Proposed section 250 regulations narrow FDDEI for certain asset sales

Section 250 and the new FDDEI property disposition exclusion

Section 250 permits a domestic corporation to claim a deduction equal to 33.34% of its foreign-derived deduction eligible income (FDDEI) (37.5% on foreign-derived intangible income, or FDII, for taxable years beginning before January 1, 2026). FDDEI generally consists of deduction-eligible income (DEI) derived from property sold to non-U.S. persons for foreign use or from services provided to persons, or with respect to property, located outside the United States. DEI is generally the excess of a corporation’s gross income, determined after excluding certain categories of income specified in section 250(b)(3)(A)(i), over properly allocable deductions.

As part of the OBBBA’s revisions to section 250, section 250(b)(3)(A)(i)(VII) now excludes certain property disposition income from DEI. In December 2025, the IRS and Treasury issued Notice 2025-78, which outlined the related rules expected to be included in future regulations and permitted taxpayers to rely on that guidance pending issuance of proposed regulations.

On Aug. 20, 2026, the Treasury Department and the IRS subsequently issued proposed regulations that largely adopted the framework outlined in Notice 2025-78, providing guidance on the scope of these exclusions, the types of property covered, and the transactions that constitute a sale or other disposition for purposes of the new rule.

With the statutory changes generally applying to dispositions occurring after June 16, 2025, the proposed regulations provide the first detailed roadmap for distinguishing between income that continues to qualify for section 250 benefits and income that no longer does.

Definition of sale or other disposition

The proposed regulations would provide a narrower definition of “sale or other disposition” for purposes of section 250(b)(3)(A)(i)(VII) than the broader sale concept used elsewhere in the section 250 regulations.

Under the proposed rule, the characterization of a transaction as a sale or other disposition would be determined under general federal income tax principles. A transaction characterized as a lease or license under general tax principles would not be treated as a sale or other disposition, even if it involves intellectual property or software.

Guidance on excluded property sales income

Under Prop. Reg. section 1.250(b)-1(h)(1), excluded property sales income would include income and gain derived from the sale or other disposition of:

• Intangible property, as defined under existing section 1.250(b)-3(b)(11).
• Other excluded property, meaning property that is not intangible property (as defined above) and that, in the hands of the seller, is or has been any of the following:
  • Of a character subject to depreciation under section 167
  • Subject to amortization
  • Subject to depletion under section 611

The proposed regulations adopt familiar tax concepts rather than creating a new property-classification regime for section 250 purposes.

In general, income from the disposition of intellectual property or productive business assets would be excluded from DEI, while income from ordinary sales activity with foreign markets may continue to qualify for FDDEI treatment.

Clarification on intangible property

Favorable treatment for copyrighted articles

The proposed regulations clarify that a copyrighted article would not be treated as intangible property for purposes of section 250(b)(3)(A)(i)(VII)(aa). The sale of software, digital media, publications, and other copyrighted products generally would not be excluded from DEI merely because the product embodies copyrighted content.

By contrast, a sale or other disposition of the underlying copyright or other section 367(d)(4) intangible property may give rise to excluded property sales income. A copyrighted article may still fall within the exclusion if it constitutes property subject to depreciation, amortization, or depletion in the hands of the seller.

Clarification of other excluded property

Previously depreciated assets may remain excluded after refurbishment or conversion

The proposed regulations indicate that property may constitute other excluded property even if it is no longer generating depreciation deductions because it has been fully depreciated or later converted to another use.

As a result, property that was previously depreciable in the hands of the seller would generally retain its status as excluded property even if it is later refurbished, remanufactured, repurposed or converted into inventory before sale.

Ordinary-course inventory excluded

One of the most taxpayer-favorable aspects of the proposed regulations is the clarification that property held solely as inventory generally would not be treated as other excluded property for purposes of section 250(b)(3)(A)(i)(VII).

The proposed regulations adopt an asset-by-asset approach that focuses on the character of the property in the hands of the seller, distinguishing ordinary-course inventory sales from dispositions of depreciable, amortizable, or depletable business assets. Inventory held for sale may continue to generate FDDEI, while income and gain from the disposition of productive assets used in the seller’s business are excluded from DEI.

The preamble of the proposed regulations clarifies that this approach is to preserve the intended availability of FDDEI for ordinary foreign-market sales while preventing taxpayers from claiming FDDEI benefits on the disposition of business assets that Congress intended to exclude.

Related-party anti-abuse rule

The proposed regulations contain a related-party anti-abuse rule to prevent taxpayers from avoiding the exclusion of depreciable, amortizable or depletable property through related-party transfers.

Under this proposed rule, property that was treated as "other excluded property" in the hands of a related party would generally retain that status when transferred to another member of the group if both of the following conditions are met:

• The transferee acquires the property in a carryover-basis transaction or series of transactions in which the property's basis is determined by reference to the transferor's basis
• A principal purpose of the transaction is to avoid having the property excluded from DEI under section 250(b)(3)(A)(i)(VII)(bb).

The example in the proposed section 1.250(b)-1(h)(4)(vi) illustrates that simply relabeling the property as inventory may not change the result. The proposed regulations may continue to treat the associated gain as excluded property sales income despite the property's inventory status at the time of sale.

Key takeaway: Primary considerations for businesses claiming FDDEI

The proposed regulations provide additional clarity on several questions raised by the OBBBA, but many businesses may still need to determine how the new framework applies to their specific transactions and revenue streams.

Although these proposed rules are not yet final, the statutory exclusion applies to covered sales and dispositions occurring after June 16, 2025. Taxpayers may continue to rely on the proposed regulations before finalization if they apply the rules consistently and in their entirety.

As a result, companies that currently benefit under FDDEI may find value in evaluating whether existing transaction classifications, forecasting assumptions and documentation processes remain aligned with the emerging regulatory framework. Taxpayers should consider:

• Identifying income streams that may be affected by the new exclusion
• Evaluating transaction classifications
• Quantifying the potential effect on future FDDEI calculations
• Reviewing related-party transactions in light of the proposed anti-abuse rule

Early analysis can help taxpayers assess whether existing documentation and reporting processes remain consistent with the proposed rules, evaluate the treatment of affected income streams and identify areas that may require further review as the regulations are finalized.