In AM 2024-002, released October 11, the IRS set forth its position that the section 246(b) taxable income limitations apply to the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) under section 250 and provided guidance on how to apply these limitations. The stated policy animating the IRS position is to ensure that taxpayers' unrelated deductions do not reduce FDII and GILTI inclusions (and the section 78 gross-up on GILTI inclusions), and thus "preserve[] taxation of FDII and GILTI inclusions at an effective rate calculated by reference to the statutory rate." Taxpayers with outsized unrelated deductions (e.g., U.S. losses) should evaluate whether the approach adopted by the IRS would limit their GILTI or FDII deduction in unexpected ways. 

Section 250(a) provides a deduction equal to 37.5 percent of a taxpayer's FDII and 50 percent of a taxpayer's GILTI inclusion and section 78 gross up (collectively, the section 250 deduction). As relevant here, section 243 provides a 65 percent deduction for dividends from corporations in which the taxpayer owns at least 20 percent (a 20%-owned corporation) and a 50 percent deduction for corporations in which the taxpayer owns less than 20 percent (a non-20%-owned corporation). Section 245 extends section 243 treatment to the U.S.-source portion of dividends from foreign corporations. The IRS advice memorandum sets forth a three-step process that applies for determining how these deductions may be limited based on taxable income. 

1. Under section 250(a)(2), the section 250 deduction may first be limited if the amount of GILTI and FDII inclusions exceed taxable income (computed without regard to the section 250 deduction). 
2. Next, under section 246(b)(3)(A), the section 250 deduction and the deduction for dividends from 20%-owned corporations may be limited if those deductions exceed 65 percent of taxable income (computed without regard to certain deductions, adjustments and carrybacks). 
3. Finally, under section 246(b)(3)(B), the section 250 deduction and the deduction for dividends from non-20%-owned corporations may be limited if those deductions exceed 50 percent of taxable income (computed without regard to certain deductions, adjustments and carrybacks). 

To the extent a limitation applies under section 246(b), the reduction is allocated pro rata among the relevant deductions based on the total amount of the deductions at issue. 

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

Caroline R. Reaves, creaves@milchev.com, 202-626-5939

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