TITLE: IRS Guidance on US Inventory Sold Abroad: What International Sellers Need to Know
Why the IRS timing matters for international sellers
If your business produces inventory in the United States but sells it through a foreign branch or overseas operation, the timing of this IRS update matters.
On Friday 18 September 2026, an IRS official reportedly said that the IRS hopes to issue guidance by the end of 2026 on sourcing income from inventory produced in the United States and sold outside the country. The guidance is expected to explain how the 2025 One Big Beautiful Bill Act changes interact with existing foreign tax credit rules.
This is an important development for international sellers, US LLC owners, Amazon FBA businesses, and companies using US inventory or fulfilment networks.
The guidance is not final yet. Until it is published, you must continue to apply the existing sourcing framework and keep clear records that support your position.
The key issue is not simply where your customer is located.
The US tax analysis can depend on:
- Where the inventory was produced.
- Where the sale was managed and completed.
- Whether the business maintains a foreign branch or fixed place of business.
- Whether a US office, warehouse, or other facility contributes to the sale.
- Whether the inventory was produced or purchased.
- How the income is allocated for foreign tax credit limitation purposes.
The IRS guidance project appears in the IRS 2025–2026 Priority Guidance Plan. The plan refers to guidance on income from inventory produced in the United States and sold outside the United States through a foreign branch.
The September announcement confirms the expected timing. It does not replace the current rules or create a filing extension. You should therefore prepare your 2026 records using the rules available today, while building a process that can be updated when the final guidance arrives.
What changed under Section 904(b)(6)?
Before the 2025 legislation, income from selling inventory produced in the United States was generally treated as US-source income for the relevant foreign tax credit limitation analysis, even where the sale took place through a foreign branch.
The 2025 law added Section 904(b)(6). The new provision allows a taxpayer to treat up to 50% of income from the sale of US-produced inventory as foreign-source income for foreign tax credit limitation purposes.
The rule applies where:
- The taxpayer is a US person.
- The inventory was produced in the United States.
- The inventory was sold outside the United States.
- The taxpayer maintains an office or other fixed place of business in a foreign country.
- The income from the sale is attributable to that foreign location.
The change applies to taxable years beginning after 31 December 2025.
This is a targeted rule. It applies for the Section 904 foreign tax credit limitation. It does not automatically change the source of the income for every other US tax purpose.
The statutory baseline is available in Section 904 of the Internal Revenue Code. The IRS and Treasury guidance should clarify how the new rule operates alongside existing inventory sourcing regulations.
Continue using the existing sourcing framework
Until the new guidance is issued, your business must still consider the established rules under IRC Section 865 and Treasury Regulation Section 1.865-3.
These rules are particularly relevant where a nonresident maintains an office or other fixed place of business in the United States.
Produced inventory may use a 50/50 or books-and-records method
Under Treasury Regulation Section 1.865-3, income from produced inventory attributable to a US office may generally be allocated using:
- The 50/50 method; or
- An eligible books-and-records method.
Under the 50/50 method, 50% of the gross income, gain, or loss is allocated to the US office or fixed place of business. The remaining 50% is allocated to production activities and sourced under the applicable production rules.
The books-and-records method requires more detailed support. Your records must show, in good faith and without being influenced by tax considerations, how income relates to sales activities and production activities. You must also maintain the supporting explanation and records when the return is filed.
Purchased inventory is treated differently
If the inventory is purchased rather than produced by the nonresident seller, all income from sales attributable to the US office is generally treated as properly allocable to that US office.
That means you cannot automatically apply a 50/50 split to purchased inventory.
Foreign offices can affect the result
The regulations also contain an exception for certain inventory sold for use, disposition, or consumption outside the United States where a foreign office materially participates in the sale.
This is why you should document the actual functions performed in each location. Do not rely only on the location of your customer, warehouse, or marketplace account.
How this affects Amazon FBA and international sellers
Many businesses use Amazon FBA, third-party logistics providers, or US fulfilment centres. However, FBA activity alone is not a blanket safe harbour or automatic US office determination.
The analysis is fact-specific.
You should consider:
- Whether your business owns or controls inventory in the United States.
- Whether you are the importer of record.
- Who arranges customs clearance and transportation.
- Whether Amazon or another provider performs only logistics functions.
- Whether your business has employees, agents, or contractors carrying out sales activities in the United States.
- Where pricing, contracting, customer management, and sales decisions are made.
- Whether you maintain a foreign branch with genuine operational activity.
For UK sellers, this issue should sit alongside your wider ecommerce accounting and tax records. Your US activity may also need to be reviewed separately from UK VAT, customs, corporation tax, and year-end reporting.
A business can have US sales without meeting the conditions for the new Section 904(b)(6) treatment. Similarly, a US LLC owner may have reporting obligations that are separate from the foreign tax credit analysis.
For example, a foreign-owned US disregarded LLC may need to consider Form 5472 reporting and the related Form 1120 filing process. Form 5472 penalties can be significant, so do not assume that inventory sourcing is your only US compliance responsibility.
Worked example: a foreign branch selling US-produced inventory
Assume a US corporation:
- Produces goods in a US factory.
- Sells those goods to customers in Germany and France.
- Uses a properly established German branch to manage European sales.
- Earns $300,000 of gross income from the relevant inventory sales.
- Pays $45,000 of foreign income tax on the related foreign activity.
Under the new Section 904(b)(6) rule, the corporation may potentially treat up to $150,000, or 50% of the $300,000 income, as foreign-source income
