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Proposed regulations (REG-117130-25) issued by the Treasury Department and IRS show how the administration plans to implement the One Big Beautiful Bill Act’s (OBBBA) amendment to Section 250. The change excludes from a domestic corporation’s deduction eligible income (DEI), and therefore from foreign-derived deduction eligible income (FDDEI), income and gain from sales or other dispositions of intangible property and property subject to depreciation, amortization or depletion. The exclusion applies to dispositions after June 16, 2025.
The proposed regulations, published Aug. 20, are generally consistent with Notice 2025-78 (PDF - 109.98KB).
The legislative change draws a deliberate line between income generated by an asset and gain from disposing of the asset. Royalties earned while intangible property is held are not excluded under this rule, although they must still satisfy all other DEI and FDDEI requirements, including the foreign-person and foreign-use requirements. The rule extends beyond intellectual property: Capital-intensive exporters that sell used equipment, vehicles, aircraft or other previously depreciated business assets may also be affected.
Scope and the sale-versus-license line
The proposed regulations define “excluded property sales income” as income and gain from the sale or other disposition of (1) intangible property, defined by cross-reference to Reg. Section 1.250(b)-3(b)(11), which incorporates Section 367(d)(4) but excludes copyrighted articles under Reg. Section 1.861-18(c)(3), and (2) “other excluded property,” meaning property that, in the seller’s hands, is or has been depreciable under Section 167, amortizable or depletable under Section 611. The OBBBA made the broad Section 250 definition of “sale,” which otherwise includes leases and licenses, inapplicable to this exclusion.
Accordingly, a lease or license under general federal income tax principles is not a disposition for this purpose.
The analysis follows general federal income tax principles, including Reg. Section 1.861-18, rather than the agreement’s label or the form of consideration, and reaches deemed sales and Section 367(d) transactions.
Software and copyrighted articles
The proposals confirm that intangible property does not include a “copyrighted article.” A transfer of the underlying copyright is excluded, but a sale of a copy embodying the content, whether electronic or physical, is not excluded under this rule. An example also confirms that a limited-duration lease of a copy is not a sale.
Asset-by-asset testing and the anti-abuse rule
Property is tested asset by asset: property always held as inventory may fall outside the exclusion, but property previously used or depreciated remains excluded even if later refurbished, remanufactured or transferred to inventory.
Treasury declined to add either a remanufacturing exception or a depreciation-recapture limitation. A related-party anti-abuse rule also preserves excluded-property status when a seller acquires the property from a modified affiliated group member in a carryover-basis transaction, or series of transactions, with a principal purpose of avoiding the exclusion.
Grant Thornton insight:
Taxpayers should identify sales or other dispositions occurring after June 16, 2025, including deemed sales and Section 367(d) transactions, that may now generate income excluded from FDDEI. The proposed regulations are intended to apply from that date, except for the rules clarifying that FDDEI is a subset of DEI, which are proposed to apply to tax years beginning after Dec. 31, 2025.
Software and technology companies should map sales of copies, licenses and transfers of copyright rights to the sale-versus-license rules because similar commercial arrangements may produce different results depending on the rights transferred and the governing documentation. Cloud and software-as-a-service offerings are generally classified as services under Reg. Section 1.861-19 rather than as sales, so the typical exclusion should not apply to them.
Applicability and reliance
Treasury and the IRS expect to finalize the proposed regulations by Jan. 4, 2027.
Relying on the authority under Section 7805(b)(2), the rules implementing the exclusion are generally proposed to apply to sales or other dispositions, as defined in Prop. Reg. Section 1.250(b)-1(h)(2)(iii), occurring after June 16, 2025, matching the statutory effective date (see Prop. Reg. Section 1.250-1(b)). The separate clarification that FDDEI is a subset of DEI, and therefore cannot exceed DEI, is instead proposed to apply to tax years beginning after Dec. 31, 2025. Taxpayers may rely on the proposed regulations before they are finalized if the taxpayer and its related parties apply them in their entirety and consistently.
Comments are due Oct. 5, 2026. Treasury and the IRS expect to address other OBBBA changes to Section 250, including revised deduction-allocation rules, the treatment of losses and deferred income from prior dispositions, and the removal of the foreign-derived intangible income and deemed tangible income return mechanics, in separate guidance.
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