NCTI and FDDEI Replace GILTI and FDII After the 2025 Legislation: New Deduction Rates, the End of the Tangible Asset Return and the 90 Percent Credit

For taxable years beginning after December 31, 2025, global intangible low-taxed income (GILTI) is called net CFC tested income (NCTI), and foreign-derived intangible income (FDII) is called foreign-derived deduction eligible income (FDDEI). The names changed because the formulas changed. The deduction under section 250 is 40 percent of NCTI, down from 50 percent, and 33.34 percent of FDDEI, down from 37.5 percent. The deemed return on tangible assets that used to reduce the inclusion is gone, and the deemed-paid foreign tax credit on tested income rose from 80 percent to 90 percent.

For a calendar-year corporation, 2026 is the first year on the new rules. The changes come from sections 70311, 70312, 70321, 70322 and 70323 of Public Law 119-21. This article covers each change, a worked computation, and what an international tax or ASC 740 workpaper needs to show.

What are the new section 250 rates?

Section 250(a)(1) now allows a domestic corporation two deductions:

• 33.34 percent of its FDDEI (section 250(a)(1)(A)). The prior rate was 37.5 percent.
• 40 percent of the NCTI amount included under section 951A, plus 40 percent of the section 78 dividend attributable to that amount (section 250(a)(1)(B)). The prior rate was 50 percent.

The 2025 amendments to rates and terminology apply to taxable years beginning after December 31, 2025 (section 70321(b)).

Section 11(b) sets the corporate rate at 21 percent. A 40 percent deduction leaves 60 percent of NCTI taxable, so the rate on NCTI before foreign tax credits is 21 percent x 60 percent = 12.6 percent. A 33.34 percent deduction leaves 66.66 percent of FDDEI taxable, an effective rate of about 14.0 percent.

How did the NCTI computation change?

Section 951A(a) requires each U.S. shareholder to include its net CFC tested income in gross income. Under section 951A(b)(1), NCTI is the excess of the shareholder's pro rata share of the tested income of each controlled foreign corporation over its pro rata share of tested loss.

Tested income (section 951A(b)(2)(A)) is a CFC's gross income, without regard to five categories, less the deductions (including taxes) allocable to that income under rules similar to section 954(b)(5). The excluded categories are:

1. Items described in section 952(b)
2. Gross income taken into account in determining subpart F income
3. Gross income excluded under section 954(b)(4)
4. Dividends from a related person under section 954(d)(3)
5. Foreign oil and gas extraction income under section 907(c)(1)

The act struck former subsection (b), which defined GILTI and the net deemed tangible income return, and redesignated subsection (c) as (b). In practical terms there is no longer a reduction for a net deemed tangible income return. A CFC with large depreciable foreign assets now includes all of its tested income, where before part of it was sheltered. The amendments to section 951A apply to taxable years beginning after December 31, 2025 (section 70323(c)).

What changed in the foreign tax credit?

Section 960(d)(1) deems a domestic corporation to have paid foreign income taxes equal to 90 percent of the product of its inclusion percentage and the aggregate tested foreign income taxes. The prior figure was 80 percent. The inclusion percentage in section 960(d)(2) is the ratio of the corporation's NCTI to the aggregate of its pro rata shares of tested income. The 90 percent rate applies to taxable years beginning after December 31, 2025 (section 70312(a)).

What changed in the FDDEI base?

FDDEI is deduction eligible income (DEI) derived from property sold to a non-U.S. person for a foreign use, or from services provided to a person, or with respect to property, not located in the United States (section 250(b)(1)). Foreign use means any use, consumption or disposition not within the United States.

Section 250(b)(3)(A) defines DEI as gross income less allocable expenses, excluding:

• Section 951(a)(1) amounts and NCTI
• Financial services income
• Dividends from controlled foreign corporations
• Domestic oil and gas extraction income
• Foreign branch income
• Income and gain from sales or other dispositions of intangible property and other depreciable, amortizable or depletable property, unless the Secretary provides otherwise

The last item, new clause (VII), applies to sales or dispositions occurring after June 16, 2025 (section 70322(a)(3)). Allocable expenses for DEI no longer include interest expense or research or experimental expenditures, effective for taxable years beginning after December 31, 2025. A company that sold a patent to a foreign customer in the second half of 2025 should look at the dates in the contract and the closing.

What does the computation look like?

Worked example, NCTI. A calendar-year domestic corporation's CFC has tested income of $1,000,000 in 2026, and the corporation is the only U.S. shareholder. NCTI is $1,000,000.

1. Section 250(a)(1)(B) deduction: 40 percent x $1,000,000 = $400,000.
2. Taxable NCTI: $1,000,000 - $400,000 = $600,000.
3. Tax at 21 percent: $600,000 x 21 percent = $126,000, before any foreign tax credit, which is 12.6 percent of NCTI.

Worked example, FDDEI. The same corporation has $2,000,000 of DEI, of which $1,500,000 is FDDEI.

1. Section 250(a)(1)(A) deduction: 33.34 percent x $1,500,000 = $500,100.
2. FDDEI left in taxable income: $1,500,000 - $500,100 = $999,900.
3. Tax at 21 percent on that amount: $999,900 x 21 percent = $209,979, about 14.0 percent of FDDEI.

If FDDEI plus the NCTI amount exceeds taxable income computed without section 250, section 250(a)(2) reduces both. FDDEI is reduced by the excess multiplied by the ratio of FDDEI to the combined total, and the NCTI amount is reduced by the rest of the excess. A corporation with a net operating loss or large deductions can lose part of the benefit through this limit, so the workpaper should run it.

What should the file contain?

• Year split. A marker for the first taxable year beginning after December 31, 2025. A fiscal-year corporation reaches the new rules at the start of that fiscal year, so a year beginning in 2025 and ending in 2026 stays on the old terms.
• CFC schedule. Tested income, tested loss, and tested foreign income taxes for each CFC, with the inclusion percentage.
• Dispositions list. Intangible and depreciable property sales with dates, to apply the June 16, 2025 cutoff.
• Expense allocation. Support showing that interest and research expenses were left out of the allocable expenses for DEI.
• Section 250(a)(2) test. Taxable income before section 250 compared with FDDEI plus NCTI.

How does this reach the financial statements?

The new rates change the expected current tax on foreign earnings and feed the effective tax rate reconciliation. See ASC 740 deferred taxes with worked journal entries and the ASC 740-10 uncertain tax positions standard. The ASU 2023-09 rate reconciliation article covers how the reconciling items are built and tied out. For the other business changes from the same act, see the 2026 client meeting checklist.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• Cornell Law School Legal Information Institute, 26 U.S.C. 250: https://www.law.cornell.edu/uscode/text/26/250
• Cornell Law School Legal Information Institute, 26 U.S.C. 951A: https://www.law.cornell.edu/uscode/text/26/951A
• Cornell Law School Legal Information Institute, 26 U.S.C. 960: https://www.law.cornell.edu/uscode/text/26/960
• Cornell Law School Legal Information Institute, 26 U.S.C. 11: https://www.law.cornell.edu/uscode/text/26/11
• U.S. Government Publishing Office, Public Law 119-21 (table of contents, sections 70311 to 70323): https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm

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