Instructions for Form 8873 |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Use this form to figure the amount of extraterritorial income (defined below) excluded from gross income for the tax year.
Attach the form to your
income tax return.
Note.
The amount figured on the form is net of the disallowed deductions.
The American Jobs Creation Act of 2004 repealed the ETI exclusion provisions generally for transactions after 2004, subject
to transition rules.
Transition Rule and Binding Contract Exception
Transition rule.
Taxpayers may claim 80% and 60% of the otherwise applicable pre-repeal ETI exclusion for transactions during 2005
and 2006, respectively. See
80% transactions and 60% transactions below for additional information.
Binding contract exception.
The binding contract exception has been repealed for tax years beginning after May 17, 2006. For tax years beginning
before May 18, 2006, the
following rules apply: The taxpayer may claim a 100% exclusion with respect to transactions in the ordinary course of a trade
or business under a
binding contract if such contract is between the taxpayer and an unrelated person (defined below) and such contract was in
effect on September 17,
2003, and at all times thereafter.
For these purposes, a binding contract includes a purchase option, renewal option, or replacement option that is included
in such contract and that
is enforceable against the seller or lessor. For this purpose, a replacement option will be considered enforceable against
a lessor notwithstanding
the fact that a lessor retained approval of the replacement lessee.
Unrelated person.
An unrelated person is a person that is not a related person as defined in Qualifying Foreign Trade Property on page 2.
100% transactions are (a) transactions under a binding contract that meets the requirements described in Binding contract
exception above or (b) transactions before 2005.
80% transactions are transactions during 2005 to which the Binding contract exception (described above) does not apply.
60% transactions are transactions during 2006 to which the Binding contract exception (described above) does not apply.
Pre-Repeal ETI Exclusion Rules
Who Qualifies for the Exclusion
Individuals, corporations (including S corporations), partnerships, and other pass-through entities are entitled to the exclusion
if they have
extraterritorial income.
Special rule for DISCs.
The extraterritorial income exclusion does not apply to any taxpayer for any tax year if, at any time during the tax
year, the taxpayer is a member
of a controlled group of corporations (as defined in section 927(d)(4), as in effect before its repeal) of which a DISC (Domestic
International Sales
Corporation) is a member.
Generally, the extraterritorial income exclusion applies to taxpayers with respect to transactions after September 30, 2000.
However, the exclusion
does not apply to any transaction in the ordinary course of a trade or business involving a FSC (Foreign Sales Corporation)
that is under a binding
contract that is in effect on September 30, 2000, and at all times thereafter, and that is between the FSC (or a person related
to the FSC) and a
person other than a related person.
Line 2 election.
The taxpayer may elect to apply the exclusion rules for the transactions described above involving a FSC. To make
the election, check the box on
line 2. See the instructions for line 2 for more details.
Extraterritorial income is the gross income of the taxpayer attributable to foreign trading gross receipts (defined below).
The taxpayer reports
all of its extraterritorial income on its tax return. It then uses Form 8873 to calculate its exclusion from income for extraterritorial
income that
is qualifying foreign trade income.
Qualifying Foreign Trade Income
Generally, qualifying foreign trade income is the amount of gross income that, if excluded, would result in a reduction of
taxable income by the
greatest of:
-
15% of foreign trade income,
-
1.2% of foreign trading gross receipts, or
-
30% of foreign sale and leasing income.
See definitions below and on page 2.
Foreign Trading Gross Receipts
A taxpayer is treated as having foreign trading gross receipts (FTGR) derived from certain activities in connection with qualifying
foreign trade
property (defined on page 2) only if it meets the foreign economic process requirements (described on page 2). Foreign trading
gross receipts are the
taxpayer's gross receipts that are:
-
From the sale, exchange, or other disposition of qualifying foreign trade property;
-
From the lease or rental of qualifying foreign trade property for use by the lessee outside the United States;
-
For services that are related and subsidiary to (a) any sale, exchange, or other disposition of qualifying foreign trade property
by such
taxpayer or (b) any lease or rental of qualifying foreign trade property for use by the lessee outside the United States;
-
For engineering or architectural services for construction projects located (or proposed for location) outside the United
States;
or
-
For the performance of managerial services for a person other than a related person connected with the production of foreign
trading gross
receipts described in items 1, 2, or 3 above. Item 5 does not apply to a taxpayer for any tax year unless at least 50% of
its foreign trading gross
receipts (determined without regard to this sentence) for such tax year are derived from the activities described in items
1, 2, or 3
above.
Excluded receipts.
Foreign trading gross receipts do not include the receipts of a taxpayer from a transaction if:
-
The qualifying foreign trade property or services are for ultimate use in the United States;
-
The qualifying foreign trade property or services are for use by the United States or any instrumentality of the United States
and such use
is required by law or regulation;
-
Such transaction is accomplished by a subsidy granted by the government (or any instrumentality) of the country or possession
in which the
property is manufactured, produced, grown, or extracted; or
-
The taxpayer has elected to exclude the receipts under section 942(a)(3). See the instructions for line 1 for more details.
Foreign Economic Process Requirements
You are generally treated as having foreign trading gross receipts from a transaction only if certain economic processes take
place outside the
United States with respect to that transaction. However, see $5 million gross receipts exception below.
Generally, a transaction will qualify if two requirements are met:
For purposes of determining whether your gross receipts qualify as foreign trading gross receipts, the foreign economic process
requirements are
treated as satisfied if any related person has met the economic process requirements with respect to the same qualifying foreign
trade property.
Participation outside the United States in the sales portion of the transaction.
Generally, the foreign economic process requirements are met for your gross receipts derived from any transaction
if you have (or any person acting
under a contract with you has) participated outside the United States in the solicitation (other than advertising), negotiation,
or the making of the
contract relating to the transaction.
50% foreign direct cost test.
You meet this test if the foreign direct costs you incurred that are attributable to the transaction equal or exceed
50% of the total direct costs
you incurred attributable to the transaction.
Total direct costs
are those costs for any transaction that are attributable to the following activities you (or any person acting under
a contract with you)
performed at any location with respect to qualifying foreign trade property:
-
Advertising and sales promotion,
-
Processing of customer orders and arranging for delivery,
-
Transportation outside the United States in connection with delivery to the customer,
-
Determination and transmittal of a final invoice or statement of account or the receipt of payment, and
-
Assumption of credit risk.
Foreign direct costs
are the portion of the total direct costs of any transaction attributable to activities performed outside the United
States.
Alternative 85% foreign direct cost test.
You meet this test if, for any two of the activities listed above, the foreign direct costs equal or exceed 85% of
the total direct costs
attributable to that activity.
If you incur no direct costs with respect to any activity listed above, that activity is not taken into account for
purposes of determining
whether you have met either the 50% or 85% foreign direct cost test.
$5 million gross receipts exception.
The foreign economic process requirements do not apply to taxpayers whose foreign trading gross receipts for the tax
year are $5 million or less.
For tax years of less than 12 months, the test is determined on an annualized basis. For purposes of the exception, all related
persons are treated as
one taxpayer and, therefore, only one $5 million limit applies.
In the case of a partnership, S corporation, or other pass-through entity, the limit applies to both the pass-through
entity and its partners,
shareholders, or other owners. The pass-through entity must advise its partners, shareholders, or other owners if and how
the entity met the foreign
economic process requirements.
Qualifying Foreign Trade Property
Generally, qualifying foreign trade property is property that meets all three of the following conditions.
-
The property must be held primarily for sale, lease, or rental, in the ordinary course of a trade or business, for direct
use, consumption,
or disposition outside the United States and Puerto Rico.
-
Not more than 50% of the fair market value of the property can be attributable to (a) articles manufactured, produced, grown,
or extracted
outside the United States and Puerto Rico and (b) direct costs of labor performed outside the United States and Puerto Rico.
-
The property generally must be manufactured, produced, grown, or extracted within the United States and Puerto Rico. However,
property
manufactured, produced, grown, or extracted outside the United States and Puerto Rico is qualifying foreign trade property
if the property was
manufactured, produced, grown, or extracted by:
-
A domestic corporation,
-
An individual who is a citizen or resident of the United States,
-
A foreign corporation that elects to be treated as a domestic corporation under section 943(e), or
-
A partnership or other pass-through entity all of the partners or owners of which are described in items 1, 2, or 3 above.
Excluded property.
The following property is excluded from the definition of qualifying foreign trade property:
-
Property with respect to which a related person (defined below) has calculated its exclusion using the 1.2% of foreign trading
gross
receipts method,
-
Property you lease or rent for use by any related person,
-
Certain intangibles described in section 943(a)(3)(B),
-
Oil or gas (or any primary product of oil or gas),
-
Any log, cant, or similar form of unprocessed softwood timber,
-
Products the transfer of which is prohibited or curtailed to carry out the policy stated in paragraph (2)(C) of section 3
of Public Law
96-72, The Export Administration Act of 1979, and
-
Property designated by an Executive order of the President as in short supply because the property is insufficient to meet
the requirements
of the domestic economy (beginning with the date specified in the Executive order).
Related person.
Generally, a person is considered related to another person, for purposes of the extraterritorial income exclusion,
if the persons are treated as a
single employer under section 52(a) or (b) or section 414(m) or (o). For this purpose, determinations under section 52(a)
and (b) are made without
regard to section 1563(b).
Foreign trade income (FTI) is your taxable income (determined without regard to the extraterritorial income exclusion) attributable
to foreign
trading gross receipts. See section 941(b)(2) for special rules for cooperatives.
Foreign Sale and Leasing Income
Foreign sale and leasing income (FSLI) is generally the amount of your foreign trade income for a transaction that is:
-
Properly allocable to activities that constitute foreign economic processes (described above),
-
Derived by you from the lease or rental of qualifying foreign trade property for use by the lessee outside the United States,
or
-
Derived by you from the sale of qualifying foreign trade property formerly leased or rented for use by the lessee outside
the United
States.
Only directly allocable expenses are taken into account in figuring your foreign sale and leasing income. Income properly
allocable to certain
intangibles is excluded from foreign sale and leasing income. See sections 941(c)(2)(B) and 941(c)(3) for special rules related
to foreign sale and
leasing income.
Reporting of Transactions
Generally, you may report transactions (including sale transactions and leasing transactions) either on a transaction-by-
transaction basis or on the basis of groups of transactions based on product lines or recognized industry or trade usage.
See the instructions for
line 5c for rules concerning grouping elections that may be made with respect to transactions. However, you may not group
sales and leases together,
and you may not report foreign sale and leasing income in column (b) of Part II of the form on the basis of groups.
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