The U.S. Treasury and IRS have proposed regulations that quietly redraw the boundaries of a significant corporate tax benefit, excluding from eligibility the income companies earn when they sell intangible assets or depreciated property to foreign buyers. Effective for transactions after June 16, 2025, the rules reflect a deliberate policy choice: to keep the foreign-derived deduction eligible income incentive tethered to the export of manufactured goods rather than the offshore disposition of accumulated business assets. In the long arc of tax policy, this is a familiar tension — between rewa
IRS Clarifies Property Sales Exclusion from FDDEI Deduction in New Proposed Regulations
Property that has been fully depreciated retains its excluded status
Mark
Why did the government feel it needed to add this exclusion? The FDDEI deduction already existed.
Mimi
The concern was that companies were using the deduction in ways Congress didn't intend. They could sell off productive assets—machines, patents, copyrights—to foreign buyers and still claim the tax benefit. The government saw that as erosion of the tax base. If you sell a machine to a foreign customer, you're not really exporting American manufacturing capacity in the way the deduction was meant to encourage.
Mark
So the exclusion is meant to push companies toward selling inventory instead of assets?
Mimi
Exactly. The deduction works best when a company manufactures goods domestically and sells them abroad. That creates jobs here, keeps production in the U.S. Selling off a depreciated machine or a patent doesn't have the same economic effect. It's more like offshoring an asset.
Mark
The software rules seem oddly specific. Why the distinction between copies and copyrights?
Mimi
Because they're economically different things. A copy of software is a product—the customer gets a usable tool. The copyright is the underlying right to reproduce and distribute. If you're selling copies you manufactured, that looks like inventory. If you're selling the copyright itself, that's selling an intangible asset, which the government wants to discourage.
Mark
And the anti-abuse rule—is that really necessary? Would companies actually try that kind of maneuver?
Mimi
They would, and some probably already have. The rule prevents a company from moving depreciable property through related entities to change its character on paper. It's a way of saying: we're watching the substance of the transaction, not just the form.
Mark
What's the practical impact for a company with a diverse portfolio of foreign sales?
Mimi
They need to categorize every transaction carefully. Is this a sale or a license? Was this property ever depreciated? Who owns it now, and who owned it before? The regulations give examples, but real-world transactions are messier. A company selling to foreign customers will need to audit its practices.
O Pulso
- A major corporate tax deduction has been quietly narrowed, catching companies mid-transaction as new rules exclude intangible and depreciated asset sales from FDDEI eligibility for deals struck after June 16, 2025.
- The distinction between selling a software copy and selling the underlying copyright could mean the difference between qualifying for the deduction and losing it entirely — a razor-thin line that will demand precise asset classification.
- Anti-abuse provisions close a related-party loophole, tracking depreciable property through affiliated group transfers so that repackaging assets as inventory does not restore their deduction eligibility.
- Even fully depreciated assets — and property depreciated by prior owners in carryover-basis deals — remain excluded, as Treasury explicitly rejected requests for a remanufacturing exception.
- Companies may rely on the proposed rules now if applied consistently, with final regulations expected by January 4, 2027, and public comments due October 4, 2026.
The U.S. Treasury and IRS have proposed regulations that quietly redraw the boundaries of a significant corporate tax benefit, excluding from eligibility the income companies earn when they sell intangible assets or depreciated property to foreign buyers. Effective for transactions after June 16, 2025, the rules reflect a deliberate policy choice: to keep the foreign-derived deduction eligible income incentive tethered to the export of manufactured goods rather than the offshore disposition of accumulated business assets. In the long arc of tax policy, this is a familiar tension — between rewarding outward commerce and guarding against the erosion of the domestic tax base through sophisticated asset transfers.
The Treasury Department and IRS have issued proposed regulations that significantly narrow the scope of the foreign-derived deduction eligible income benefit, a tax incentive allowing domestic corporations to deduct a portion of income earned from foreign sales. Taking effect for transactions after June 16, 2025, the new rules exclude income from selling intangible assets — patents, copyrights, trademarks — as well as tangible property the seller has depreciated, amortized, or depleted. The policy logic is deliberate: Treasury wants the deduction to reward the export of U.S.-manufactured goods, not the offshore disposition of productive business assets.
The regulations introduce meaningful complexity around software. Copies of software sold to customers — whether downloaded or on physical media — are treated as "copyrighted articles" rather than intangible property, which opens a narrow path: if those copies were never used in the seller's own operations, the income may still qualify for the deduction. Selling the underlying copyright itself, however, is clearly excluded. Leasing or licensing software for a limited term is treated as neither a sale nor a transfer, so the exclusion does not apply at all.
Anti-abuse rules close a potential loophole by tracking depreciable property through related-party transfers within a modified affiliated group. A company cannot transfer machinery to a partnership, which passes it to a subsidiary holding it as inventory, and then claim the income qualifies for the deduction. If the transfer was made principally to avoid the exclusion, the property retains its excluded character regardless of how subsequent owners classify it.
The rules also reach further than many may expect: fully depreciated assets remain excluded, as does property depreciated by a prior owner in a carryover-basis transaction — even if the current owner never claimed a single depreciation deduction. Requests for an exception allowing remanufactured or repurposed property to escape the exclusion were explicitly rejected.
Companies may begin relying on these proposed regulations immediately, provided they apply them consistently. Final regulations are expected by January 4, 2027, with public comments due October 4, 2026. For any corporation with substantial foreign sales of tangible or intangible property, a careful review of transaction structures and asset classifications is now essential.
The Treasury Department and Internal Revenue Service have released proposed regulations that narrow the scope of a major corporate tax deduction by excluding certain property sales from eligibility. The rules, which take effect for transactions after June 16, 2025, target what the government calls foreign-derived deduction eligible income, or FDDEI—a tax benefit that allows domestic corporations to deduct a portion of income earned from selling goods or services to foreign customers.
Under the new framework, companies can no longer count income from selling intangible assets like patents, copyrights, and trademarks toward their FDDEI deduction. The same applies to sales of tangible property that the seller has depreciated, amortized, or depleted—think machinery, equipment, or other business assets that lose value over time. This represents a significant tightening of the rules. The policy rationale is straightforward: the government wants to discourage American corporations from offshoring productive assets that could otherwise generate taxable income domestically. By excluding these sales from the deduction, Treasury aims to keep the tax incentive focused on what it was designed to reward—the export of inventory and goods manufactured in the United States.
The regulations introduce several layers of complexity that will require careful attention from tax professionals. One critical distinction involves software. When a company sells copies of software to customers—whether through electronic download or physical media—those copies are treated as "copyrighted articles" under existing tax law, not as intangible property. This matters because it opens a narrow window: if the company never actually used those particular copies in its own business operations, the income from selling them does not fall under the exclusion and may still qualify for the FDDEI deduction. By contrast, selling the underlying copyright itself is clearly excluded. And leasing or licensing software for a limited period is treated differently still—it is not considered a sale at all, so the exclusion does not apply regardless of the asset's character.
The regulations also address a potential loophole. Companies cannot simply transfer depreciable property to a related party, have that party hold it as inventory, and then sell it to a foreign buyer to escape the exclusion. The IRS has built in an anti-abuse rule that tracks property through related-party transfers within what the regulations call a "modified affiliated group." If the property retains its depreciable character in the hands of the original owner, and the transfer was made with the principal purpose of avoiding the exclusion, the property keeps that character in the hands of the new owner. The regulations include a detailed example: a company transfers cars it held as depreciable property to a partnership, which then transfers them to a subsidiary that holds them as inventory. Even though the subsidiary treats them as inventory, the income from selling those cars remains excluded from the FDDEI deduction because of the anti-abuse rule.
One subtlety that may catch unwary taxpayers involves fully depreciated assets. Property that has been completely depreciated still counts as excluded property for purposes of this rule. The same applies to property that was depreciated by a prior owner in a carryover-basis transaction—the property retains its excluded status even if the current owner never claimed any depreciation deductions. The regulations explicitly rejected requests for an exception that would have allowed companies to reclassify previously depreciated property if they repurposed or remanufactured it into inventory.
The distinction between a "sale" and a "lease or license" presents another area where taxpayers must tread carefully. The regulations use a narrower definition of sale for this exclusion than the tax code uses elsewhere. Under general federal income tax principles, a transaction that transfers all substantial rights in an asset—such as an exclusive, irrevocable license for the remaining life of a copyright—constitutes a sale and triggers the exclusion. A nonexclusive, revocable, limited-duration license does not. This distinction creates opportunities for sophisticated structuring but also traps for the unwary.
Taxpayers can begin relying on these proposed regulations immediately, provided they follow them consistently and in their entirety. The IRS and Treasury expect to finalize the regulations by January 4, 2027. Comments are due 45 days after publication in the Federal Register, which means the deadline is October 4, 2026. For companies with significant foreign sales of tangible or intangible property, these rules will require a careful audit of transaction structures and asset classifications.
Citações Notáveis
Treasury and the IRS stated that this additional exclusion was intended to strengthen the policy objectives of the FDDEI regime, directed principally toward curbing erosion of the U.S. tax base through the offshoring of property that would otherwise generate foreign-market intangible income.— IRS and Treasury Department
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Economy & Finance