Instructions For Form 8873 - Extraterritorial Income Exclusion

Processing of customer orders and

2. An individual who is a citizen or

from foreign sale and leasing income. See

arranging for delivery,

resident of the United States,

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

special rules related to foreign sale and

Transportation outside the United

3. A foreign corporation that elects to

leasing income.

States in connection with delivery to the

be treated as a domestic corporation

customer,

under section 943(e), or

Reporting of Transactions

Determination and transmittal of a final

4. A partnership or other pass-through

For all transactions other than foreign sale

invoice or statement of account or the

entity all of the partners or owners of

and leasing income transactions, you may

receipt of payment, and

which are described in items 1, 2, or 3

report your transactions on a

above.

Assumption of credit risk.

transaction-by-transaction basis or on the

Excluded property. The following

Foreign direct costs are the portion of

basis of groups of transactions based on

property is excluded from the definition of

the total direct costs of any transaction

product lines or recognized industry or

qualifying foreign trade property.

attributable to activities performed outside

trade usage. See the instructions for line

the United States.

Property with respect to which a related

5c for rules concerning grouping elections

person (defined below) has calculated its

Alternative 85% foreign direct cost

that may be made with respect to some

exclusion using the 1.2% of foreign

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

or all transactions of the taxpayer.

trading gross receipts method,

the activities listed above, the foreign

You must report foreign sale and

direct costs equal or exceed 85% of the

Property you lease or rent for use by

leasing income transactions on a

total direct costs attributable to that

any related person,

transaction-by-transaction basis. You may

activity.

Certain intangibles described in section

not report foreign sale and leasing income

If you incur no direct costs with respect

943(a)(3)(B),

transactions on the basis of groups of

to any activity listed above, that activity is

Oil or gas (or any primary product of oil

transactions. In addition, you may not

not taken into account for purposes of

or gas),

group foreign sale and leasing income

determining whether you have met either

Any log, cant, or similar form of

transactions with other transactions.

the 50% or 85% foreign direct cost test.

unprocessed softwood timber,

$5 million gross receipts exception.

Products the transfer of which is

The foreign economic process

Specific Instructions

prohibited or curtailed to carry out the

requirements do not apply to taxpayers

policy stated in paragraph (2)(C) of

whose foreign trading gross receipts for

section 3 of Public Law 96–72, The Export

Part I–Elections and Other

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

Administration Act of 1979, and

years of less than 12 months, including

Information

Property designated by an Executive

the year of enactment of these provisions

order of the President as in short supply

as well as short tax years, the test is

Line 1. Check the box if the taxpayer is

because the property is insufficient to

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

determined on an annualized basis. For

meet the requirements of the domestic

exclude a portion of its gross receipts

purposes of the exception, all related

economy (beginning with the date

from treatment under the extraterritorial

persons are treated as one taxpayer and,

specified in the Executive order).

therefore, only one $5 million limit applies.

income exclusion provisions. Attach a

Related person. Generally, a person is

schedule that lists the transactions being

In the case of a partnership, S

considered related to another person, for

omitted.

corporation, or other pass-through entity,

purposes of the extraterritorial income

the limit applies to both the pass-through

Note: A foreign tax credit may be

exclusion, if the persons are treated as a

available for foreign taxes paid on the

entity and its partners, shareholders, or

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

receipts the taxpayer does not treat as

other owners. The pass-through entity

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

subject to the extraterritorial income

must advise its partners, shareholders, or

determinations under section 52(a) and

other owners if and how the entity met the

exclusion provisions.

(b) are made without regard to section

foreign economic process requirements.

Line 2. Check the box if the taxpayer is

1563(b).

electing, with respect to certain

Qualifying Foreign

Foreign Trade Income

transactions, to have the extraterritorial

income exclusion provisions apply in lieu

Trade Property

Foreign trade income is your taxable

of the FSC provisions. Attach a schedule

income (determined without regard to the

Generally, qualifying foreign trade

listing those transactions. Once the

extraterritorial income exclusion)

property is property that meets all three

election is made with respect to a

attributable to foreign trading gross

of the following conditions:

transaction, the election applies to the tax

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

year for which it was made and all later

The property must be held primarily for

rules for cooperatives.

tax years. The election may be revoked

sale, lease, or rental, in the ordinary

only with IRS consent.

course of a trade or business, for direct

Foreign Sale and Leasing Income

use, consumption, or disposition outside

Line 3. Check the box if the taxpayer is

Foreign sale and leasing income is

the United States and Puerto Rico.

an “applicable foreign corporation” that

generally the amount of your foreign trade

elects to be treated as a domestic

Not more than 50% of the fair market

income for a transaction that is:

corporation under section 943(e). To be

value of the property can be attributable

Properly allocable to activities that

eligible, the foreign corporation must

to (a) articles manufactured, produced,

constitute foreign economic processes

waive the right to claim all benefits

grown, or extracted outside the United

(described on page 1),

granted to it by the United States under

States and Puerto Rico and (b) direct

Derived by you from the lease or rental

any treaty. If the election is made, the

costs of labor performed outside the

of qualifying foreign trade property for use

corporation will be treated as a domestic

United States and Puerto Rico.

by the lessee outside the United States,

corporation for all purposes of the Internal

The property generally must be

Revenue Code. However, the corporation

manufactured, produced, grown, or

Derived by you from the sale of

may not elect to be an S corporation.

extracted within the United States and

qualifying foreign trade property formerly

An “applicable foreign corporation” is a

Puerto Rico. However, property

leased or rented for use by the lessee

corporation that:

manufactured, produced, grown, or

outside the United States.

extracted outside the United States and

1. Manufactures, produces, grows, or

Only directly allocable expenses are

Puerto Rico is qualifying trade property if

extracts property in the ordinary course

taken into account in figuring your foreign

the property was manufactured,

of the corporation's trade or business or

sale and leasing income. Income properly

produced, grown, or extracted by:

2. Substantially all of its gross receipts

allocable to certain intangibles is excluded

1. A domestic corporation,

are foreign trading gross receipts.

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Instructions For Form 8873 - Extraterritorial Income Exclusion - 2000 Page 2

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