IRS Proposes Deduction Divorce for Global Biz Taxes
Published Date: 9/11/2026
Proposed Rule
Summary
The IRS is proposing new rules on how companies split their tax deductions between U.S. and foreign income. This mainly affects businesses with foreign operations and those claiming special foreign income deductions. Comments are open until November 10, 2026, so companies should review these changes soon to understand any tax impacts starting in 2026.
Analyzed Economic Effects
7 provisions identified: 1 benefits, 1 costs, 5 mixed.
DEI and FDDEI Calculation Change
The proposed regulations say gross deduction eligible income (DEI) and gross foreign-derived DEI (FDDEI) are reduced by the expenses and other deductions that the taxpayer deducts in the taxable year. These rules apply for taxable years beginning after December 31, 2025, and taxpayers may rely on them for those years if they follow them in full.
Interest and R&E Exclusions from FDDEI
For purposes of computing deductions allocable to gross DEI and gross FDDEI, taxpayers must determine those deductions without regard to interest expense (any amount deductible under section 163) and research & experimental (R&E) expenditures (amounts deductible under sections 174, 174A, or 59(e)(2)(B)). This change is proposed to apply to taxable years beginning after December 31, 2025.
Special Rules for Section 951A Deductions
Under proposed Sec. 1.904(b)-4, deductions under section 250(a)(1)(B) and section 164(a)(3) (to the extent tax is imposed on net CFC tested income) are allocated or apportioned to foreign source section 951A category income, while interest expense and R&E expenditures are not allocated or apportioned to that category. Any other deduction is allocated to the section 951A category only if it is "directly allocable," and amounts that would otherwise have been allocated to the section 951A category are reallocated to U.S. source income.
Who Is Covered by These Rules
If you operate in foreign countries through foreign corporations or are a domestic corporation that claims the foreign-derived deduction eligible income (FDDEI) deduction, these proposed rules apply to you. Written comments are due November 10, 2026, and the rules are proposed to apply to taxable years beginning after December 31, 2025.
Net Operating Loss (NOL) Treatment Change
The proposed regulations provide that section 904(b)(5) is taken into account when determining the separate limitation loss (SLL) and U.S. source loss components of a net operating loss (NOL), and that an NOL component allocated and apportioned to foreign source section 951A category income is treated as directly allocable. These rules apply to taxable years beginning after December 31, 2025.
Recordkeeping and Paperwork Notes
The proposed regulations include recordkeeping requirements needed to allocate and apportion deductions to net CFC tested income and to deduction eligible income. Those recordkeeping requirements are treated as general tax records and are covered by existing OMB control numbers 1545-0047, 1545-0074, 1545-0092, and 1545-0123.
Small Business Impact Certification
The Treasury and IRS certified under the Regulatory Flexibility Act that these proposed regulations will not have a significant economic impact on a substantial number of small entities. The agency requests comments on that certification.
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Key Dates
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