Instructions For Form 8873 - Extraterritorial Income Exclusion

•

Foreign Trade Income

receipts derived from any transaction if

The property must be held primarily for

you have (or any person acting under a

sale, lease, or rental, in the ordinary

Foreign trade income is your taxable

contract with you has) participated

course of a trade or business, for direct

income (determined without regard to the

outside the United States in the

use, consumption, or disposition outside

extraterritorial income exclusion)

solicitation (other than advertising),

the United States and Puerto Rico.

attributable to foreign trading gross

•

negotiation, or the making of the contract

Not more than 50% of the fair market

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

relating to the transaction.

value of the property can be attributable

rules for cooperatives.

to (a) articles manufactured, produced,

50% foreign direct cost test. You meet

grown, or extracted outside the United

this test if the foreign direct costs you

Foreign Sale and Leasing

incurred that are attributable to the

States and Puerto Rico and (b) direct

Income

transaction equal or exceed 50% of the

costs of labor performed outside the

total direct costs you incurred attributable

United States and Puerto Rico.

Foreign sale and leasing income is

•

to the transaction.

generally the amount of your foreign trade

The property generally must be

income for a transaction that is:

manufactured, produced, grown, or

Total direct costs are those costs for

•

Properly allocable to activities that

extracted within the United States and

any transaction that are attributable to the

constitute foreign economic processes

Puerto Rico. However, property

following activities you (or any person

(described on page 1),

acting under a contract with you)

manufactured, produced, grown, or

•

Derived by you from the lease or rental

performed at any location with respect to

extracted outside the United States and

of qualifying foreign trade property for use

qualifying foreign trade property:

Puerto Rico is qualifying foreign trade

•

by the lessee outside the United States,

Advertising and sales promotion,

property if the property was

•

Processing of customer orders and

manufactured, produced, grown, or

•

Derived by you from the sale of

arranging for delivery,

extracted by:

•

qualifying foreign trade property formerly

Transportation outside the United

1. A domestic corporation,

leased or rented for use by the lessee

States in connection with delivery to the

2. An individual who is a citizen or

outside the United States.

customer,

•

resident of the United States,

Only directly allocable expenses are

Determination and transmittal of a final

3. A foreign corporation that elects to

taken into account in figuring your foreign

invoice or statement of account or the

be treated as a domestic corporation

sale and leasing income. Income properly

receipt of payment, and

•

allocable to certain intangibles is

under section 943(e), or

Assumption of credit risk.

excluded from foreign sale and leasing

4. A partnership or other pass-through

Foreign direct costs are the portion

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

entity all of the partners or owners of

of the total direct costs of any transaction

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

which are described in items 1, 2, or 3

attributable to activities performed outside

foreign sale and leasing income.

above.

the United States.

Reporting of Transactions

Alternative 85% foreign direct cost

Excluded property. The following

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

Generally, you may report transactions

property is excluded from the definition of

the activities listed above, the foreign

(including sale transactions and leasing

qualifying foreign trade property:

direct costs equal or exceed 85% of the

•

transactions) either on a transaction-by-

Property with respect to which a related

total direct costs attributable to that

transaction basis or on the basis of

person (defined below) has calculated its

activity.

groups of transactions based on product

exclusion using the 1.2% of foreign

lines or recognized industry or trade

If you incur no direct costs with

trading gross receipts method,

usage. See the instructions for line 5c for

respect to any activity listed above, that

•

Property you lease or rent for use by

rules concerning grouping elections that

activity is not taken into account for

any related person,

purposes of determining whether you

may be made with respect to

•

Certain intangibles described in section

transactions. However, you may not

have met either the 50% or 85% foreign

943(a)(3)(B),

direct cost test.

group sales and leases together, and you

•

may not report foreign sale and leasing

Oil or gas (or any primary product of oil

$5 million gross receipts exception.

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

or gas),

The foreign economic process

•

on the basis of groups.

Any log, cant, or similar form of

requirements do not apply to taxpayers

unprocessed softwood timber,

whose foreign trading gross receipts for

•

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

Products the transfer of which is

Specific Instructions

years of less than 12 months, the test is

prohibited or curtailed to carry out the

determined on an annualized basis. For

policy stated in paragraph (2)(C) of

purposes of the exception, all related

section 3 of Public Law 96-72, The Export

Part I–Elections and Other

persons are treated as one taxpayer and,

Administration Act of 1979, and

•

therefore, only one $5 million limit applies.

Information

Property designated by an Executive

order of the President as in short supply

In the case of a partnership, S

Line 1. Check the box if the taxpayer is

because the property is insufficient to

corporation, or other pass-through entity,

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

meet the requirements of the domestic

the limit applies to both the pass-through

exclude a portion of its gross receipts

economy (beginning with the date

entity and its partners, shareholders, or

from treatment under the extraterritorial

specified in the Executive order).

other owners. The pass-through entity

income exclusion provisions. Attach a

must advise its partners, shareholders, or

schedule that lists the transactions being

Related person. Generally, a person is

other owners if and how the entity met the

omitted.

considered related to another person, for

foreign economic process requirements.

Note: A foreign tax credit may be

purposes of the extraterritorial income

available for foreign taxes paid on the

exclusion, if the persons are treated as a

Qualifying Foreign

receipts the taxpayer excludes from

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

Trade Property

treatment under the extraterritorial income

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

exclusion provisions.

determinations under sections 52(a) and

Generally, qualifying foreign trade

property is property that meets all three of

(b) are made without regard to section

Line 2. Check the box if the taxpayer is

the following conditions:

1563(b).

electing to apply the extraterritorial

-2-

Instructions For Form 8873 - Extraterritorial Income Exclusion - 2002 Page 2

Related Articles

Related forms

Related Categories