FDDEI in 2026: How a U.S. C Corporation Selling Abroad on Marketplaces Gets to About 14%

A U.S. C corporation that sells goods to foreign persons for use outside the U.S. can deduct part of that profit as FDDEI. After the OBBBA, for tax years beginning in 2026, the deduction is 33.34%, for an effective federal rate of about 14% (21% × 66.66%). Profit from marketplace sales, such as on Mercado Libre, to individual buyers abroad shipped to foreign addresses generally qualifies. Only C corporations can claim it, on Form 8993 attached to Form 1120, and each order's foreign delivery record should be kept.

What is FDDEI, and what did the OBBBA change?

FDDEI, foreign-derived deduction eligible income, is a deduction for domestic corporations under Internal Revenue Code §250. The 2017 tax law introduced it as FDII, foreign-derived intangible income. The OBBBA (Pub. L. 119-21), signed July 4, 2025, renamed it and changed the math.

The rate: the deduction was 37.5% and was scheduled to drop to 21.875% in 2026. The OBBBA repealed that drop and set it at 33.34% for tax years beginning after December 31, 2025, moving the effective rate from about 13.125% to about 14%.

The base: the old rules first subtracted a deemed return on tangible assets (10% of QBAI), which left trading companies with warehouses, equipment and inventory with little deduction. The OBBBA removed that step, so returns on tangible assets now qualify. Interest expense and research and experimental expenditures are also no longer allocated against this income, which raises deduction eligible income.

Exclusions: under the OBBBA changes, gains from sales of intangible and depreciable property after June 16, 2025 are excluded from deduction eligible income. Ordinary profit from selling inventory isn't affected.

Who qualifies, and why LLCs and S corporations don't

FDDEI is only for domestic C corporations, including U.S. subsidiaries of foreign parents. LLCs under default classification (disregarded if single-member, partnerships if multi-member), S corporations and partnerships can't claim it, because their profit flows to the owners' returns.

An LLC that wants it must first elect corporate treatment on Form 8832. The price is that all of the LLC's business is then taxed as a C corporation, with a second layer of tax on dividends, and the LLC generally can't change classification again for 60 months under Treas. Reg. §301.7701-3(c)(1)(iv). Don't elect for FDDEI alone; model dividends, U.S. sales and state tax together.

How the calculation works, in three steps

Step one, deduction eligible income. Gross income less related expenses and taxes, but not interest or R&E, and excluding statutory items such as dividends from controlled foreign corporations.

Step two, isolate FDDEI. The part of deduction eligible income from property sold to non-U.S. persons for foreign use, plus services provided to persons or property outside the U.S. A company that also sells in the U.S. has to split U.S. and foreign orders and allocate income and expenses between them.

Step three, multiply by 33.34%. The deduction is limited by taxable income, and net operating loss carryovers follow the ordering on Form 8993.

How do marketplace sellers prove foreign sales?

Treas. Reg. §1.250(b)-4 gives two key rules. Foreign person: a sale to an end user with a shipping address outside the U.S. is presumed to be to a foreign person, unless you know or have reason to know otherwise, for example a U.S. phone number or billing address. Foreign use: delivery through a carrier or freight forwarder to an end user who receives the goods outside the U.S. is a foreign use.

On a platform like Mercado Libre, direct orders to individual buyers in Mexico, Brazil or Chile, delivered by a carrier to a foreign address, generally meet both tests. What you need is each order's number, destination country, tracking number and settlement record, downloaded and archived monthly. Platform reports aren't kept forever, and rebuilding them later is hard.

Sales to a local intermediary: under Full Chile, for example, a Chilean company imports and sells. Your sale to it is a sale for resale, and you have to be able to show the goods ultimately reach end users outside the U.S.

Orders shipped to U.S. forwarding addresses: if the delivery address is in the U.S., such as a reshipper used by a buyer abroad, the foreign-address presumption doesn't apply. Analyze those separately, and leave them out of FDDEI if you can't support them.

Example: $170,000 of taxable income

Example (hypothetical numbers, to show the method): a U.S. C corporation sells on Mercado Libre in 2026 to individual buyers in Latin America, all with foreign delivery addresses. Taxable income is $170,000, with no interest, no R&E and no U.S. orders.

Without FDDEI: $170,000 × 21% = $35,700.

With FDDEI: the deduction is $170,000 × 33.34% = $56,678, taxable income falls to $113,322 and federal tax is $23,798. That is $11,902 less each year, about a 14% effective rate.

If the company also earned $100,000 of profit on U.S. orders, only the foreign portion counts as FDDEI, and expenses must be allocated reasonably between U.S. and foreign income rather than parked on the U.S. side.

Common mistakes

Mistake one: anything sold abroad qualifies. Both tests, foreign person and foreign use, have to be met and supported; orders delivered to U.S. addresses can't simply be presumed.

Mistake two: S corporations can use it. They can't. An S corporation saves self-employment tax; a C corporation with FDDEI saves corporate tax. Compare them on your profit and dividend plans.

Mistake three: state tax drops too. Many states don't follow this federal deduction, so state income tax is figured separately.

Mistake four: a U.S. warehouse rules it out. Goods exported from a U.S. warehouse and received by end users abroad can still qualify; the warehouse state's taxes are a separate question.

Learn more

Mercado Libre onboarding, logistics, Latin American import taxes and entity choice are in our Mercado Libre seller guide; whether to be a C corporation is covered in our C corporation election guide. To see what FDDEI could save you, book a free 15-minute call or message us on WeChat at YCLUSA.