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.

exclusion from income for

this sentence) for such tax year are

General Instructions

extraterritorial income that is qualifying

derived from the activities described in

foreign trade income.

items 1, 2, or 3 above.

Purpose of Form

Excluded receipts. Foreign trading

Qualifying Foreign

gross receipts do not include the

Use this form to figure the amount of

Trade Income

receipts of a taxpayer from a

extraterritorial income (defined below)

transaction if:

excluded from gross income for the tax

Generally, qualifying foreign trade

•

The qualifying foreign trade property

year. Attach the form to your income

income is the amount of gross income

or services are for ultimate use in the

tax return.

that, if excluded, would result in a

United States,

reduction of taxable income by the

•

The qualifying foreign trade property

greatest of:

Note: The amount figured on the form

or services are for use by the United

•

15% of foreign trade income,

is net of the disallowed deductions.

States or any instrumentality of the

•

1.2% of foreign trading gross

United States and such use is required

receipts, or

Who Qualifies for

by law or regulation,

•

30% of foreign sale and leasing

•

Such transaction is accomplished by

the Exclusion

income.

a subsidy granted by the government

See definitions below and on page 2.

(or any instrumentality) of the country or

Eligible Taxpayers

possession in which the property is

Foreign Trading

manufactured, produced, grown, or

Individuals, corporations (including S

extracted, or

corporations), partnerships, and other

Gross Receipts

•

The taxpayer has elected to exclude

pass-through entities are entitled to the

A taxpayer is treated as having foreign

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

exclusion if they have extraterritorial

trading gross receipts derived from

See the instructions for line 1 for more

income.

certain activities in connection with

details.

Special rule for DISCs. The

qualifying foreign trade property

extraterritorial income exclusion does

Foreign Economic

(defined on page 2) only if it meets the

not apply to any taxpayer for any tax

foreign economic process requirements

Process Requirements

year if, at any time during the tax year,

(described below). Foreign trading

You are generally treated as having

the taxpayer is a member of a

gross receipts are the taxpayer’s gross

foreign trading gross receipts from a

controlled group of corporations (as

receipts that are:

transaction only if certain economic

defined in section 927(d)(4), as in effect

1. From the sale, exchange, or

processes take place outside the

before its repeal) of which a DISC is a

other disposition of qualifying foreign

United States with respect to that

member.

trade property,

transaction. However, see $5 million

2. From the lease or rental of

Eligible Transactions

gross receipts exception on page 2.

qualifying foreign trade property for use

Generally, the extraterritorial income

Generally, a transaction will qualify if

by the lessee outside the United States,

exclusion applies to taxpayers with

two requirements are met:

3. For services that are related and

•

respect to transactions after September

Participation outside the United

subsidiary to (a) any sale, exchange, or

30, 2000. However, the exclusion does

States in the sales portion of the

other disposition of qualifying foreign

not apply to any transaction in the

transaction and

trade property by such taxpayer or (b)

•

ordinary course of a trade or business

Satisfaction of either the 50% or the

any lease or rental of qualifying foreign

involving a FSC that occurs before

85% foreign direct cost test.

trade property for use by the lessee

January 1, 2002, unless the taxpayer

For purposes of determining whether

outside the United States,

elects to apply the exclusion rules in

your gross receipts qualify as foreign

4. For engineering or architectural

lieu of the FSC rules. To make the

trading gross receipts, the foreign

services for construction projects

election, check the box on line 2. See

economic process requirements are

located (or proposed for location)

the instructions for line 2 for more

treated as satisfied if any related

outside the United States, or

details.

person has met the economic process

5. For the performance of

requirements with respect to the same

managerial services for a person other

Extraterritorial Income

qualifying foreign trade property.

than a related person connected with

Extraterritorial income is the gross

the production of foreign trading gross

Participation outside the United

income of the taxpayer attributable to

receipts described in items 1, 2, or 3

States in the sales portion of the

foreign trading gross receipts (defined

above. Item 5 does not apply to a

transaction. Generally, the foreign

below). The taxpayer reports all of its

taxpayer for any tax year unless at

economic process requirements are

extraterritorial income on its tax return.

least 50% of its foreign trading gross

met for your gross receipts derived from

It then uses Form 8873 to calculate its

receipts (determined without regard to

any transaction if you have (or any

Cat. No. 31661R

Instructions For Form 8873 - Extraterritorial Income Exclusion - 2001

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