Instructions For Form 8873 - Extraterritorial Income Exclusion

person acting under a contract with you

Qualifying Foreign

the date specified in the Executive

has) participated outside the United

order).

Trade Property

States in the solicitation (other than

Related person. Generally, a person

advertising), negotiation, or the making

Generally, qualifying foreign trade

is considered related to another person,

of the contract relating to the

property is property that meets all three

for purposes of the extraterritorial

transaction.

of the following conditions:

income exclusion, if the persons are

•

The property must be held primarily

50% foreign direct cost test. You

treated as a single employer under

for sale, lease, or rental, in the ordinary

meet this test if the foreign direct costs

section 52(a) or (b) or section 414(m) or

you incurred that are attributable to the

course of a trade or business, for direct

(o). However, determinations under

transaction equal or exceed 50% of the

use, consumption, or disposition

section 52(a) and (b) are made without

total direct costs you incurred

outside the United States and Puerto

regard to section 1563(b).

attributable to the transaction.

Rico.

•

Not more than 50% of the fair market

Total direct costs are those costs

Foreign Trade Income

value of the property can be attributable

for any transaction that are attributable

Foreign trade income is your taxable

to (a) articles manufactured, produced,

to the following activities you (or any

income (determined without regard to

grown, or extracted outside the United

person acting under a contract with

the extraterritorial income exclusion)

States and Puerto Rico and (b) direct

you) performed at any location with

attributable to foreign trading gross

costs of labor performed outside the

respect to qualifying foreign trade

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

United States and Puerto Rico.

property:

•

special rules for cooperatives.

Advertising and sales promotion,

The property generally must be

•

Processing of customer orders and

manufactured, produced, grown, or

arranging for delivery,

Foreign Sale and Leasing

extracted within the United States and

•

Transportation outside the United

Puerto Rico. However, property

Income

States in connection with delivery to the

manufactured, produced, grown, or

Foreign sale and leasing income is

customer,

extracted outside the United States and

•

generally the amount of your foreign

Determination and transmittal of a

Puerto Rico is qualifying foreign trade

trade income for a transaction that is:

final invoice or statement of account or

property if the property was

•

the receipt of payment, and

Properly allocable to activities that

manufactured, produced, grown, or

•

Assumption of credit risk.

constitute foreign economic processes

extracted by:

Foreign direct costs are the portion

(described on page 1),

1. A domestic corporation,

•

of the total direct costs of any

Derived by you from the lease or

2. An individual who is a citizen or

transaction attributable to activities

rental of qualifying foreign trade

resident of the United States,

performed outside the United States.

property for use by the lessee outside

3. A foreign corporation that elects

the United States, or

Alternative 85% foreign direct cost

to be treated as a domestic corporation

•

test. You meet this test if, for any two

Derived by you from the sale of

under section 943(e), or

of the activities listed above, the foreign

qualifying foreign trade property

4. A partnership or other

direct costs equal or exceed 85% of the

formerly leased or rented for use by the

pass-through entity all of the partners

total direct costs attributable to that

lessee outside the United States.

or owners of which are described in

activity.

Only directly allocable expenses are

items 1, 2, or 3 above.

taken into account in figuring your

If you incur no direct costs with

foreign sale and leasing income.

respect to any activity listed above, that

Excluded property. The following

Income properly allocable to certain

activity is not taken into account for

property is excluded from the definition

intangibles is excluded from foreign

purposes of determining whether you

of qualifying foreign trade property.

have met either the 50% or 85% foreign

sale and leasing income. See sections

•

Property with respect to which a

direct cost test.

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

related person (defined below) has

rules related to foreign sale and leasing

$5 million gross receipts exception.

calculated its exclusion using the 1.2%

income.

The foreign economic process

of foreign trading gross receipts

requirements do not apply to taxpayers

method,

Reporting of Transactions

whose foreign trading gross receipts for

•

Property you lease or rent for use by

the tax year are $5 million or less. For

For all transactions other than foreign

any related person,

tax years of less than 12 months,

•

sale and leasing income transactions,

Certain intangibles described in

including the year of enactment of

you may report your transactions on a

section 943(a)(3)(B),

these provisions as well as short tax

transaction-by-transaction basis or on

•

Oil or gas (or any primary product of

years, the test is determined on an

the basis of groups of transactions

oil or gas),

annualized basis. For purposes of the

based on product lines or recognized

•

exception, all related persons are

Any log, cant, or similar form of

industry or trade usage. See the

treated as one taxpayer and, therefore,

unprocessed softwood timber,

instructions for line 5c for rules

•

only one $5 million limit applies.

Products the transfer of which is

concerning grouping elections that may

prohibited or curtailed to carry out the

be made with respect to some or all

In the case of a partnership, S

policy stated in paragraph (2)(C) of

transactions of the taxpayer.

corporation, or other pass-through

section 3 of Public Law 96-72, The

entity, the limit applies to both the

Export Administration Act of 1979, and

You must report foreign sale and

pass-through entity and its partners,

•

leasing income transactions on a

Property designated by an Executive

shareholders, or other owners. The

transaction-by-transaction basis. You

order of the President as in short

pass-through entity must advise its

may not report foreign sale and leasing

supply because the property is

partners, shareholders, or other owners

income transactions on the basis of

if and how the entity met the foreign

insufficient to meet the requirements of

groups of transactions.

economic process requirements.

the domestic economy (beginning with

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Instructions For Form 8873 - Extraterritorial Income Exclusion - 2001 Page 2

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