NCTI and FDDEI expense apportionment now follows a simpler rule for tax years beginning after December 31, 2025: interest expense and research and experimental (R&E) expenditures no longer reduce deduction eligible income or foreign source net CFC tested income. Proposed regulations REG-117273-25, published on September 11, 2026, explain how to apply that rule, and they would let more foreign tax credits through the limitation and preserve more of the export deduction.
For CPA firms, NCTI and FDDEI expense apportionment is a 2026 workpaper issue. The rules are still proposed as of October 2026, comments are due November 10, 2026, and taxpayers may rely on them for 2026 if they follow them in their entirety. This guide covers what the statute changed, what the proposed regulations add, and how the numbers move in a simple example.
The One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) rewrote the two main outbound and export regimes. Section 951A, once titled global intangible low-taxed income (GILTI), is now headed "Net CFC tested income included in gross income of United States shareholders". The foreign-derived intangible income (FDII) deduction in section 250 now applies to foreign-derived deduction eligible income (FDDEI).
The changes go beyond the names. The statute removed the qualified business asset investment (QBAI) reduction from section 951A and the deemed tangible income return from the section 250 FDDEI calculation. A US shareholder now includes its full net CFC tested income, and a domestic corporation's FDDEI is no longer reduced by a return on its tangible assets. If you need the inclusion mechanics and filing side first, our guide to GILTI and Form 8992 (now NCTI) covers what US owners of foreign companies owe.
The 2026 section 250 deduction rates, per the current text of section 250, are:
| Item | Tax years beginning before 2026 | Tax years beginning after Dec 31, 2025 |
|---|---|---|
| Deduction for FDII / FDDEI | 37.5% | 33.34% |
| Deduction for GILTI / NCTI and the related section 78 gross-up | 50% | 40% |
| Deemed paid credit for taxes on tested income (section 960(d)) | 80% | 90% |
| QBAI or tangible return reduction | Applied | Removed |
At the 21% corporate rate, a 33.34% deduction leaves an effective rate of about 14% on FDDEI, and a 40% deduction leaves about 12.6% on NCTI before credits.
Both regimes are computed on net income, so every dollar of expense that gets allocated to them shrinks the benefit.
On the export side, FDDEI is a share of deduction eligible income (DEI), which is gross income (minus excluded items) reduced by properly allocable deductions. Larger allocations mean smaller FDDEI and a smaller deduction.
On the outbound side, foreign tax credits for NCTI sit in their own section 951A category. The foreign tax credit limitation for that category equals the US tax on net foreign source section 951A category income. When US expenses such as interest or stewardship were apportioned against that income, the limitation shrank and foreign taxes were stranded. Section 904(c) does not allow carrybacks or carryovers of excess credits in this category, so a stranded credit is lost for good.
The 2026 deemed paid credit also carries a haircut. Under section 960(d)(1), a domestic corporation is treated as paying 90 percent of the foreign income taxes attributable to its tested income (up from 80%), while the section 78 gross-up still counts the full tax. So 10% of those foreign taxes are never creditable, and the limitation decides how much of the remaining 90% can be used.
Two OBBBA provisions drive the new apportionment rules, and both apply to tax years beginning after December 31, 2025.
Section 250(b)(3)(A)(ii). DEI is now gross income reduced by "expenses and deductions (including taxes), other than interest expense and research or experimental expenditures, properly allocable to such gross income." Interest and R&E simply drop out of the FDDEI computation.
Section 904(b)(5). For the section 951A category limitation, section 904(b)(5) sorts deductions into three groups:
Anything that would have landed on foreign source section 951A category income but for the second and third groups is allocated to US source income instead.
The statute left several gaps, and the proposed regulations fill them. The points below come from the Federal Register notice and the same text reprinted in Internal Revenue Bulletin 2026-40 at page 450.
Interest expense means any expense that is deductible under section 163, including original issue discount. R&E expenditures mean any amount deducted (including as amortization) in the year under section 174, 174A or 59(e)(2)(B). For FDDEI, the proposed rules also remove the old reference to section 163(j), since interest no longer enters the calculation. Our articles on the section 174 changes and the 2026 business interest expense limitation explain how those deductions are measured before apportionment.
Treasury and the IRS read "directly allocable" as requiring a closer link than "properly allocable." Under the proposed test, a deduction is not directly allocable if it is the type of deduction that can be apportioned by the relative value of assets or amounts of gross income. What matters is the type of deduction, regardless of how a particular taxpayer apportioned it.
The preamble gives examples. Stewardship expenses and legal expenses are not directly allocable, so they move to US source income. Section 986(c) foreign currency loss on a distribution of previously taxed earnings, when assigned to the section 951A category, is directly allocable and stays. A net operating loss deduction apportioned to the category under the existing rules is also treated as directly allocable.
Taxpayers first run the normal section 861 apportionment as if section 904(b)(5) did not exist. Only deductions that land on foreign source section 951A category income in that first pass get moved to US source income. R&E is a special case: the existing section 1.861-17 rules already keep R&E away from section 951A category income, and the preamble says Treasury and the IRS view that result as still correct.
Reallocated deductions count as US source deductions for all section 904 purposes. They can create or increase a domestic loss and an overall domestic loss, and section 904(b)(5) is taken into account when splitting a net operating loss into its separate limitation loss and US source loss components.
The figures below are invented to show the direction of the change. They assume a 21% rate, ample US source income, no section 250 taxable income limit, a 100% inclusion percentage, and apportionment on a simple 40% ratio for Part A. Real section 861 computations use asset values, gross receipts and other factors.
Part A: FDDEI. A domestic corporation has gross DEI of $10,000,000, of which $4,000,000 is gross FDDEI. It has $3,000,000 of other deductions, $1,000,000 of interest expense and $1,500,000 of R&E expenditures.
| If interest and R&E were apportioned | 2026 rule | |
|---|---|---|
| Gross FDDEI | $4,000,000 | $4,000,000 |
| Deductions apportioned at 40% | $2,200,000 | $1,200,000 |
| FDDEI | $1,800,000 | $2,800,000 |
| Section 250 deduction at 33.34% | $600,120 | $933,520 |
Leaving interest and R&E out raises the deduction by $333,400, which is worth $70,014 of federal tax at 21%.
Part B: NCTI foreign tax credit limitation. The same corporation owns a CFC with $6,000,000 of pre-tax income and $1,000,000 of foreign income tax, so tested income is $5,000,000. The section 951A category gross income is $6,000,000 ($5,000,000 of NCTI plus the $1,000,000 section 78 gross-up). The section 250 deduction is 40% of that, or $2,400,000. The deemed paid credit is 90% of $1,000,000, or $900,000. In the first pass, $500,000 of interest and $200,000 of stewardship expense would be apportioned to the category.
| Without section 904(b)(5) | With section 904(b)(5) | |
|---|---|---|
| Section 951A category gross income | $6,000,000 | $6,000,000 |
| Section 250 deduction | ($2,400,000) | ($2,400,000) |
| Interest and stewardship | ($700,000) | Moved to US source |
| Net foreign source income in the category | $2,900,000 | $3,600,000 |
| Limitation at 21% | $609,000 | $756,000 |
| Credit allowed (of $900,000 deemed paid) | $609,000 | $756,000 |
The limitation rises by $147,000. Under the 2026 rule, the credit fully offsets the $756,000 of US tax on the net category income. The remaining $144,000 of deemed paid tax, plus the $100,000 that the 90% rule never allowed, cannot be credited, and the category has no carryover.
As of October 2026, REG-117273-25 is a notice of proposed rulemaking. No final regulations have been published.
Treasury and the IRS also said separate guidance will update the rest of the section 250 regulations for other OBBBA changes, including the removal of the deemed tangible income return. Watch for that alongside the final version of these rules.
NCTI and FDDEI calculations feed several other deliverables. The corporation's year-end tax provision under ASC 740 needs the revised deduction and credit figures. The CFC data for tested income and foreign taxes comes from the same records used for Form 5471 filings. Because state income taxes on NCTI are one of the few deductions still allocated to the category, the state's position on conformity to the OBBBA affects the limitation too. Large groups should also check how their US results feed Pillar Two compliance calculations.
Start by rerunning 2026 foreign tax credit projections for any client with CFCs. Pull interest, R&E, stewardship and legal expense out of the section 951A category and move them to US source income, then check whether that creates a domestic loss.
Next, rebuild the FDDEI schedule without interest and R&E, and remove the deemed tangible income return. For exporters with large interest or research costs, the deduction may rise by more than the rate cut from 37.5% to 33.34% takes away.
Then decide on reliance. Using the proposed rules for 2026 requires applying the relevant set in full, so document that choice in the workpapers and note that final rules may differ. If a client has concerns about the "directly allocable" test or the R&E position, the November 10, 2026 comment deadline is the window to raise them.
What is REG-117273-25? It is a set of proposed Treasury regulations published in the Federal Register on September 11, 2026. They explain how to allocate and apportion deductions to deduction eligible income and to foreign source section 951A category income under the OBBBA changes to sections 250 and 904.
Are the REG-117273-25 rules final? No. As of October 2026 they are proposed, with comments and hearing requests due November 10, 2026. Taxpayers may rely on them for tax years beginning after December 31, 2025 if they follow the relevant set of rules in its entirety.
What are the 2026 section 250 deduction rates for FDDEI and NCTI? For tax years beginning after December 31, 2025, the deduction is 33.34% of FDDEI and 40% of net CFC tested income plus the related section 78 gross-up.
Which deductions still reduce foreign source NCTI for the foreign tax credit limitation? The section 250 deduction for NCTI, state and local income taxes imposed on NCTI or its gross-up, and deductions that are directly allocable, such as certain section 986(c) losses and net operating loss deductions apportioned to the category. Interest, R&E, stewardship and legal expenses move to US source income.
How much of the foreign tax on tested income is creditable in 2026? Section 960(d) treats 90% of the foreign income taxes attributable to tested income as deemed paid, up from 80%, and the credit is then capped by the section 951A category limitation.
Madras Accountancy supports US CPA firms with international tax workpapers, including expense apportionment schedules, foreign tax credit limitation calculations and the supporting CFC data. To talk through your 2026 NCTI and FDDEI work, contact our team.
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