Instructions For Form 8873 - 2005
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Department of the Treasury
Internal Revenue Service
Instructions for Form 8873
Extraterritorial Income Exclusion
Section references are to the Internal Revenue Code unless otherwise noted.
enforceable against a lessor notwithstanding
927(d)(4), as in effect before its repeal) of
What’s New
the fact that a lessor retained approval of
which a DISC (Domestic International Sales
the replacement lessee.
Corporation) is a member.
The American Jobs Creation Act of 2004
Unrelated person. An unrelated person is
repealed the extraterritorial income (ETI)
Eligible Transactions
a person that is not a related person as
exclusion provisions generally for
Generally, the extraterritorial income
defined in Qualifying Foreign Trade Property
transactions after 2004, subject to a
exclusion applies to taxpayers with respect
on page 2.
transition rule. Under the transition rule,
to transactions after September 30, 2000.
taxpayers may claim 80% and 60% of the
Definitions
However, the exclusion does not apply to
otherwise applicable pre-repeal ETI
any transaction in the ordinary course of a
100% transactions are transactions under
exclusion for transactions during 2005 and
trade or business involving a FSC (Foreign
a binding contract that meets the
2006, respectively. The general repeal of
Sales Corporation) that is under a binding
requirements described above.
the ETI exclusion provisions does not apply
contract that is in effect on September 30,
to transactions in the ordinary course of a
2000, and at all times thereafter, and that is
80% transactions are transactions during
trade or business under a binding contract if
between the FSC (or a person related to the
2005 that are not under a binding contract
such contract is between the taxpayer and
FSC) and a person other than a related
that meets the requirements described
an unrelated person (defined below) and
person.
above.
such contract is in effect on September 17,
Line 2 election. The taxpayer may elect to
2003, and at all times thereafter.
apply the exclusion rules for the transactions
60% transactions are transactions during
Foreign corporations that elected to be
described above involving a FSC. To make
2006 that are not under a binding contract
treated as domestic corporations (on line 3
the election, check the box on line 2. See
that meets the requirements described
of Form 8873) were permitted, under certain
the instructions for line 2 for more details.
above.
circumstances, to revoke such election
before October 22, 2005, without recognition
Revocation of Election to be
Extraterritorial Income
of gain or loss.
Treated as a Domestic
Extraterritorial income is the gross income of
For more information, see ETI Repeal
the taxpayer attributable to foreign trading
Corporation
below.
gross receipts (defined below). The taxpayer
Foreign corporations that elected to be
reports all of its extraterritorial income on its
treated as domestic corporations under
General Instructions
tax return. It then uses Form 8873 to
section 943(e) (on line 3 of Form 8873) may,
calculate its exclusion from income for
under the circumstances described below,
extraterritorial income that is qualifying
Purpose of Form
revoke such election before October 22,
foreign trade income.
2005. If the election is revoked, no gain or
Use this form to figure the amount of
loss shall be recognized with respect to
Qualifying Foreign
extraterritorial income (defined below)
property treated as transferred under
Trade Income
excluded from gross income for the tax year.
section 943(e)(4)(B)(ii) to the extent such
Attach the form to your income tax return.
Generally, qualifying foreign trade income is
property:
•
the amount of gross income that, if
Note. The amount figured on the form is net
was treated as transferred under section
excluded, would result in a reduction of
of the disallowed deductions.
943(e)(4)(B)(i) or
•
taxable income by the greatest of:
was acquired during a tax year to which
•
ETI Repeal
15% of foreign trade income,
such election applies and before May 1,
•
1.2% of foreign trading gross receipts, or
2003, in the ordinary course of its trade or
The American Jobs Creation Act of 2004
•
30% of foreign sale and leasing income.
business.
repealed the ETI exclusion provisions
See definitions below and on page 2.
The IRS and Treasury have been
generally for transactions after 2004, subject
authorized to issue any guidance that may
to transition rules.
Foreign Trading
be necessary to prevent the abuse of the
Transition Rule and Binding
Gross Receipts
above rules.
Contract Exception
A taxpayer is treated as having foreign
Pre-Repeal ETI Exclusion
trading gross receipts (FTGR) derived from
Taxpayers may claim 80% and 60% of the
certain activities in connection with
Rules
otherwise applicable pre-repeal ETI
qualifying foreign trade property (defined on
exclusion for transactions during 2005 and
page 2) only if it meets the foreign economic
2006, respectively. The general repeal of
Who Qualifies for the Exclusion
process requirements (described on page
the ETI exclusion provisions does not apply
2). Foreign trading gross receipts are the
to transactions in the ordinary course of a
Eligible Taxpayers
taxpayer’s gross receipts that are:
trade or business under a binding contract if
Individuals, corporations (including S
such contract is between the taxpayer and
1. From the sale, exchange, or other
corporations), partnerships, and other
an unrelated person (defined below) and
disposition of qualifying foreign trade
pass-through entities are entitled to the
such contract is in effect on September 17,
property;
exclusion if they have extraterritorial income.
2003, and at all times thereafter. For these
2. From the lease or rental of qualifying
purposes, a binding contract includes a
Special rule for DISCs. The extraterritorial
foreign trade property for use by the lessee
purchase option, renewal option, or
income exclusion does not apply to any
outside the United States;
replacement option that is included in such
taxpayer for any tax year if, at any time
3. For services that are related and
contract and that is enforceable against the
during the tax year, the taxpayer is a
subsidiary to (a) any sale, exchange, or
seller or lessor. For this purpose, a
member of a controlled group of
other disposition of qualifying foreign trade
replacement option will be considered
corporations (as defined in section
property by such taxpayer or (b) any lease
Cat. No. 31661R
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