Instructions For Form 8873 - 2005 (Page 2 of 4) in pdf

or rental of qualifying foreign trade property

under a contract with you) performed at any

4. A partnership or other pass-through

for use by the lessee outside the United

location with respect to qualifying foreign

entity all of the partners or owners of which

States;

trade property:

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

•

4. For engineering or architectural

Advertising and sales promotion,

•

Excluded property. The following property

services for construction projects located (or

Processing of customer orders and

is excluded from the definition of qualifying

proposed for location) outside the United

arranging for delivery,

•

foreign trade property:

States; or

Transportation outside the United States

•

Property with respect to which a related

5. For the performance of managerial

in connection with delivery to the customer,

•

person (defined below) has calculated its

services for a person other than a related

Determination and transmittal of a final

exclusion using the 1.2% of foreign trading

person connected with the production of

invoice or statement of account or the

gross receipts method,

foreign trading gross receipts described in

receipt of payment, and

•

Property you lease or rent for use by any

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

Assumption of credit risk.

related person,

to a taxpayer for any tax year unless at least

Foreign direct costs are the portion of

•

Certain intangibles described in section

50% of its foreign trading gross receipts

the total direct costs of any transaction

943(a)(3)(B),

(determined without regard to this sentence)

attributable to activities performed outside

•

Oil or gas (or any primary product of oil or

for such tax year are derived from the

the United States.

gas),

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

•

Alternative 85% foreign direct cost test.

Any log, cant, or similar form of

You meet this test if, for any two of the

Excluded receipts. Foreign trading gross

unprocessed softwood timber,

•

activities listed above, the foreign direct

receipts do not include the receipts of a

Products the transfer of which is

costs equal or exceed 85% of the total direct

taxpayer from a transaction if:

prohibited or curtailed to carry out the policy

•

costs attributable to that activity.

The qualifying foreign trade property or

stated in paragraph (2)(C) of section 3 of

services are for ultimate use in the United

Public Law 96-72, The Export Administration

If you incur no direct costs with respect

States;

Act of 1979, and

to any activity listed above, that activity is

•

The qualifying foreign trade property or

Property designated by an Executive

not taken into account for purposes of

services are for use by the United States or

order of the President as in short supply

determining whether you have met either

any instrumentality of the United States and

because the property is insufficient to meet

the 50% or 85% foreign direct cost test.

such use is required by law or regulation;

the requirements of the domestic economy

•

$5 million gross receipts exception. The

Such transaction is accomplished by a

(beginning with the date specified in the

foreign economic process requirements do

subsidy granted by the government (or any

Executive order).

not apply to taxpayers whose foreign trading

instrumentality) of the country or possession

Related person. Generally, a person is

gross receipts for the tax year are $5 million

in which the property is manufactured,

considered related to another person, for

or less. For tax years of less than 12

produced, grown, or extracted; or

purposes of the extraterritorial income

months, the test is determined on an

•

The taxpayer has elected to exclude the

exclusion, if the persons are treated as a

annualized basis. For purposes of the

receipts under section 942(a)(3). See the

single employer under section 52(a) or (b) or

exception, all related persons are treated as

instructions for line 1 for more details.

section 414(m) or (o). For this purpose,

one taxpayer and, therefore, only one $5

determinations under section 52(a) and (b)

million limit applies.

Foreign Economic

are made without regard to section 1563(b).

Process Requirements

In the case of a partnership, S

corporation, or other pass-through entity, the

You are generally treated as having foreign

Foreign Trade Income

limit applies to both the pass-through entity

trading gross receipts from a transaction

Foreign trade income (FTI) is your taxable

and its partners, shareholders, or other

only if certain economic processes take

income (determined without regard to the

owners. The pass-through entity must

place outside the United States with respect

extraterritorial income exclusion) attributable

advise its partners, shareholders, or other

to that transaction. However, see $5 million

to foreign trading gross receipts. See

owners if and how the entity met the foreign

gross receipts exception below.

section 941(b)(2) for special rules for

economic process requirements.

Generally, a transaction will qualify if two

cooperatives.

requirements are met:

Qualifying Foreign

•

Foreign Sale and Leasing

Participation outside the United States in

Trade Property

the sales portion of the transaction and

Income

•

Generally, qualifying foreign trade property

Satisfaction of either the 50% or the 85%

Foreign sale and leasing income (FSLI) is

is property that meets all three of the

foreign direct cost test.

generally the amount of your foreign trade

following conditions.

For purposes of determining whether

•

income for a transaction that is:

The property must be held primarily for

•

your gross receipts qualify as foreign trading

Properly allocable to activities that

sale, lease, or rental, in the ordinary course

gross receipts, the foreign economic

constitute foreign economic processes

of a trade or business, for direct use,

process requirements are treated as

(described above),

consumption, or disposition outside the

•

satisfied if any related person has met the

Derived by you from the lease or rental of

United States and Puerto Rico.

economic process requirements with

•

qualifying foreign trade property for use by

Not more than 50% of the fair market

respect to the same qualifying foreign trade

the lessee outside the United States, or

value of the property can be attributable to

•

property.

Derived by you from the sale of qualifying

(a) articles manufactured, produced, grown,

Participation outside the United States in

foreign trade property formerly leased or

or extracted outside the United States and

the sales portion of the transaction.

rented for use by the lessee outside the

Puerto Rico and (b) direct costs of labor

Generally, the foreign economic process

United States.

performed outside the United States and

requirements are met for your gross receipts

Puerto Rico.

Only directly allocable expenses are

•

derived from any transaction if you have (or

The property generally must be

taken into account in figuring your foreign

any person acting under a contract with you

manufactured, produced, grown, or

sale and leasing income. Income properly

has) participated outside the United States

extracted within the United States and

allocable to certain intangibles is excluded

in the solicitation (other than advertising),

Puerto Rico. However, property

from foreign sale and leasing income. See

negotiation, or the making of the contract

manufactured, produced, grown, or

sections 941(c)(2)(B) and 941(c)(3) for

relating to the transaction.

extracted outside the United States and

special rules related to foreign sale and

50% foreign direct cost test. You meet

Puerto Rico is qualifying foreign trade

leasing income.

this test if the foreign direct costs you

property if the property was manufactured,

Reporting of Transactions

incurred that are attributable to the

produced, grown, or extracted by:

transaction equal or exceed 50% of the total

1. A domestic corporation,

Generally, you may report transactions

direct costs you incurred attributable to the

2. An individual who is a citizen or

(including sale transactions and leasing

transaction.

resident of the United States,

transactions) either on a transaction-by-

Total direct costs are those costs for

3. A foreign corporation that elects to be

transaction basis or on the basis of groups

any transaction that are attributable to the

treated as a domestic corporation under

of transactions based on product lines or

following activities you (or any person acting

section 943(e), or

recognized industry or trade usage. See the

-2-

Instructions For Form 8873 - 2005 Page 2

Related Articles

Related forms

Related Categories