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IRS Proposes New Tax Rules for U.S. Companies With Foreign Income and Overseas Operations

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The IRS and Treasury Department are proposing new rules for allocating deductions when certain U.S. companies calculate foreign tax credits and deductions connected to foreign-derived income. DK_STUDIO29/Shutterstock

U.S. companies doing business overseas could face updated rules for calculating important international tax deductions and foreign tax credits under a new proposal from the Internal Revenue Service and Treasury Department.

The proposed regulations, published September 11, are intended to implement international tax changes Congress enacted in the 2025 One, Big, Beautiful Bill Act.

For most individual taxpayers, the proposal won’t change how they prepare their federal income tax returns. Instead, the rules primarily matter to domestic corporations claiming a deduction connected to foreign-derived income and taxpayers operating abroad through foreign corporations.

What Is the IRS Proposing?

At the center of the proposal is a complicated but important tax question: When a company has income from both U.S. and foreign sources, which expenses and deductions should be assigned to each?

That calculation matters because assigning a deduction to one category of income rather than another can change the amount of income used to calculate certain tax benefits.

The proposed regulations address two areas.

The first involves the calculation of deduction eligible income, or DEI, used in determining a domestic corporation’s deduction for foreign-derived deduction eligible income, commonly abbreviated FDDEI.

The second involves the foreign tax credit limitation for foreign-source Section 951A category income. That category generally relates to income U.S. shareholders recognize from controlled foreign corporations.

The IRS proposal provides detailed rules for deciding how deductions should be allocated and apportioned when companies make those calculations.

The Rules Stem From the 2025 Tax Law

Congress changed both areas as part of the One, Big, Beautiful Bill Act, which was signed into law July 4, 2025.

The changes generally apply to taxable years beginning after December 31, 2025.

For deduction eligible income, the amended law changed which deductions reduce gross income when calculating DEI.

Under the new framework, deductions—including certain taxes—that are properly allocable to the relevant gross income generally reduce DEI. However, interest expense and research or experimental expenditures are excluded from that reduction.

The proposed Treasury regulations provide instructions for applying those statutory changes.

Foreign Tax Credit Calculations Are Changing Too

The foreign tax credit is designed, broadly speaking, to reduce the potential for U.S. taxpayers to be taxed twice on qualifying foreign income.

But determining how much foreign tax credit a taxpayer can use involves a limitation calculation, and that requires determining how much taxable income belongs in different foreign-income categories.

The 2025 law added special rules under Section 904(b)(5) for deductions associated with foreign-source Section 951A category income.

Under those rules, certain deductions—including the Section 250 deduction associated with net CFC tested income and certain taxes—are allocated to that foreign-source income.

Interest expenses and research and experimental expenditures, meanwhile, aren’t allocated to foreign-source Section 951A category income under the new rules.

Other deductions generally go to that foreign-source category only when they are directly allocable to it. Otherwise, they’re allocated to U.S.-source income.

The proposed regulations provide additional details for putting those rules into practice.

Who Actually Needs to Pay Attention?

This isn’t a proposal that the typical employee, retiree or small household needs to factor into a Form 1040.

Treasury and the IRS say the regulations would primarily affect taxpayers operating in foreign countries through foreign corporations and domestic corporations claiming the deduction for foreign-derived deduction eligible income.

That means companies with foreign subsidiaries, significant international operations or qualifying foreign-derived income—and the tax professionals advising them—have much more reason to study the proposal closely.

The allocation rules can affect both the amount of income used in calculating the FDDEI deduction and the limitation on foreign tax credits.

Because international corporate tax calculations can involve multiple entities, income categories and jurisdictions, affected businesses should evaluate the proposal based on their particular structures rather than relying on a simplified example.

Companies May Be Able to Use the Proposed Rules Before They’re Final

One noteworthy part of the proposal is that affected taxpayers don’t necessarily have to wait for Treasury to publish final regulations before relying on the new guidance.

The proposed rules generally apply to taxable years beginning after December 31, 2025.

Treasury and the IRS also say taxpayers may rely on the proposed Section 250 rules before final regulations are published if they follow the applicable proposed regulations in their entirety.

Similar reliance is available for the proposed rules addressing Section 904(b)(5) and related deduction allocation, again provided taxpayers follow those proposed provisions in their entirety.

That can give businesses and their tax advisers a framework for dealing with the statutory changes while the formal rulemaking process continues.

IRS Wants Comments by November 10

These regulations aren’t final yet.

The IRS is accepting written and electronic comments on the proposal, along with requests for a public hearing, through November 10, 2026.

Electronic comments can be submitted through the federal rulemaking portal by referencing REG-117273-25.

Treasury and the IRS will consider those comments before moving ahead with final regulations.

For most consumers, there is no immediate tax action required because of this proposal. Businesses with controlled foreign corporations, foreign-derived income or significant cross-border operations, however, may want their tax professionals to review the rules now because the underlying statutory changes already apply to taxable years beginning after December 31, 2025.

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IRS Finalizes New Car Loan Interest Deduction — Who Can Claim Up to $10,000

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The IRS has finalized regulations for a temporary federal deduction allowing eligible taxpayers to deduct up to $10,000 a year in interest on loans used to buy qualifying new vehicles assembled in the United States. Zamrznuti tonovi/Shutterstock

Americans financing certain new vehicles can deduct up to $10,000 a year in car loan interest under a temporary federal tax break, and the IRS has now finalized regulations explaining who qualifies. The deduction was created by the One Big Beautiful Bill Act signed into law July 4, 2025, and applies to qualifying vehicle loans incurred after December 31, 2024. It is available for tax years 2025 through 2028 under current law.

One particularly important feature is that taxpayers don’t have to itemize deductions to claim it. Someone who takes the standard deduction may still qualify for the car loan interest deduction. But the $10,000 headline comes with several significant restrictions.

The Vehicle Generally Must Be New and Assembled in the United States

The deduction doesn’t apply to every car loan. To qualify, the loan must be used to purchase an eligible passenger vehicle for personal use, and the debt must be secured by a first lien on the vehicle. The original use of the vehicle must also begin with the taxpayer, which generally means the vehicle must be treated as new when purchased.

Another major requirement is final assembly in the United States. The IRS rules allow taxpayers to determine the final assembly location using information encoded in the vehicle identification number or the final assembly point shown on the vehicle’s required label.

Eligible vehicle classifications can include cars, minivans, vans, SUVs, pickup trucks and motorcycles that satisfy the applicable requirements. Vehicles must also have a gross vehicle weight rating below 14,000 pounds. Leases don’t qualify, nor do loans financing certain fleet sales, non-personal commercial vehicles, salvage-title vehicles, or vehicles intended for scrap or parts.

The Deduction Is Worth Up to $10,000 a Year

Eligible taxpayers can deduct qualified interest paid or accrued during the year, subject to a maximum of $10,000 per tax return per year. That doesn’t mean buying a qualifying vehicle automatically produces a $10,000 deduction. A taxpayer who pays $2,800 of qualifying interest during the year, for example, generally has only $2,800 potentially available for the deduction before considering other limitations. The tax savings also aren’t the same as the deduction itself.

A $3,000 deduction doesn’t mean the IRS sends someone an extra $3,000. Instead, a deduction generally reduces the amount of income subject to federal income tax. The tax break is temporary under current law and applies to qualifying interest for tax years 2025 through 2028.

Higher-Income Taxpayers May Get a Smaller Deduction

Income can reduce or completely eliminate the tax break. The deduction begins phasing out when modified adjusted gross income exceeds $100,000 for most filers or $200,000 for married couples filing jointly.

For each $1,000—or portion of $1,000—above the applicable threshold, the otherwise allowable deduction is reduced by $200. That means shoppers shouldn’t assume they’ll receive the full tax benefit simply because the vehicle and loan meet the other requirements.

Taxpayers should also remember that eligibility for a deduction is only one factor to consider when financing a vehicle. Paying thousands of dollars of additional interest solely to receive a tax deduction generally doesn’t make that interest free.

Your VIN Will Matter at Tax Time

Taxpayers claiming qualified passenger vehicle loan interest must include the vehicle’s VIN on their federal income tax return. The VIN is important both for identifying the vehicle and for helping establish whether its final assembly occurred in the United States. The IRS regulations point taxpayers toward vehicle-manufacturing information that can be used to determine final assembly location.

Consumers shopping for a new vehicle who expect to use the deduction may therefore want to verify final assembly before completing the purchase rather than assuming that an American brand name automatically means the vehicle qualifies. Where a vehicle was assembled—not simply the automaker’s headquarters or brand identity—is what matters for this requirement.

Lenders Will Have New Reporting Requirements

The final regulations also establish reporting requirements intended to help taxpayers document the interest they paid. A lender or other qualifying business that receives $600 or more in interest during a calendar year from an individual on a specified passenger vehicle loan generally must file an information return with the IRS and furnish a statement to the borrower.

The reporting requirements are established under new Internal Revenue Code Section 6050AA. Businesses required to file at least 10 information returns of any type during a calendar year generally must file electronically under the applicable IRS rules.

These reporting requirements should eventually give qualifying borrowers documentation that can help them determine the interest associated with an eligible vehicle loan.

Don’t Buy a More Expensive Car Just for the Tax Deduction

The new deduction can reduce the after-tax cost of borrowing for someone who already needs a qualifying vehicle, but it shouldn’t make an unaffordable car loan suddenly affordable. Consider someone who pays $4,000 in qualifying car loan interest and is able to deduct the entire amount. The financial benefit is the tax savings produced by that $4,000 deduction—not reimbursement of the $4,000 of interest.

Vehicle price, interest rate, loan term, insurance, maintenance, depreciation and the monthly payment can still matter far more to a household budget than the deduction. The tax break is also scheduled to disappear after 2028 unless Congress extends it, while a five-, six- or seven-year auto loan could continue long after the deduction expires.

For shoppers comparing vehicles, the better question isn’t simply, “Does this car qualify for the deduction?” It’s whether the total cost of the vehicle and financing still makes sense without counting on a temporary tax break.

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