Instructions For Form 8873 - Extraterritorial Income Exclusion

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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

to transactions after September 30, 2000.

What’s New

the fact that a lessor retained approval of

However, the exclusion does not apply to

the replacement lessee.

any transaction in the ordinary course of a

The American Jobs Creation Act of 2004

trade or business involving a FSC (Foreign

Unrelated person. An unrelated person is

repealed the extraterritorial income (ETI)

Sales Corporation) that is under a binding

a person that is not a related person as

exclusion provisions generally for

contract that is in effect on September 30,

defined in Qualifying Foreign Trade Property

transactions after 2004, subject to a

2000, and at all times thereafter, and that is

on page 2.

transition rule. Under the transition rule,

between the FSC (or a person related to the

taxpayers may claim 80% and 60% of the

Note. For purposes of implementing these

FSC) and a person other than a related

otherwise-applicable pre-repeal ETI

rules, transactions after 2004 that are not

person.

exclusion for transactions during 2005 and

under a binding contract described above

Line 2 election. The taxpayer may elect to

2006, respectively. The general repeal of

cannot be included on the same Form 8873

apply the exclusion rules for the transactions

the ETI exclusion provisions does not apply

with other transactions. See the specific

described above involving a FSC. To make

to transactions in the ordinary course of a

instructions for line 5c on page 3 for more

the election, check the box on line 2. See

trade or business under a binding contract if

information.

the instructions for line 2 for more details.

such contract is between the taxpayer and

Revocation of Election to be

an unrelated person (defined below) and

Extraterritorial Income

such contract is in effect on September 17,

Treated as a Domestic

Extraterritorial income is the gross income of

2003, and at all times thereafter.

Corporation

the taxpayer attributable to foreign trading

Foreign corporations that elected to be

gross receipts (defined below). The taxpayer

Foreign corporations that elected to be

treated as domestic corporations (on line 3

reports all of its extraterritorial income on its

treated as domestic corporations under

of Form 8873) may, under certain

tax return. It then uses Form 8873 to

section 943(e) (on line 3 of Form 8873) may,

circumstances, revoke such election before

calculate its exclusion from income for

under the circumstances described below,

October 22, 2005, without recognition of

extraterritorial income that is qualifying

revoke such election before October 22,

gain or loss.

foreign trade income.

2005. If the election is revoked, no gain or

For more information, see ETI Repeal

loss shall be recognized with respect to

Qualifying Foreign

below.

property treated as transferred under

Trade Income

section 943(e)(4)(B)(ii) to the extent such

General Instructions

property:

Generally, qualifying foreign trade income is

•

was treated as transferred under section

the amount of gross income that, if

943(e)(4)(B)(i) or

excluded, would result in a reduction of

Purpose of Form

•

was acquired during a tax year to which

taxable income by the greatest of:

•

Use this form to figure the amount of

such election applies and before May 1,

15% of foreign trade income,

•

extraterritorial income (defined below)

2003, in the ordinary course of its trade or

1.2% of foreign trading gross receipts, or

•

excluded from gross income for the tax year.

business.

30% of foreign sale and leasing income.

Attach the form to your income tax return.

The IRS and Treasury have been

See definitions below and on page 2.

Note. The amount figured on the form is net

authorized to issue any guidance that may

Foreign Trading

of the disallowed deductions.

be necessary to prevent the abuse of the

above rules.

Gross Receipts

ETI Repeal

A taxpayer is treated as having foreign

Pre-Repeal ETI Exclusion

The American Jobs Creation Act of 2004

trading gross receipts (FTGR) derived from

repealed the ETI exclusion provisions

certain activities in connection with

Rules

generally for transactions after 2004, subject

qualifying foreign trade property (defined on

to a transition rule.

page 2) only if it meets the foreign economic

Who Qualifies for the Exclusion

process requirements (described on page

Transition Rule and Binding

2). Foreign trading gross receipts are the

Eligible Taxpayers

Contract Exception

taxpayer’s gross receipts that are:

Individuals, corporations (including S

Taxpayers may claim 80% and 60% of the

1. From the sale, exchange, or other

corporations), partnerships, and other

otherwise-applicable pre-repeal ETI

disposition of qualifying foreign trade

pass-through entities are entitled to the

exclusion for transactions during 2005 and

property;

exclusion if they have extraterritorial income.

2006, respectively. The general repeal of

2. From the lease or rental of qualifying

the ETI exclusion provisions does not apply

foreign trade property for use by the lessee

Special rule for DISCs. The extraterritorial

to transactions in the ordinary course of a

outside the United States;

income exclusion does not apply to any

trade or business under a binding contract if

taxpayer for any tax year if, at any time

3. For services that are related and

such contract is between the taxpayer and

subsidiary to (a) any sale, exchange, or

during the tax year, the taxpayer is a

an unrelated person (defined below) and

other disposition of qualifying foreign trade

member of a controlled group of

such contract is in effect on September 17,

property by such taxpayer or (b) any lease

corporations (as defined in section

2003, and at all times thereafter. For these

or rental of qualifying foreign trade property

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

purposes, a binding contract includes a

for use by the lessee outside the United

which a DISC (Domestic International Sales

purchase option, renewal option, or

States;

Corporation) is a member.

replacement option that is included in such

4. For engineering or architectural

Eligible Transactions

contract and that is enforceable against the

services for construction projects located (or

seller or lessor. For this purpose, a

Generally, the extraterritorial income

proposed for location) outside the United

replacement option will be considered

exclusion applies to taxpayers with respect

States; or

Cat. No. 31661R

Instructions For Form 8873 - Extraterritorial Income Exclusion - 2004

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