Instructions For Form 8873 - 2006 printable pdf download

2006

Department of the Treasury

Internal Revenue Service

Instructions for Form 8873

Extraterritorial Income Exclusion

Section references are to the Internal

Definitions

Qualifying Foreign

Revenue Code unless otherwise noted.

Trade Income

100% transactions are (a) transactions

under a binding contract that meets the

Generally, qualifying foreign trade income is

requirements described in Binding contract

the amount of gross income that, if

What’s New

exception above or (b) transactions before

excluded, would result in a reduction of

2005.

taxable income by the greatest of:

The Tax Increase Prevention and

•

15% of foreign trade income,

Reconciliation Act of 2005 repealed the

•

80% transactions are transactions during

1.2% of foreign trading gross receipts, or

extraterritorial income (ETI) binding contract

2005 to which the Binding contract

•

30% of foreign sale and leasing income.

exception. See Binding contract exception

exception (described above) does not apply.

below for details.

See definitions below and on page 2.

60% transactions are transactions during

General Instructions

2006 to which the Binding contract

Foreign Trading

exception (described above) does not apply.

Gross Receipts

Purpose of Form

A taxpayer is treated as having foreign

Pre-Repeal ETI Exclusion

trading gross receipts (FTGR) derived from

Use this form to figure the amount of

Rules

certain activities in connection with

extraterritorial income (defined below)

qualifying foreign trade property (defined on

excluded from gross income for the tax year.

page 2) only if it meets the foreign economic

Who Qualifies for the Exclusion

Attach the form to your income tax return.

process requirements (described on page

Note. The amount figured on the form is net

2). Foreign trading gross receipts are the

Eligible Taxpayers

of the disallowed deductions.

taxpayer’s gross receipts that are:

Individuals, corporations (including S

1. From the sale, exchange, or other

corporations), partnerships, and other

ETI Repeal

disposition of qualifying foreign trade

pass-through entities are entitled to the

property;

The American Jobs Creation Act of 2004

exclusion if they have extraterritorial income.

2. From the lease or rental of qualifying

repealed the ETI exclusion provisions

foreign trade property for use by the lessee

Special rule for DISCs. The extraterritorial

generally for transactions after 2004, subject

outside the United States;

income exclusion does not apply to any

to transition rules.

3. For services that are related and

taxpayer for any tax year if, at any time

subsidiary to (a) any sale, exchange, or

during the tax year, the taxpayer is a

Transition Rule and Binding

other disposition of qualifying foreign trade

member of a controlled group of

Contract Exception

property by such taxpayer or (b) any lease

corporations (as defined in section

or rental of qualifying foreign trade property

927(d)(4), as in effect before its repeal) of

Transition rule. Taxpayers may claim 80%

for use by the lessee outside the United

which a DISC (Domestic International Sales

and 60% of the otherwise applicable

States;

Corporation) is a member.

pre-repeal ETI exclusion for transactions

4. For engineering or architectural

during 2005 and 2006, respectively. See

Eligible Transactions

services for construction projects located (or

80% transactions and 60% transactions

proposed for location) outside the United

below for additional information.

Generally, the extraterritorial income

States; or

exclusion applies to taxpayers with respect

Binding contract exception. The binding

5. For the performance of managerial

to transactions after September 30, 2000.

contract exception has been repealed for tax

services for a person other than a related

However, the exclusion does not apply to

years beginning after May 17, 2006. For tax

person connected with the production of

any transaction in the ordinary course of a

years beginning before May 18, 2006, the

foreign trading gross receipts described in

trade or business involving a FSC (Foreign

following rules apply: The taxpayer may

items 1, 2, or 3 above. Item 5 does not apply

Sales Corporation) that is under a binding

claim a 100% exclusion with respect to

to a taxpayer for any tax year unless at least

contract that is in effect on September 30,

transactions in the ordinary course of a

50% of its foreign trading gross receipts

2000, and at all times thereafter, and that is

trade or business under a binding contract if

(determined without regard to this sentence)

between the FSC (or a person related to the

such contract is between the taxpayer and

for such tax year are derived from the

FSC) and a person other than a related

an unrelated person (defined below) and

activities described in items 1, 2, or 3 above.

person.

such contract was in effect on September

Line 2 election. The taxpayer may elect to

17, 2003, and at all times thereafter.

Excluded receipts. Foreign trading gross

apply the exclusion rules for the transactions

receipts do not include the receipts of a

For these purposes, a binding contract

described above involving a FSC. To make

taxpayer from a transaction if:

includes a purchase option, renewal option,

•

the election, check the box on line 2. See

The qualifying foreign trade property or

or replacement option that is included in

the instructions for line 2 for more details.

services are for ultimate use in the United

such contract and that is enforceable

States;

against the seller or lessor. For this purpose,

•

Extraterritorial Income

The qualifying foreign trade property or

a replacement option will be considered

Extraterritorial income is the gross income of

services are for use by the United States or

enforceable against a lessor notwithstanding

any instrumentality of the United States and

the taxpayer attributable to foreign trading

the fact that a lessor retained approval of

such use is required by law or regulation;

gross receipts (defined below). The taxpayer

the replacement lessee.

•

Such transaction is accomplished by a

reports all of its extraterritorial income on its

subsidy granted by the government (or any

Unrelated person. An unrelated person is

tax return. It then uses Form 8873 to

instrumentality) of the country or possession

a person that is not a related person as

calculate its exclusion from income for

defined in Qualifying Foreign Trade Property

extraterritorial income that is qualifying

in which the property is manufactured,

on page 2.

foreign trade income.

produced, grown, or extracted; or

Cat. No. 31661R

Instructions For Form 8873 - 2006

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