Refurbish a machine you once depreciated, sell it abroad, and Treasury says the profit no longer counts toward the export deduction

The exception the equipment sellers asked for is not in the draft.

Treasury and the Internal Revenue Service have proposed regulations defining a category of income called excluded property sales income, which drops out of the calculation behind the deduction for foreign-derived income. The statute behind it is new. Section 70322(a)(1) of the law enacted on July 4, 2025 added section 250(b)(3)(A)(i)(VII) to the code, and it excludes income and gain from the sale of intangible property, and of any other property of a type subject to depreciation, amortization or depletion by the seller.

The same law cut the deduction itself from 37.5 percent of qualifying income to 33.34 percent for tax years beginning after December 31, 2025.

What the commenter wanted

A commenter told Treasury that companies routinely lease or use high-value assets, then repurpose, remanufacture or refurbish them and sell them to unrelated foreign customers. On that reading, gain reflecting new investment and new value should be treated like inventory or newly manufactured goods, which the exclusion does not touch. The commenter also asked, as a fallback, that the exclusion be capped at the depreciation previously claimed, so that gain above that amount stayed eligible.

Neither request survived. The proposed regulations say property previously depreciated in a trade or business and then repurposed, remanufactured or refurbished into inventory keeps its character as property subject to depreciation. On the recapture cap, the document says the statute excludes all income and gain and does not suggest any such limit.

The lines that were drawn

Property that has always been held as inventory is not caught, because it was never of a character subject to depreciation. A copyrighted article, meaning a copy of digital content, is not intangible property for this purpose. And the ordinary section 250 definition of a sale, which sweeps in leases, licenses and exchanges, does not apply here. A sale means a sale under general federal income tax principles, plus deemed dispositions.

There is an anti-abuse rule. Where property passes to a related party in a transaction that carries over basis, and a principal purpose is avoiding this exclusion, the character follows the property.

The proposed rules would apply to sales occurring after June 16, 2025, which is before they were written. Comments are due 45 days after the document publishes. Treasury and the IRS say they expect to finalize by January 4, 2027, and that taxpayers may rely on the proposal in the meantime, on one condition: the taxpayer and its related parties have to follow the whole thing, consistently.