an error in identifying qualifying income or allocating deductions can affect the final deduction.

What Are FDII and GILTI?

FDII and GILTI are separate tax concepts that may be relevant to Form 8993.

Foreign-Derived Intangible Income (FDII) is a tax calculation intended to provide a deduction for eligible income connected with certain foreign sales and services. Despite its name, the calculation is not limited to income from legally defined intangible property.

Global Intangible Low-Taxed Income (GILTI) under the established rules is a separate inclusion associated with certain earnings of controlled foreign corporations. Eligible taxpayers may be able to claim a Section 250 deduction related to that inclusion.

The two calculations have different requirements. Businesses should not assume that qualifying for one automatically qualifies them for the other.

What Changed for Tax Year 2025 and Later?

Taxpayers should pay particular attention to the tax year being prepared because Section 250 rules have changed.

Under the IRS instructions revised in December 2025, the generally applicable deduction percentages for tax years beginning before January 1, 2026, were 37.5% for FDII and 50% for GILTI, subject to the applicable rules and limitations.

For tax years beginning on or after January 1, 2026, those percentages change under the law in effect for the relevant tax year. The December 2025 instructions identify the reduced percentages as 33.34% for FDII and 40% for GILTI.

The 2025 instructions also address legislative changes excluding certain gains from sales or dispositions of intangible property and certain depreciable, amortizable, or depletable property from the relevant income calculation when the transactions occur after June 16, 2025.

Because the IRS may publish revised forms and instructions, businesses preparing 2026 returns should confirm the final requirements for that tax year rather than relying solely on prior-year calculations.

What Records Should a Business Keep?

Businesses evaluating a possible Section 250 deduction should maintain documentation that supports both eligibility and the calculation.

Helpful records may include:

• Sales invoices and contracts for foreign customers.
• Customer location and foreign-use documentation.
• Records identifying related-party transactions.
• Business income statements and expense records.
• Information about tangible business property and adjusted tax basis.
• Partnership Schedule K-3 information, when relevant.
• Foreign corporation income calculations and related tax forms, if applicable.

The IRS has specific substantiation rules. A company should be prepared to explain why particular income qualifies and how the associated deductions were calculated.

Common Form 8993 Mistakes

Common errors include assuming every overseas sale qualifies, failing to document foreign use, incorrectly allocating business expenses, overlooking related-party rules, and applying deduction percentages from the wrong tax year.

Another mistake is assuming that Form 8993 replaces other required international tax forms. Depending on the company’s ownership and activities, additional reporting may be necessary.

Reviewing the calculation before filing can help identify problems and support the deduction claimed.

How AIM Financial Can Help Your Business

International sales can create valuable business opportunities, but they may also introduce specialized tax reporting requirements. Businesses in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan should understand the tax rules that apply to their corporate structure and foreign transactions.

Contact AIM Financial for assistance with business tax preparation and federal tax reporting. Our team can help you organize financial records, review relevant tax documents, and identify potential reporting questions that may need additional attention.

If your business sells products overseas, provides services to international customers, or has ownership interests in foreign corporations, bring your financial statements, sales documentation, and prior-year tax returns when discussing your tax preparation needs.

For official information, review the IRS resources for Form 8993 and the Instructions for Form 8993.

This article is for general educational purposes and is not individualized tax advice. Eligibility, calculations, and deduction limits depend on the taxpayer’s circumstances and the law applicable to the tax year.