Instructions For Form 8873 - Extraterritorial Income Exclusion

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total direct costs you incurred attributable

The property generally must be

Properly allocable to activities that

to the transaction.

manufactured, produced, grown, or

constitute foreign economic processes

extracted within the United States and

(described on page 1),

Total direct costs are those costs for

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Puerto Rico. However, property

Derived by you from the lease or rental

any transaction that are attributable to the

manufactured, produced, grown, or

of qualifying foreign trade property for use

following activities you (or any person

extracted outside the United States and

by the lessee outside the United States,

acting under a contract with you)

Puerto Rico is qualifying foreign trade

performed at any location with respect to

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property if the property was

Derived by you from the sale of

qualifying foreign trade property:

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manufactured, produced, grown, or

qualifying foreign trade property formerly

Advertising and sales promotion,

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extracted by:

leased or rented for use by the lessee

Processing of customer orders and

outside the United States.

1. A domestic corporation,

arranging for delivery,

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Only directly allocable expenses are

2. An individual who is a citizen or

Transportation outside the United

taken into account in figuring your foreign

resident of the United States,

States in connection with delivery to the

sale and leasing income. Income properly

3. A foreign corporation that elects to

customer,

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allocable to certain intangibles is

be treated as a domestic corporation

Determination and transmittal of a final

excluded from foreign sale and leasing

under section 943(e), or

invoice or statement of account or the

income. See sections 941(c)(2)(B) and

4. A partnership or other pass-through

receipt of payment, and

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941(c)(3) for special rules related to

entity all of the partners or owners of

Assumption of credit risk.

foreign sale and leasing income.

which are described in items 1, 2, or 3

Foreign direct costs are the portion

above.

of the total direct costs of any transaction

Reporting of Transactions

attributable to activities performed outside

Excluded property. The following

the United States.

Generally, you may report transactions

property is excluded from the definition of

(including sale transactions and leasing

Alternative 85% foreign direct cost

qualifying foreign trade property:

transactions) either on a transaction-by-

test. You meet this test if, for any two of

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Property with respect to which a related

transaction basis or on the basis of

the activities listed above, the foreign

person (defined below) has calculated its

groups of transactions based on product

direct costs equal or exceed 85% of the

exclusion using the 1.2% of foreign

lines or recognized industry or trade

total direct costs attributable to that

trading gross receipts method,

usage. See the instructions for line 5c for

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activity.

Property you lease or rent for use by

rules concerning grouping elections that

If you incur no direct costs with

any related person,

may be made with respect to

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respect to any activity listed above, that

Certain intangibles described in section

transactions. However, you may not

activity is not taken into account for

943(a)(3)(B),

group sales and leases together, and you

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purposes of determining whether you

Oil or gas (or any primary product of oil

may not report foreign sale and leasing

have met either the 50% or 85% foreign

or gas),

income in column (b) of Part II of the form

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direct cost test.

Any log, cant, or similar form of

on the basis of groups.

unprocessed softwood timber,

$5 million gross receipts exception.

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Products the transfer of which is

The foreign economic process

prohibited or curtailed to carry out the

requirements do not apply to taxpayers

Specific Instructions

policy stated in paragraph (2)(C) of

whose foreign trading gross receipts for

section 3 of Public Law 96-72, The Export

the tax year are $5 million or less. For tax

Administration Act of 1979, and

years of less than 12 months, the test is

Part I–Elections and Other

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Property designated by an Executive

determined on an annualized basis. For

Information

order of the President as in short supply

purposes of the exception, all related

because the property is insufficient to

persons are treated as one taxpayer and,

Line 1. Check the box if the taxpayer is

meet the requirements of the domestic

therefore, only one $5 million limit applies.

electing, under section 942(a)(3), to

economy (beginning with the date

In the case of a partnership, S

exclude a portion of its gross receipts

specified in the Executive order).

corporation, or other pass-through entity,

from treatment under the extraterritorial

the limit applies to both the pass-through

Related person. Generally, a person is

income exclusion provisions. Attach a

entity and its partners, shareholders, or

considered related to another person, for

schedule that lists the transactions being

other owners. The pass-through entity

purposes of the extraterritorial income

omitted.

must advise its partners, shareholders, or

exclusion, if the persons are treated as a

Note: A foreign tax credit may be

other owners if and how the entity met the

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

available for foreign taxes paid on the

foreign economic process requirements.

or section 414(m) or (o). However,

receipts the taxpayer excludes from

determinations under sections 52(a) and

treatment under the extraterritorial income

Qualifying Foreign

(b) are made without regard to section

exclusion provisions.

1563(b).

Trade Property

Line 2. Check the box if the taxpayer is

Generally, qualifying foreign trade

electing to apply the extraterritorial

Foreign Trade Income

property is property that meets all three of

income exclusion provisions to certain

Foreign trade income is your taxable

the following conditions:

transactions involving a FSC (see

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income (determined without regard to the

The property must be held primarily for

Eligible Transactions on page 1).

extraterritorial income exclusion)

sale, lease, or rental, in the ordinary

Note: The extraterritorial income

attributable to foreign trading gross

course of a trade or business, for direct

exclusion provisions and the FSC

receipts. See section 941(b)(2) for special

use, consumption, or disposition outside

provisions may not be applied to the

rules for cooperatives.

the United States and Puerto Rico.

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same transaction.

Not more than 50% of the fair market

Foreign Sale and Leasing

value of the property can be attributable

Attach a schedule listing those

to (a) articles manufactured, produced,

transactions. Once the election is made

Income

grown, or extracted outside the United

with respect to a transaction, the election

States and Puerto Rico and (b) direct

Foreign sale and leasing income is

applies to the tax year for which it was

costs of labor performed outside the

generally the amount of your foreign trade

made and all later tax years. The election

United States and Puerto Rico.

income for a transaction that is:

may be revoked only with IRS consent.

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Instructions For Form 8873 - Extraterritorial Income Exclusion - 2003 Page 2

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