Instructions For Form 8873 - Extraterritorial Income Exclusion - 2002

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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.
transactions described above involving a
5. For the performance of managerial
A Change to Note
FSC. To make the election, check the box
services for a person other than a related
The computation in Part IV of Form 8873
on line 2. See the instructions for line 2
person connected with the production of
has been revised.
for more details.
foreign trading gross receipts described in
items 1, 2, or 3 above. Item 5 does not
The instructions for your income
apply to a taxpayer for any tax year
Extraterritorial Income
!
tax return may refer to the
unless at least 50% of its foreign trading
extraterritorial income exclusion
CAUTION
Extraterritorial income is the gross income
gross receipts (determined without regard
from Form 8873, line 55. The correct
of the taxpayer attributable to foreign
to this sentence) for such tax year are
reference for this line is Form 8873, line
trading gross receipts (defined below).
derived from the activities described in
52.
The taxpayer reports all of its
items 1, 2, or 3 above.
extraterritorial income on its tax return. It
General Instructions
then uses Form 8873 to calculate its
Excluded receipts. Foreign trading
exclusion from income for extraterritorial
gross receipts do not include the receipts
income that is qualifying foreign trade
of a taxpayer from a transaction if:
Purpose of Form
income.
The qualifying foreign trade property or
Use this form to figure the amount of
services are for ultimate use in the United
extraterritorial income (defined below)
Qualifying Foreign
States,
excluded from gross income for the tax
The qualifying foreign trade property or
Trade Income
year. Attach the form to your income tax
services are for use by the United States
return.
or any instrumentality of the United States
Generally, qualifying foreign trade income
and such use is required by law or
is the amount of gross income that, if
Note: The amount figured on the form is
regulation,
net of the disallowed deductions.
excluded, would result in a reduction of
Such transaction is accomplished by a
taxable income by the greatest of:
Who Qualifies for
subsidy granted by the government (or
15% of foreign trade income,
any instrumentality) of the country or
1.2% of foreign trading gross receipts,
the Exclusion
possession in which the property is
or
manufactured, produced, grown, or
30% of foreign sale and leasing
Eligible Taxpayers
extracted, or
income.
The taxpayer has elected to exclude
Individuals, corporations (including S
See definitions below and on page 2.
the receipts under section 942(a)(3). See
corporations), partnerships, and other
pass-through entities are entitled to the
the instructions for line 1 for more details.
Foreign Trading
exclusion if they have extraterritorial
Foreign Economic
Gross Receipts
income.
Process Requirements
A taxpayer is treated as having foreign
Special rule for DISCs. The
You are generally treated as having
trading gross receipts derived from
extraterritorial income exclusion does not
foreign trading gross receipts from a
apply to any taxpayer for any tax year if,
certain activities in connection with
transaction only if certain economic
at any time during the tax year, the
qualifying foreign trade property (defined
processes take place outside the United
taxpayer is a member of a controlled
on page 2) only if it meets the foreign
States with respect to that transaction.
economic process requirements
group of corporations (as defined in
However, see $5 million gross receipts
(described below). Foreign trading gross
section 927(d)(4), as in effect before its
exception on page 2.
repeal) of which a DISC is a member.
receipts are the taxpayer’s gross receipts
Generally, a transaction will qualify if
that are:
Eligible Transactions
two requirements are met:
1. From the sale, exchange, or other
Generally, the extraterritorial income
Participation outside the United States
disposition of qualifying foreign trade
exclusion applies to taxpayers with
in the sales portion of the transaction and
property,
respect to transactions after September
Satisfaction of either the 50% or the
2. From the lease or rental of
30, 2000. However, the exclusion does
85% foreign direct cost test.
qualifying foreign trade property for use
not apply to any transaction in the
For purposes of determining whether
by the lessee outside the United States,
ordinary course of a trade or business
your gross receipts qualify as foreign
3. For services that are related and
involving a FSC that occurs:
trading gross receipts, the foreign
subsidiary to (a) any sale, exchange, or
Before January 1, 2002, or
economic process requirements are
other disposition of qualifying foreign
After December 31, 2001, pursuant to a
treated as satisfied if any related person
trade property by such taxpayer or (b)
binding contract that is in effect on
has met the economic process
any lease or rental of qualifying foreign
September 30, 2000, and thereafter, and
requirements with respect to the same
trade property for use by the lessee
that is between the FSC (or a person
qualifying foreign trade property.
outside the United States,
related to the FSC) and a person other
4. For engineering or architectural
Participation outside the United States
than a related person.
services for construction projects located
in the sales portion of the transaction.
Line 2 election. The taxpayer may elect
(or proposed for location) outside the
Generally, the foreign economic process
to apply the exclusion rules for the
United States, or
requirements are met for your gross
Cat. No. 31661R

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