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 schedule 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 on page 1).

Note.

The extraterritorial income exclusion provisions and the FSC provisions may not be applied to the same transaction.

Attach a schedule 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 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 beginning on page 1.

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.

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 schedule that contains all information that would be reported if a separate Form 8873 were filed for each transaction. The supporting schedule 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 on page 1.

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 beginning on page 1). 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 schedule 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 greatest of lines 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 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 2010 Form 1120).


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