The U.S. Department of the Treasury and the IRS have issued proposed regulations (REG-117130-25) under Internal Revenue Code (IRC) Section 250 addressing changes enacted by the One Big Beautiful Bill Act (OB3). The guidance provides rules for excluding income or gain from deduction eligible income (DEI) for purposes of calculating foreign-derived deduction eligible income (FDDEI) when the income or gain arises from sales or other dispositions of intangible property and other excluded property that is or has been subject to depreciation, amortization, or depletion in the seller’s hands. The proposed regulations are generally consistent with the approach adopted in Notice 2025-78.
Depreciable Property Sales May Be Excluded From FDDEI
The proposed regulations include a broad definition of “other excluded property” to include property that is or has been subject to depreciation, amortization, or depletion in the hands of the seller, even if fully depreciated. Thus, income or gain from the disposition of such property is excluded from DEI and, therefore, from the FDDEI calculation. The proposed regulations rejected the comment that such exclusion should be limited to recapture income.
The proposed regulations also provide that whether a transaction is a sale or other disposition is determined under general federal income tax principles. This includes deemed sales, transactions subject to IRC §367(d), and other deemed dispositions. A transaction characterized as a lease or license under general federal income tax principles is not treated as a sale or other disposition for this exclusion.
Insight from Forvis Mazars: Property in this category includes “property of a character subject to the allowance for” depreciation, amortization, or depletion. The proposed regulations also include an anti-abuse rule intended to prevent the avoidance of other excluded property status in certain related-party or affiliated group situations. Note that this rule requires that the property was acquired with “a principal purpose of avoiding” IRC §250(b)(3)(A)(i)(VII)(bb). Property that has always been held as inventory is not subject to this rule.
Intangible Property Sales May Be Excluded From FDDEI
For purposes of the proposed regulations, intangible property is defined by reference to IRC §367(d)(4). Dispositions of intangible property include deemed dispositions and transactions subject to IRC §367(d). However, leases or licenses of intangible property are not treated as sales or other dispositions. The guidance also confirms that a copyrighted article is not treated as intangible property. For example, sales of software copies are not treated as sales of intangible property.
Insight from Forvis Mazars: A key distinction is whether property is excluded as intangible property under §367(d)(4) or as other excluded property because it is or has been subject to amortization in the seller’s hands. This distinction may be important for software, copyrighted articles, and other property that can raise characterization questions.
FDDEI Remains Limited by DEI
The proposed regulations clarify aspects of the FDDEI deduction calculation arising from amendments to IRC §250, including that FDDEI remains limited by DEI.
Insight from Forvis Mazars: This clarification is significant because many taxpayers questioned whether a foreign-derived ratio remained necessary after the OB3 amended the FDDEI computation. The proposed regulations provide helpful guidance by clarifying the intended scope of those amendments and resolving uncertainty created by the statutory changes.
How Forvis Mazars Can Help
The effective date of the OB3 changes is for sales or other dispositions occurring after June 16, 2025. Thus, taxpayers filing their 2025 tax returns must account for such transactions. In addition, taxpayers affected by these changes should also consider the impact of how the new provisions in the OB3 and the new proposed regulations affect their IRC §861 expense allocation methodologies, which directly impact the benefit computed for FDDEI. The proposed regulations permit taxpayers to rely on the rules prior to finalization if applied consistently and in their entirety. Our international tax professionals can help assess the impact of these rules. Reach out to a professional at Forvis Mazars to learn more.