IRS Issues Guidance on Foreign-Derived Deduction Eligible Income Changes in One Big Beautiful Bill Act

On December 4, 2025, the Internal Revenue Service (IRS) issued a long-awaited notice providing preliminary guidance addressing the scope of IRS Section 250(b)(3), which excludes certain income from the sale of intangibles from the determination of foreign-derived deduction eligible income (FDDEI). Notice 2025-78 provides guidance for sales and other dispositions occurring after June 16, 2025, pending the release of proposed regulations.

The One Big Beautiful Bill Act (OBBBA) added a new category of income to be excluded from the determination of deduction eligible income (DEI) pursuant to Section 250. Specifically, OBBBA excluded any income and gain derived from the sale or other disposition of intangible property and any other property of a type subject to depreciation, amortization, or depletion by the seller. The change to intangibles in OBBBA was meant to curb use of the deduction on income made from the sale of intellectual property (IP) overseas. The exclusion of intangible property from FDDEI closes that loophole.

Purpose and Scope of Notice 2025-78

• Notice 2025-78 was issued on December 4, 2025 to announce the IRS and Treasury’s intent to issue proposed regulations interpreting the newly added Section 250(b)(3)(A)(i)(VII), which was added by Section 70322 of OBBBA.

• This section excludes from DEI any income or gain from the sale or other disposition, including deemed sales such as certain outbound transfers under Section 367(d) of

  • Intangible property (e.g., patents, trademarks, know-how), and

  • Certain depreciable, amortizable, or depletable property, but only if the property was subject to those allowances in the hands of the seller.

Key Clarifications in the Notice

1. Definition of “Excluded Property”

   • Intangible property generally follows the statutory definition tied to Section 367(d)(4).

   • “Other excluded property” includes property that is or has been depreciated, amortized, or depleted by the seller.

   • Inventory and other property not subject to those allowances in the seller’s hands generally aren’t treated as excluded property under this rule.

2. Section 367(d) and Deemed Sales

   • The notice confirms that certain deemed transfers, like outbound transfers of intangible property under Section 367(d), are treated as sales or dispositions for purposes of the exclusion.

3. Anti-Abuse Rule

   • The IRS added an anti-abuse rule targeting related-party transactions designed to circumvent the exclusion—for example, transfers among related parties with basis carryovers that are intended purely to generate FDDEI benefits on later sales.

Effective Dates and Application

• The exclusions and the forthcoming proposed regulations apply to sales and other dispositions occurring after June 16, 2025.

• Taxpayers may rely on the notice for such transactions that occur before the proposed regulations are finalized, as long as the guidance is applied fully and consistently.

• Comments on the rules discussed in the notice must be submitted by February 2, 2026.

Implications for Taxpayers

Corporations claiming the Section 250 FDDEI deduction now need to assess whether any income or gain from asset dispositions must be excluded from the FDDEI base, reducing the amount of income eligible for the deduction. Planning and compliance considerations include:

• Whether property held by the taxpayer qualifies as intangible or depreciable/amortizable/depletable property subject to exclusion.

• How related-party transactions are structured to avoid triggering the anti-abuse rule.

• Adjusting tax models and documentation to reflect these exclusions before the proposed regulations are finalized.

FDDEI as a Planning Opportunity―Model, Model, and Model!

Notwithstanding the changes described above, OBBBA’s revisions to the foreign-derived intangible income (FDII) regime are largely welcome. In light of these developments, now is a great time for taxpayers to reevaluate their value chains and global operating models.

Taxpayers should strategically assess the optimal location of manufacturing activities, research and development functions, and intellectual property. In doing so, careful consideration must be given to transfer pricing implications and valuation issues, non-U.S. exit taxes, and other related tax consequences.

Equally important is understanding how the revised FDDEI rules interact with other provisions of the tax code. Taxpayers should model multiple scenarios to determine whether accelerating significant deductions into the current year—such as current and prior-year research and experimental (R&E) expenses/amortization deductions or bonus depreciation—produces a more favorable result than maximizing potential FDDEI benefits in the current year.

Ryan’s income tax professionals are well positioned to help taxpayers navigate these rules and the broader changes introduced by OBBBA as tax deadlines rapidly approach.

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.