Two weeks after the U.S. designated Iran's Revolutionary Guard a "foreign terrorist organization," the State Department announced Tuesday that foreign governments, businesses and other entities that work with the Guard will be exempt from that designation.

Members of Iran's Revolutionary Guards Corps (IRGC) march during the annual military parade In Iran's southwestern city of Ahvaz before the attack.

A State Department spokesperson told CNBC that the new exemptions are intended to mitigate complications created by the designation, which was announced on April 8. It was the first time the U.S. has formally given the label of foreign terrorist organization, or FTO, to a military branch of another nation.

Under the FTO designation, any entity providing "material support" to the Guard would face U.S. sanctions, including denial of visas to the United States. This would create difficulties for foreign governments, allies and trading partners — including Iraq, Syria and Turkey — and nongovernmental organizations and businesses that work with Iran closely.

"There is clearly a realization that this will impact the functioning of not only the Iraqi government but also the functioning of the United States and its allies," said Jonathan Cristol, senior fellow at the Center for Civic Engagement.

The U.S. retains the right to sanction any individual providing material support to the Guard.

Despite the new exemptions, the State Department has yet to comment on how it defines "material support." This poses a major problem, Cristol says. "For many foreign entities what is considered material support is unclear, and [that] could give the U.S. an incredibly broad reach in punishing those who violate the designation."

Richard Nephew, former principal deputy coordinator for sanctions policy at the State Department, says the term "material support" has been used liberally in the past but typically refers to charity groups funneling funds to nonstate actors, such as ISIS and al-Qaeda.

Nephew said the FTO designation is "not the tool that was meant to be used for state actors. It is meant for actual terrorist groups. That's why the administration is having a problem defining 'material support.'"

The Revolutionary Guard and its linked entities are estimated to control about 20% of the Iranian economy, from shipping and petrochemicals to real estate and banking, making it difficult to avoid the group. Plus, a two-year military service is mandatory for men, so many Iranian families have a connection to the group regardless of their politics.