8873 Instructions for Form 8873

Instructions for Form 8873
(Rev. September 2017)

Department of the Treasury
Internal Revenue Service

(Use with the December 2010 revision of Form 8873.)
Extraterritorial Income Exclusion
Section references are to the Internal Revenue
Code unless otherwise noted.

What’s New
These instructions are being revised
because of a required change to the
Paperwork Reduction Act Notice
regarding the OMB control number under
which the information pertaining to Form
8873 is being collected.

General Instructions
Purpose of Form

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, later.

Pre-Repeal ETI Exclusion
Rules
Who Qualifies for the Exclusion
Eligible Taxpayers

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.

Individuals, corporations (including S
corporations), partnerships, and other
pass-through entities are entitled to the
exclusion if they have extraterritorial
income.

Note. The amount figured on the form is
net of the disallowed deductions.

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.

ETI Repeal

The American Jobs Creation Act of 2004
repealed the ETI exclusion provisions
generally for transactions after 2004,
subject to transition rules.

Transition Rule

Taxpayers may claim the ETI exclusion for
(a) transactions under a binding contract
that meets the requirements described in
Binding Contract Exception below or (b)
transactions before 2005. Also see
Pre-Repeal ETI Exclusion Rules below.

Binding Contract Exception

The Tax Increase Prevention and
Reconciliation Act of 2005 repealed the
ETI binding contract exception for tax
years beginning after May 17, 2006. For
tax years beginning before May 18, 2006,
the following rules apply: The taxpayer
may claim an ETI 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
Sep 05, 2017

Eligible Transactions
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

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
Cat. No. 31661R

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.

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
later) only if it meets the foreign economic
process requirements (described below).
Foreign trading gross receipts are the
taxpayer's gross receipts that are:
1. From the sale, exchange, or other
disposition of qualifying foreign trade
property;
2. From the lease or rental of
qualifying foreign trade property for use by
the lessee outside the United States;
3. 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;
4. For engineering or architectural
services for construction projects located
(or proposed for location) outside the
United States; or
5. 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
item 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 item 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, later.
Generally, a transaction will qualify if
two requirements are met;
Participation outside the United States
in the sales portion of the transaction; and
Satisfaction of either the 50% or the
85% foreign direct cost test.
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.

property if the property was manufactured,
produced, grown, or extracted by:
1. A domestic corporation;
2. An individual who is a citizen or
resident of the United States;
3. A foreign corporation that elects to
be treated as a domestic corporation
under section 943(e); or
4. A partnership or other pass-through
entity all of the partners or owners of
which are described in item 1, 2, or 3
above.

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.

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).

$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
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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

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
Instructions for Form 8873 (Rev. 9-2017)

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-bytransaction 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.

Specific Instructions
Part I–Elections and Other
Information
Line 1. Check the box if the taxpayer is
electing, under section 942(a)(3), to
exclude a portion of its gross receipts from
treatment under the extraterritorial income
exclusion provisions. Attach a statement
that lists the transactions being omitted.
Note. A foreign tax credit may be
available for foreign taxes paid on the
receipts the taxpayer excludes from
treatment under the extraterritorial income
exclusion provisions.
Line 2. Check the box if the taxpayer is
electing to apply the extraterritorial income
exclusion provisions to certain
transactions involving a FSC (see Eligible
Transactions, earlier).
Note. The extraterritorial income
exclusion provisions and the FSC
provisions may not be applied to the same
transaction.
Attach a statement listing those
transactions. Once the election is made
with respect to a transaction, the election
applies to the tax year for which it was
made and all later tax years. The election
may be revoked only with IRS consent.
See Rev. Proc. 2001-37, 2001-1 C.B.
1327.
Line 3. Check the box if the taxpayer is
an “applicable foreign corporation” that
elects to be treated as a domestic
corporation under section 943(e). To be
Instructions for Form 8873 (Rev. 9-2017)

eligible, the foreign corporation must
waive the right to claim all benefits granted
to it by the United States under any treaty.
If the election is made, the corporation will
be treated as a domestic corporation for
all purposes of the Internal Revenue
Code. However, the corporation may not
elect to be an S corporation.
An “applicable foreign corporation” is a
foreign corporation that:
1. Manufactures, produces, grows, or
extracts property in the ordinary course of
the corporation's trade or business; or
2. Substantially all of its gross receipts
are foreign trading gross receipts.
Once made, the election applies to the
tax year made and remains in effect for all
subsequent years unless revoked or
terminated. Any revocation or termination
applies to tax years beginning after the tax
year during which the election was made.
The election will automatically terminate if
the corporation fails to meet either of the
requirements listed above. If an election is
revoked by the corporation or is
automatically terminated, the corporation
(and any successor corporation) may not
elect to be a domestic corporation again
for 5 tax years beginning with the first tax
year after the revocation or termination.
See Rev. Proc. 2001-37.
Effect of election. For purposes of
section 367, a foreign corporation that has
elected to be a domestic corporation is
generally treated as transferring, as of the
first day of the first tax year to which the
election applies, all of its assets to a
domestic corporation in an exchange
under section 354.
Exception for old earnings and
profits of certain corporations. If the
exception described in section 5(c)(3) of
the FSC Repeal and Extraterritorial
Income Exclusion Act of 2000 applies,
attach a statement indicating the basis for
your entitlement, if any, to that exception.
Effect of revocation or termination.
If a foreign corporation has elected to be a
domestic corporation and the election
ceases to apply for any subsequent tax
year, the corporation is treated as a
domestic corporation transferring, as of
the first day of the subsequent tax year to
which the election no longer applies, all of
its property to a foreign corporation in an
exchange under section 354.
Line 4. Before completing lines 4a and
4b, see Foreign Economic Process
Requirements, earlier.
Line 5a. Enter the six-digit code that best
describes the business activity for which
the form is being filed from the list of
Principal Business Activity Codes included
in your tax return instructions.

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Line 5b. Enter your product or product
line that meets one of the two standards
below.
The product or product line based on
the North American Industry Classification
System (NAICS), or
A recognized industry or trade usage.
Line 5c. Check the applicable box to
indicate the basis on which the amounts
on Form 8873 are determined using either
the transaction-by-transaction basis or an
election to group transactions. Use one of
the following formats.
(1) Transaction-by-transaction. If
your determination is based on each
transaction rather than an election to
group transactions, check box (1)(a), (1)
(b), or (1)(c), depending on your preferred
reporting format.
(a) Aggregate on Form 8873. If you
choose to aggregate your transactions on
one or more Forms 8873, check box (1)(a)
of line 5c. Aggregate on one Form 8873
those transactions for which the same
method is applied, provided all the
transactions (other than foreign sale and
leasing income transactions) are included
in the same product or product line
indicated on line 5b. If a different method
is applied to some of the transactions in
one or more of the separate product lines,
additional Forms 8873 must be filed.
Example. If you have no foreign sale
and leasing income and you apply the
15% of foreign trade income method to all
transactions in three separate product
lines, you would file three aggregate
Forms 8873. However, if you use the 1.2%
of foreign trading gross receipts method
for some of the transactions in one of the
product lines, you would then file four
aggregate Forms 8873.
Note. Taxpayers that check box (1)(a) of
line 5c may aggregate transactions on the
same Form 8873 only if they are applying
the same method (for example, 15% of
FTI, 1.2% of FTGR, 30% of FSLI) to all
transactions reported on the form and the
transactions (other than foreign sale and
leasing income transactions) are included
in the same product or product line.
(b) Aggregate on tabular schedule.
You may choose to aggregate your
transactions on a tabular schedule rather
than on Form 8873. To do so, file one
Form 8873 entering only your name and
identifying number at the top of the form.
Also check box (1)(b) of line 5c. Attach a
tabular schedule to the partially completed
Form 8873 reporting all information as if a
separate form were filed for each
aggregate of transactions described in (1)
(a) above. Also see Format of tabular
schedules below.
Note. To be eligible for either of the
aggregate reporting formats described in

(1)(a) or (b) above, you must maintain a
supporting statement that contains all
information that would be reported if a
separate Form 8873 were filed for each
transaction. The supporting statement
should not be filed with the Form 8873.
(c) Tabular schedule of
transactions. Instead of aggregate
reporting, you may choose to report
transactions on a tabular schedule. File
one Form 8873 entering only your name
and identifying number at the top of the
form. Also check box (1)(c) of line 5c.
Attach a tabular schedule to the partially
completed Form 8873 reporting all
information as if a separate Form 8873
were filed for each transaction. Also see
Format of tabular schedules below.
(2) Group of transactions. You may
elect to group transactions (other than
foreign sale and leasing income
transactions) by product or product line.
The grouping of transactions applies to all
transactions completed during the tax year
for that product or product line.
To make the election, complete one
Form 8873 entering only your name and
identifying number at the top of the form.
Also check box (2) of line 5c. Attach a
tabular schedule to the partially completed
Form 8873 reporting all information as if a
separate Form 8873 were filed for each
group of transactions. See Format of
tabular schedules below.
Note. If a grouping basis is elected,
aggregate reporting is not permitted.
Attach Form 8873 to your tax return.
Once the election is made, grouping
redeterminations are permitted until one
year after the later of:
1. The due date of your timely filed
return (including extensions), or
2. In the event of an examination of
your return by the IRS, notification by the
IRS of such examination (provided you
agree to extend the statute of limitations
for assessment by 1 year).
Note. If your foreign trading gross
receipts are $5 million or less for the tax
year, you may file a separate Form 8873
for each group of transactions instead of
filing a tabular schedule.
Format of tabular schedules. If a
tabular schedule is attached to Form
8873, the schedule must:
Be in spreadsheet or similar format,
List your name and identifying number
on each numbered page,
Be formatted in columns that
correspond to each line item of Form
8873, and
Show totals in each column.

Part II–Foreign Trade
Income and Foreign Sale
and Leasing Income
Lines 6 through 14. Enter your foreign
trading gross receipts identified on lines 6
through 14 using the rules outlined under
Foreign Trading Gross Receipts, earlier.
Line 14, column (b). Enter on this line
only the sum of those portions of the
amounts on lines 6, 9, 12, and 13, column
(a), that are attributable to foreign
economic processes (see definition
earlier). Because only foreign trading
gross receipts attributable to foreign
economic processes are included in
line 14, column (b), the amount entered on
line 14, column (b), will not necessarily
equal the total of the foreign trading gross
receipts amounts entered on lines 6, 9, 12,
and 13, column (a).
Line 17. For lines 17a through 17h,
compute your cost of goods sold allocated
to your foreign trading gross receipts. See
the instructions for the tax return to which
this form is attached for basic rules for
determining cost of goods sold.
Line 19. Enter on line 19, column (a), the
deductions, other than those you included
in figuring your cost of goods sold, that are
allocable to the amount reported on
line 15.
Enter on line 19, column (b), the
deductions, other than those you included
in figuring your cost of goods sold, that are
directly allocable to the amount reported
on line 16.
Note. Do not include your allocable
portion of general and administrative
expenses on line 19, column (b).
For both column (a) and column (b),
attach to Form 8873 a statement listing
these amounts. See the instructions for
the tax return to which this form is
attached for basic rules for determining
expenses.

Part III–Marginal Costing

Marginal costing is a method under which
only direct production costs of producing a
particular product or product line are taken
into account for purposes of computing
your qualifying foreign trade income.
Complete this section to see if you will
benefit by using marginal costing. If you
do not wish to use this method, skip Part
III and complete Part IV using the
instructions below.

Part IV–Extraterritorial
Income Exclusion
Line 45. Generally, your qualifying
foreign trade income is based on the

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greatest of line 33, 36, 38, 42, or 44.
Under the alternative computation,
however, you may instead choose to enter
on line 45 the amount from any of those
five lines (33, 36, 38, 42, or 44). For
example, although line 42 may produce
the greatest exclusion for you, use of that
line could eliminate or reduce the
exclusion for a related person because of
the limitation under section 941(a)(3) on
the use of the 1.2% of foreign trading
gross receipts method. Therefore, to
maximize the combined exclusion for you
and that related person, you may prefer to
enter on line 45 the greatest of lines 33,
36, 38, or 44 (instead of the amount on
line 42).
Line 50. If you had any operations in or
related to a country associated with
carrying out an international boycott or you
participated in or cooperated with an
international boycott, your extraterritorial
income exclusion may be reduced. See
the separate instructions for Form 5713,
International Boycott Report, for
definitions and other details and to find out
if you are required to file Form 5713. If you
are required to file Form 5713, also
complete Schedule A (Form 5713),
International Boycott Factor (Section
999(c)(1)), and Schedule C (Form 5713),
Tax Effect of the International Boycott
Provisions. Enter the amount from
Schedule C (Form 5713), line 6c, on Form
8873, line 50.
The exception from filing Form
5713 that generally applies to
CAUTION foreign persons does not apply to
a foreign person that is claiming the
extraterritorial income exclusion.

!

Also include on line 50 the total of any
illegal bribes, kickbacks, or other
payments (within the meaning of section
162(c)) paid by or on behalf of the
taxpayer directly or indirectly to
government officials, employees, or
agents.
Line 52. Although the amount on line 52
is an exclusion from income and not a
deduction, include it on the “Other
deductions” or “Other expenses” line of
your tax return or schedule.
If you are filing Schedule C (Form
1040), enter “Extraterritorial income
exclusion from Form 8873” and the
amount on a line in Part V of Schedule C.
If you are filing Schedule E (Form
1040), enter “Form 8873” and the amount
on the “Other” line under Expenses in Part
I of Schedule E.
For filers of Form 1120, include the
amount on the “Other deductions” line of
Form 1120 (line 26 of the 2017 Form
1120).

Instructions for Form 8873 (Rev. 9-2017)

Paperwork Reduction Act Notice.
We ask for the information on this form to
carry out the Internal Revenue laws of the
United States. You are required to give us
the information. We need it to ensure that
you are complying with these laws and to
allow us to figure and collect the right
amount of tax.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records relating
to a form or its instructions must be
retained as long as their contents may
become material in the administration of

Instructions for Form 8873 (Rev. 9-2017)

any Internal Revenue law. Generally, tax
returns and return information are
confidential, as required by section 6103.
The time needed to complete and file
this form will vary depending on individual
circumstances. The estimated burden for
individual and business taxpayers filing
this form is approved under OMB control
number 1545-0074 and 1545-0123. The
estimated burden for all other taxpayers
who file this form is shown below.
Recordkeeping . . . .
Learning about the
law or the form . . . .
Preparing the form,
copying,
assembling, and
sending the form to
the IRS . . . . . . . . .

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21 hr., 3 min.
1 hr., 59 min.

2 hr., 25 min.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler,
we would be happy to hear from you. See
the instructions for the tax return with
which this form is filed.