Proposed regulations (REG-117130-25) published on August 20, 2026 (the Proposed Regulations), provide guidance on the new category of "excluded property sales income" added by the OBBBA. Consistent with Notice 2025-78, the Proposed Regulations define the scope of income and gain from sales or other dispositions of intangible property and depreciable, amortizable, or depletable property that is excluded from DEI and, therefore, from FDDEI.

Background

For tax years beginning after December 31, 2025, IRC Section 250(a)(1) allows a domestic corporation to deduct 33.34% of its FDDEI. FDDEI is a corporation's DEI derived from (i) property sold to a non-US person for a foreign use, or (ii) services provided to any person, or involving property, not located in the US. IRC Section 250(b)(3)(A) defines DEI as the excess of a domestic corporation's gross income (determined without regard to certain excluded categories) over properly allocable deductions.

As originally enacted, six categories of income were excluded from FDDEI, such as foreign branch income or subpart F income inclusions. The OBBBA added a seventh category of excluded income. Specifically, it excluded any income and gain from the sale or other disposition (including deemed sales, deemed dispositions, or transactions subject to IRC Section 367(d)) of:

• Intangible property as defined in IRC Section 367(d)(4)
• Any other property of a type subject to depreciation, amortization or depletion by the seller

These changes apply to sales or other dispositions occurring after June 16, 2025.

On December 4, 2025, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) released Notice 2025-78, providing guidance on these rules. The Proposed Regulations are largely consistent with Notice 2025-78, with some additions and changes noted below.

Excluded property sales income

The Proposed Regulations define "excluded property sales income" as any income and gain derived from the sale or other disposition of two categories of property: intangible property and "other excluded property."

Intangible property

The Proposed Regulations define intangible property by reference to IRC Section 367(d)(4), consistent with the existing IRC Section 250 regulations. Importantly, the Proposed Regulations would confirm that intangible property does not include a copyrighted article as defined in Treas. Reg. Section 1.861-18(c)(3).

An example in the Proposed Regulations illustrates that a domestic corporation selling copies of a computer program to unrelated foreign customers is selling copyrighted articles, not intangible property or other excluded property; as such, the income remains eligible for the FDDEI deduction, even if the corporation also uses copies of the same program internally in its own trade or business. A second example confirms that a limited-duration arrangement (e.g., a two-year right to use the copy of the computer program) is classified as a lease, not a sale, and likewise is not "excluded property sales income."

Other excluded property

The Proposed Regulations define "other excluded property" as property that, in the hands of the seller:

• Is or has been of a character subject to depreciation under IRC Section 167

or

• Is or has been subject to amortization or depletion

Property held solely as inventory would not qualify as "other excluded property" because it would not be "of a character" subject to depreciation.

Fully depreciated property would retain its character as other excluded property. An example in the Proposed Regulations treats income or gain from a domestic corporation's sale of a fully depreciated machine with a zero-adjusted depreciable basis as excluded property sales income.

The Proposed Regulations do not include a "remanufacturing exception," which one commenter requested. The requested exception would change previously depreciated property to FDDEI-eligible property if that property were subsequently materially transformed or remanufactured into property held for sale as inventory. Treasury and the IRS concluded that such property retains its characterization as property subject to depreciation. Similarly, the Proposed Regulations do not include a depreciation recapture limitation that would limit excluded property sales income to previously claimed depreciation.

Sales or other dispositions

Like Notice 2025-78, the Proposed Regulations instruct taxpayers to use general federal income tax principles to determine whether a sale or other disposition of property has occurred. For purposes of this determination, sales include deemed sales, transactions subject to IRC Section 367(d) and other deemed dispositions. A transaction characterized as a lease or license under general tax principles, however, would not be treated as a sale or other disposition for this purpose. Accordingly, income from licensing intangible property would continue to be included in DEI and, where applicable, eligible for the FDDEI deduction.

Related-party anti-abuse rule

Under the Proposed Regulations, other excluded property would retain its character in the hands of certain related parties if acquired in a basis-carryover transaction with a principal purpose of avoiding treatment as excluded property sales income. Related parties would be determined by reference to a modified affiliated group as otherwise defined in the IRC Section 250 regulations.

The Proposed Regulations include an example of how the anti-avoidance rule would work. In the example, a domestic corporation transfers cars that are other excluded property to a related entity through a series of IRC Section 721(a) and IRC Section 351(a) exchanges, with a principal purpose of avoiding the excluded property sales income rules. The related entity recipient holds those cars as inventory and subsequently sells them to an unrelated foreign person. The example concludes that the income from the sale is treated as excluded property sales income because the transfers were conducted with a principal purpose of avoiding the excluded property sales income rules.

FDDEI remains a subset of DEI

With the OBBBA's removal of deemed intangible income and deemed tangible income return from the FDDEI calculation, the foreign-derived ratio included in current IRC Section 250 regulations is no longer needed. However, the Proposed Regulations state that FDDEI continues to be limited by total DEI. This was not addressed in Notice 2025-78.

Applicability dates and reliance

The Proposed Regulations would generally apply to sales or other dispositions occurring after June 16, 2025. The clarification that FDDEI is a subset of DEI would apply to tax years beginning after December 31, 2025.

Taxpayers may rely on the Proposed Regulations before they are published in the Federal Register, provided they and their related parties apply the rules consistently and in their entirety.

Implications

The Proposed Regulations formalize and, in some respects, provide additional clarity beyond the guidance in Notice 2025-78, particularly on copyrighted article transactions.

The characterization of a transaction as a sale versus a license remains critical. Licenses or leases of intangible property continue to generate DEI potentially eligible for the FDDEI deduction, whereas sales of the same property may not. Taxpayers should carefully review the substance of their arrangements involving intangible property to confirm proper characterization under general tax principles.

The lack of a remanufacturing exception or depreciation recapture limitation means that any property with a history of depreciation in the hands of the seller, even if subsequently converted to inventory or materially transformed by the seller, would generate excluded property sales income under the Proposed Regulations. Taxpayers that routinely transition assets from operational use to sale should evaluate the impact on their FDDEI calculations.