Instructions For Form 8873 - Extraterritorial Income Exclusion (Page 2 of 5) in pdf

The qualifying foreign trade property or

Processing of customer orders and

property if the property was manufactured,

services are for ultimate use in the United

arranging for delivery,

produced, grown, or extracted by:

States;

Transportation outside the United

1. A domestic corporation;

The qualifying foreign trade property or

States in connection with delivery to the

2. An individual who is a citizen or

services are for use by the United States

customer,

resident of the United States;

or any instrumentality of the United States

Determination and transmittal of a final

3. A foreign corporation that elects to

and such use is required by law or

invoice or statement of account or the

be treated as a domestic corporation

regulation;

receipt of payment, and

under section 943(e); or

Such transaction is accomplished by a

Assumption of credit risk.

subsidy granted by the government (or

4. A partnership or other pass-through

Foreign direct costs are the portion of

any instrumentality) of the country or

entity all of the partners or owners of

the total direct costs of any transaction

possession in which the property is

which are described in item 1, 2, or 3

attributable to activities performed outside

manufactured, produced, grown, or

above.

the United States.

extracted; or

Alternative 85% foreign direct cost

The taxpayer has elected to exclude

Excluded property. The following

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

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

property is excluded from the definition of

the activities listed above, the foreign

the instructions for line 1 for more details.

qualifying foreign trade property:

direct costs equal or exceed 85% of the

Property with respect to which a related

total direct costs attributable to that

person (defined below) has calculated its

Foreign Economic

activity.

exclusion using the 1.2% of foreign trading

Process Requirements

If you incur no direct costs with respect

gross receipts method;

You are generally treated as having

Property you lease or rent for use by

to any activity listed above, that activity is

foreign trading gross receipts from a

not taken into account for purposes of

any related person;

transaction only if certain economic

determining whether you have met either

Certain intangibles described in section

processes take place outside the United

the 50% or 85% foreign direct cost test.

943(a)(3)(B);

States with respect to that transaction.

Oil or gas (or any primary product of oil

$5 million gross receipts exception.

However, see $5 million gross receipts

or gas);

The foreign economic process

exception, later.

Any log, cant, or similar form of

requirements do not apply to taxpayers

unprocessed softwood timber;

whose foreign trading gross receipts for

Products the transfer of which is

Generally, a transaction will qualify if

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

prohibited or curtailed to carry out the

two requirements are met;

years of less than 12 months, the test is

policy stated in paragraph (2)(C) of

Participation outside the United States

determined on an annualized basis. For

section 3 of Public Law 96-72, The Export

in the sales portion of the transaction; and

purposes of the exception, all related

Administration Act of 1979; and

Satisfaction of either the 50% or the

persons are treated as one taxpayer and,

Property designated by an Executive

85% foreign direct cost test.

therefore, only one $5 million limit applies.

order of the President as in short supply

In the case of a partnership, S

because the property is insufficient to

For purposes of determining whether

corporation, or other pass-through entity,

meet the requirements of the domestic

your gross receipts qualify as foreign

the limit applies to both the pass-through

economy (beginning with the date

trading gross receipts, the foreign

entity and its partners, shareholders, or

specified in the Executive order).

economic process requirements are

other owners. The pass-through entity

treated as satisfied if any related person

Related person. Generally, a person is

must advise its partners, shareholders, or

has met the economic process

considered related to another person, for

other owners if and how the entity met the

requirements with respect to the same

purposes of the extraterritorial income

foreign economic process requirements.

qualifying foreign trade property.

exclusion, if the persons are treated as a

Qualifying Foreign

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

Participation outside the United States

Trade Property

or section 414(m) or (o). For this purpose,

in the sales portion of the transaction.

determinations under section 52(a) and

Generally, the foreign economic process

Generally, qualifying foreign trade

(b) are made without regard to section

requirements are met for your gross

property is property that meets all three of

1563(b).

receipts derived from any transaction if

the following conditions.

you have (or any person acting under a

Foreign Trade Income

The property must be held primarily for

contract with you has) participated outside

sale, lease, or rental, in the ordinary

Foreign trade income (FTI) is your taxable

the United States in the solicitation (other

course of a trade or business, for direct

income (determined without regard to the

than advertising), negotiation, or the

use, consumption, or disposition outside

extraterritorial income exclusion)

making of the contract relating to the

the United States and Puerto Rico.

attributable to foreign trading gross

transaction.

Not more than 50% of the fair market

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

value of the property can be attributable to

50% foreign direct cost test. You meet

rules for cooperatives.

(a) articles manufactured, produced,

this test if the foreign direct costs you

Foreign Sale and Leasing

grown, or extracted outside the United

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

Foreign sale and leasing income (FSLI) is

United States and Puerto Rico.

to the transaction.

generally the amount of your foreign trade

The property generally must be

Total direct costs are those costs for

income for a transaction that is:

manufactured, produced, grown, or

any transaction that are attributable to the

Properly allocable to activities that

extracted within the United States and

following activities you (or any person

constitute foreign economic processes

Puerto Rico. However, property

acting under a contract with you)

(described above),

manufactured, produced, grown, or

performed at any location with respect to

Derived by you from the lease or rental

extracted outside the United States and

qualifying foreign trade property:

of qualifying foreign trade property for use

Puerto Rico is qualifying foreign trade

Advertising and sales promotion,

by the lessee outside the United States, or

Instructions for Form 8873 (Rev. 9-2017)

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Instructions For Form 8873 - Extraterritorial Income Exclusion Page 2

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