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Form 8873, "Extraterritorial Income Exclusion"

Form 8873 is used to figure out the total gross income exclusion for transactions that result in foreign trading gross receipts. This exclusion will be in effect for most transactions that take place after September 30, 2000. This form will be required of all taxpayers that have participated in such transactions and should be sent in with the income tax return.

According to the IRS, Foreign trading gross receipts result from:

  • Selling, trading, or using any other methods of disposing of foreign trade property.

  • Any funds that are accumulated because a taxpayer rents or leases qualifying foreign trade property to a lessee outside United States.

  • Services those are provided in assistance of the above two.

  • Engineering or Architectural services for construction projects going on or being planned outside the United States.

  • Performing Managerial services for a person other than the one who is involved in generating foreign trading gross receipts through the aforementioned methods. This is not valid for a person who doesn’t generate at least 50% of his foreign trading gross receipts from the methods described above.

What is a foreign trade property? Following are the conditions set by IRS that should be true of a foreign trade property:

  • The express purpose of this property is to be sold, rented, or leased in the ordinary course of a trade or business outside the United States and Puerto Rico.

  • Up to 50% of the Fair market value is from a) the cost of labor performed outside U.S. and Puerto Rico b) Manufacturing, Producing, extraction, and growing of the articles outside the U.S. and Puerto Rico.

  • The property must be manufactured, produced, extracted, and grown in the U.S. and Puerto Rico unless a domestic corporation is involved in which case the property still qualifies for foreign trade even though it’s manufactured, produced, extracted, and grown outside the U.S. and Puerto Rico.

This exclusion is the result of Foreign Sales Corporation Repeal and Extraterritorial Income Exclusion Act of 2000. This applies to all corporate and non-corporate taxpayers that meet the conditions above and have entered into transactions since September 30, 2000.