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Department of the Treasury
Instructions for Form 8873 Internal Revenue Service

(Rev. September 2017)

(Use with the December 2010 revision of Form 8873.)
Extraterritorial Income Exclusion

Section references are to the Internal Revenue be considered enforceable against a income that is qualifying foreign trade
Code unless otherwise noted. lessor notwithstanding the fact that a income.
lessor retained approval of the
What’s New replacement lessee. Qualifying Foreign
Trade Income
These instructions are being revised Unrelated person. An unrelated person
because of a required change to the is a person that is not a related person as Generally, qualifying foreign trade income
Paperwork Reduction Act Notice defined in Qualifying Foreign Trade is the amount of gross income that, if
regarding the OMB control number under Property, later. excluded, would result in a reduction of
taxable income by the greatest of:
which the information pertaining to Form 15% of foreign trade income,
8873 is being collected. Pre-Repeal ETI Exclusion 1.2% of foreign trading gross receipts,
Rules or
30% of foreign sale and leasing
General Instructions Who Qualifies for the Exclusion income.
Purpose of Form Eligible Taxpayers
See definitions below.
Use this form to figure the amount of Individuals, corporations (including S
extraterritorial income (defined below) corporations), partnerships, and other Foreign Trading
excluded from gross income for the tax pass-through entities are entitled to the Gross Receipts
year. Attach the form to your income tax exclusion if they have extraterritorial A taxpayer is treated as having foreign
return. income. trading gross receipts (FTGR) derived
Note. The amount figured on the form is Special rule for DISCs. The from certain activities in connection with
net of the disallowed deductions. extraterritorial income exclusion does not qualifying foreign trade property (defined
apply to any taxpayer for any tax year if, at later) only if it meets the foreign economic
any time during the tax year, the taxpayer process requirements (described below).
ETI Repeal is a member of a controlled group of Foreign trading gross receipts are the
The American Jobs Creation Act of 2004 corporations (as defined in section 927(d) taxpayer's gross receipts that are:
repealed the ETI exclusion provisions (4), as in effect before its repeal) of which 1. From the sale, exchange, or other
generally for transactions after 2004, a DISC (Domestic International Sales disposition of qualifying foreign trade
subject to transition rules. Corporation) is a member. property;
Transition Rule 2. From the lease or rental of
Taxpayers may claim the ETI exclusion for Eligible Transactions qualifying foreign trade property for use by
(a) transactions under a binding contract Generally, the extraterritorial income the lessee outside the United States;
that meets the requirements described in exclusion applies to taxpayers with 3. For services that are related and
Binding Contract Exception below or (b) respect to transactions after September subsidiary to (a) any sale, exchange, or
transactions before 2005. Also see 30, 2000. However, the exclusion does other disposition of qualifying foreign trade
Pre-Repeal ETI Exclusion Rules below. not apply to any transaction in the ordinary property by such taxpayer or (b) any lease
course of a trade or business involving a or rental of qualifying foreign trade
Binding Contract Exception FSC (Foreign Sales Corporation) that is property for use by the lessee outside the
The Tax Increase Prevention and under a binding contract that is in effect on United States;
Reconciliation Act of 2005 repealed the September 30, 2000, and at all times 4. For engineering or architectural
ETI binding contract exception for tax thereafter, and that is between the FSC (or services for construction projects located
years beginning after May 17, 2006. For a person related to the FSC) and a person (or proposed for location) outside the
tax years beginning before May 18, 2006, other than a related person. United States; or
the following rules apply: The taxpayer
may claim an ETI exclusion with respect to Line 2 election. The taxpayer may elect 5. For the performance of managerial
transactions in the ordinary course of a to apply the exclusion rules for the services for a person other than a related
trade or business under a binding contract transactions described above involving a person connected with the production of
if such contract is between the taxpayer FSC. To make the election, check the box foreign trading gross receipts described in
and an unrelated person (defined below) on line 2. See the instructions for line 2 for item 1, 2, or 3 above. Item 5 does not
and such contract was in effect on more details. apply to a taxpayer for any tax year unless
at least 50% of its foreign trading gross
September 17, 2003, and at all times Extraterritorial Income receipts (determined without regard to this
thereafter.
Extraterritorial income is the gross income sentence) for such tax year are derived
For these purposes, a binding contract of the taxpayer attributable to foreign from the activities described in item 1, 2,
includes a purchase option, renewal trading gross receipts (defined below). or 3 above.
option, or replacement option that is The taxpayer reports all of its
included in such contract and that is extraterritorial income on its tax return. It Excluded receipts. Foreign trading
enforceable against the seller or lessor. then uses Form 8873 to calculate its gross receipts do not include the receipts
For this purpose, a replacement option will exclusion from income for extraterritorial of a taxpayer from a transaction if:

Sep 05, 2017 Cat. No. 31661R

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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 
services are for use by the United States     customer,                                      2. An individual who is a citizen or 
or any instrumentality of the United States   Determination and transmittal of a final       resident of the United States;
and such use is required by law or            invoice or statement of account or the         3. A foreign corporation that elects to 
regulation;                                   receipt of payment, and                        be treated as a domestic corporation 
Such transaction is accomplished by a         Assumption of credit risk.                     under section 943(e); or
subsidy granted by the government (or         Foreign direct costs are the portion of        4. A partnership or other pass-through 
any instrumentality) of the country or        the total direct costs of any transaction      entity all of the partners or owners of 
possession in which the property is           attributable to activities performed outside   which are described in item 1, 2, or 3 
manufactured, produced, grown, or             the United States.                             above.
extracted; or
The taxpayer has elected to exclude           Alternative 85% foreign direct cost            Excluded property. The following 
the receipts under section 942(a)(3). See     test. You meet this test if, for any two of    property is excluded from the definition of 
the instructions for line 1 for more details. the activities listed above, the foreign       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           to any activity listed above, that activity is Property you lease or rent for use by 
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 
However, see $5 million gross receipts        $5 million gross receipts exception. 
                                                                                             or gas);
exception, later.                             The foreign economic process 
                                                                                             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 
For purposes of determining whether                                                          because the property is insufficient to 
                                              corporation, or other pass-through entity, 
your gross receipts qualify as foreign                                                       meet the requirements of the domestic 
                                              the limit applies to both the pass-through 
trading gross receipts, the foreign                                                          economy (beginning with the date 
                                              entity and its partners, shareholders, or 
economic process requirements are                                                            specified in the Executive order).
                                              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 
Participation outside the United States       Qualifying Foreign                             single employer under section 52(a) or (b) 
in the sales portion of the transaction.      Trade Property                                 or section 414(m) or (o). For this purpose, 
                                                                                             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        The property must be held primarily for        Foreign Trade Income
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 
50% foreign direct cost test. You meet        value of the property can be attributable to   rules for cooperatives.
this test if the foreign direct costs you     (a) articles manufactured, produced, 
incurred that are attributable to the         grown, or extracted outside the United         Foreign Sale and Leasing 
transaction equal or exceed 50% of the        States and Puerto Rico and (b) direct          Income
total direct costs you incurred attributable  costs of labor performed outside the 
to the transaction.                           United States and Puerto Rico.                 Foreign sale and leasing income (FSLI) is 
                                              The property generally must be                 generally the amount of your foreign trade 
Total direct costs are those costs for        manufactured, produced, grown, or              income for a transaction that is:
any transaction that are attributable to the  extracted within the United States and         Properly allocable to activities that 
following activities you (or any person       Puerto Rico. However, property                 constitute foreign economic processes 
acting under a contract with you)             manufactured, produced, grown, or              (described above),
performed at any location with respect to     extracted outside the United States and        Derived by you from the lease or rental 
qualifying foreign trade property:            Puerto Rico is qualifying foreign trade        of qualifying foreign trade property for use 
Advertising and sales promotion,                                                             by the lessee outside the United States, or

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Derived by you from the sale of eligible, the foreign corporation must Line 5b. Enter your product or product
qualifying foreign trade property formerly waive the right to claim all benefits granted line that meets one of the two standards
leased or rented for use by the lessee to it by the United States under any treaty. below.
outside the United States. If the election is made, the corporation will The product or product line based on
Only directly allocable expenses are be treated as a domestic corporation for the North American Industry Classification
taken into account in figuring your foreign all purposes of the Internal Revenue System (NAICS), or
sale and leasing income. Income properly Code. However, the corporation may not A recognized industry or trade usage.
allocable to certain intangibles is excluded elect to be an S corporation.
Line 5c. Check the applicable box to
from foreign sale and leasing income. See An “applicable foreign corporation” is a
indicate the basis on which the amounts
sections 941(c)(2)(B) and 941(c)(3) for foreign corporation that:
on Form 8873 are determined using either
special rules related to foreign sale and 1. Manufactures, produces, grows, or the transaction-by-transaction basis or an
leasing income. extracts property in the ordinary course of election to group transactions. Use one of
the corporation's trade or business; or
Reporting of Transactions the following formats.
2. Substantially all of its gross receipts (1) Transaction-by-transaction. If
Generally, you may report transactions are foreign trading gross receipts. your determination is based on each
(including sale transactions and leasing
transactions) either on a transaction-by- Once made, the election applies to the transaction rather than an election to
transaction basis or on the basis of groups tax year made and remains in effect for all group transactions, check box (1)(a), (1)
of transactions based on product lines or subsequent years unless revoked or (b), or (1)(c), depending on your preferred
recognized industry or trade usage. See terminated. Any revocation or termination reporting format.
the instructions for line 5c for rules applies to tax years beginning after the tax (a) Aggregate on Form 8873. If you
concerning grouping elections that may be year during which the election was made. choose to aggregate your transactions on
made with respect to transactions. The election will automatically terminate if one or more Forms 8873, check box (1)(a)
However, you may not group sales and the corporation fails to meet either of the of line 5c. Aggregate on one Form 8873
leases together, and you may not report requirements listed above. If an election is those transactions for which the same
foreign sale and leasing income in column revoked by the corporation or is method is applied, provided all the
(b) of Part II of the form on the basis of automatically terminated, the corporation transactions (other than foreign sale and
groups. (and any successor corporation) may not leasing income transactions) are included
elect to be a domestic corporation again in the same product or product line
for 5 tax years beginning with the first tax indicated on line 5b. If a different method
Specific Instructions year after the revocation or termination. is applied to some of the transactions in
See Rev. Proc. 2001-37. one or more of the separate product lines,
Part I–Elections and Other additional Forms 8873 must be filed.
Effect of election. For purposes of
Information section 367, a foreign corporation that has Example. If you have no foreign sale
Line 1. Check the box if the taxpayer is elected to be a domestic corporation is and leasing income and you apply the
electing, under section 942(a)(3), to generally treated as transferring, as of the 15% of foreign trade income method to all
exclude a portion of its gross receipts from first day of the first tax year to which the transactions in three separate product
treatment under the extraterritorial income election applies, all of its assets to a lines, you would file three aggregate
exclusion provisions. Attach a statement domestic corporation in an exchange Forms 8873. However, if you use the 1.2%
that lists the transactions being omitted. under section 354. of foreign trading gross receipts method
for some of the transactions in one of the
Exception for old earnings and
Note. A foreign tax credit may be product lines, you would then file four
profits of certain corporations. If the
available for foreign taxes paid on the aggregate Forms 8873.
exception described in section 5(c)(3) of
receipts the taxpayer excludes from Note. Taxpayers that check box (1)(a) of
the FSC Repeal and Extraterritorial
treatment under the extraterritorial income line 5c may aggregate transactions on the
Income Exclusion Act of 2000 applies,
exclusion provisions. same Form 8873 only if they are applying
attach a statement indicating the basis for
Line 2. Check the box if the taxpayer is your entitlement, if any, to that exception. the same method (for example, 15% of
electing to apply the extraterritorial income FTI, 1.2% of FTGR, 30% of FSLI) to all
exclusion provisions to certain Effect of revocation or termination. transactions reported on the form and the
transactions involving a FSC (see Eligible If a foreign corporation has elected to be a transactions (other than foreign sale and
Transactions, earlier). domestic corporation and the election leasing income transactions) are included
ceases to apply for any subsequent tax in the same product or product line.
Note. The extraterritorial income year, the corporation is treated as a
exclusion provisions and the FSC domestic corporation transferring, as of (b) Aggregate on tabular schedule.
provisions may not be applied to the same the first day of the subsequent tax year to You may choose to aggregate your
transaction. which the election no longer applies, all of transactions on a tabular schedule rather
Attach a statement listing those its property to a foreign corporation in an than on Form 8873. To do so, file one
transactions. Once the election is made exchange under section 354. Form 8873 entering only your name and
identifying number at the top of the form.
with respect to a transaction, the election Line 4. Before completing lines 4a and Also check box (1)(b) of line 5c. Attach a
applies to the tax year for which it was 4b, see Foreign Economic Process tabular schedule to the partially completed
made and all later tax years. The election Requirements, earlier. Form 8873 reporting all information as if a
may be revoked only with IRS consent. separate form were filed for each
See Rev. Proc. 2001-37, 2001-1 C.B. Line 5a. Enter the six-digit code that best
1327. describes the business activity for which aggregate of transactions described in (1)
the form is being filed from the list of (a) above. Also see Format of tabular
Line 3. Check the box if the taxpayer is Principal Business Activity Codes included schedules below.
an “applicable foreign corporation” that in your tax return instructions.
elects to be treated as a domestic Note. To be eligible for either of the
corporation under section 943(e). To be aggregate reporting formats described in

Instructions for Form 8873 (Rev. 9-2017) -3-

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(1)(a) or (b) above, you must maintain a Part II–Foreign Trade greatest of line 33, 36, 38, 42, or 44.
supporting statement that contains all Under the alternative computation,
information that would be reported if a Income and Foreign Sale however, you may instead choose to enter
separate Form 8873 were filed for each and Leasing Income on line 45 the amount from any of those
transaction. The supporting statement five lines (33, 36, 38, 42, or 44). For
should not be filed with the Form 8873. Lines 6 through 14. Enter your foreign example, although line 42 may produce
trading gross receipts identified on lines 6 the greatest exclusion for you, use of that
(c) Tabular schedule of through 14 using the rules outlined under line could eliminate or reduce the
transactions. Instead of aggregate Foreign Trading Gross Receipts, earlier. exclusion for a related person because of
reporting, you may choose to report
transactions on a tabular schedule. File Line 14, column (b). Enter on this line the limitation under section 941(a)(3) on
one Form 8873 entering only your name only the sum of those portions of the the use of the 1.2% of foreign trading
and identifying number at the top of the amounts on lines 6, 9, 12, and 13, column gross receipts method. Therefore, to
form. Also check box (1)(c) of line 5c. (a), that are attributable to foreign maximize the combined exclusion for you
Attach a tabular schedule to the partially economic processes (see definition and that related person, you may prefer to
completed Form 8873 reporting all earlier). Because only foreign trading enter on line 45 the greatest of lines 33,
information as if a separate Form 8873 gross receipts attributable to foreign 36, 38, or 44 (instead of the amount on
were filed for each transaction. Also see economic processes are included in line 42).
Format of tabular schedules below. line 14, column (b), the amount entered on Line 50. If you had any operations in or
line 14, column (b), will not necessarily
(2) Group of transactions. You may related to a country associated with
equal the total of the foreign trading gross
elect to group transactions (other than carrying out an international boycott or you
receipts amounts entered on lines 6, 9, 12,
foreign sale and leasing income participated in or cooperated with an
and 13, column (a).
transactions) by product or product line. international boycott, your extraterritorial
The grouping of transactions applies to all Line 17. For lines 17a through 17h, income exclusion may be reduced. See
transactions completed during the tax year compute your cost of goods sold allocated the separate instructions for Form 5713,
for that product or product line. to your foreign trading gross receipts. See International Boycott Report, for
To make the election, complete one the instructions for the tax return to which definitions and other details and to find out
Form 8873 entering only your name and this form is attached for basic rules for if you are required to file Form 5713. If you
identifying number at the top of the form. determining cost of goods sold. are required to file Form 5713, also
complete Schedule A (Form 5713),
Also check box (2) of line 5c. Attach a Line 19. Enter on line 19, column (a), the International Boycott Factor (Section
tabular schedule to the partially completed deductions, other than those you included 999(c)(1)), and Schedule C (Form 5713),
Form 8873 reporting all information as if a in figuring your cost of goods sold, that are Tax Effect of the International Boycott
separate Form 8873 were filed for each allocable to the amount reported on Provisions. Enter the amount from
group of transactions. See Format of line 15. Schedule C (Form 5713), line 6c, on Form
tabular schedules below.
Enter on line 19, column (b), the 8873, line 50.
Note. If a grouping basis is elected, deductions, other than those you included
aggregate reporting is not permitted. in figuring your cost of goods sold, that are The exception from filing Form
directly allocable to the amount reported 5713 that generally applies to
Attach Form 8873 to your tax return. on line 16. CAUTION! foreign persons does not apply to
Once the election is made, grouping a foreign person that is claiming the
redeterminations are permitted until one Note. Do not include your allocable extraterritorial income exclusion.
year after the later of: portion of general and administrative Also include on line 50 the total of any
1. The due date of your timely filed expenses on line 19, column (b). illegal bribes, kickbacks, or other
return (including extensions), or For both column (a) and column (b), payments (within the meaning of section
2. In the event of an examination of attach to Form 8873 a statement listing 162(c)) paid by or on behalf of the
your return by the IRS, notification by the these amounts. See the instructions for taxpayer directly or indirectly to
IRS of such examination (provided you the tax return to which this form is government officials, employees, or
agree to extend the statute of limitations attached for basic rules for determining agents.
for assessment by 1 year). expenses.
Line 52. Although the amount on line 52
is an exclusion from income and not a
Note. If your foreign trading gross Part III–Marginal Costing deduction, include it on the “Other
receipts are $5 million or less for the tax Marginal costing is a method under which deductions” or “Other expenses” line of
year, you may file a separate Form 8873 only direct production costs of producing a your tax return or schedule.
for each group of transactions instead of particular product or product line are taken
filing a tabular schedule. into account for purposes of computing If you are filing Schedule C (Form
Format of tabular schedules. If a your qualifying foreign trade income. 1040), enter “Extraterritorial income
tabular schedule is attached to Form Complete this section to see if you will exclusion from Form 8873” and the
8873, the schedule must: benefit by using marginal costing. If you amount on a line in Part V of Schedule C.
Be in spreadsheet or similar format, do not wish to use this method, skip Part If you are filing Schedule E (Form
List your name and identifying number III and complete Part IV using the 1040), enter “Form 8873” and the amount
on each numbered page, instructions below. on the “Other” line under Expenses in Part
Be formatted in columns that I of Schedule E.
correspond to each line item of Form Part IV–Extraterritorial For filers of Form 1120, include the
8873, and amount on the “Other deductions” line of
Show totals in each column. Income Exclusion
Form 1120 (line 26 of the 2017 Form
Line 45. Generally, your qualifying 1120).
foreign trade income is based on the

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Paperwork Reduction Act Notice.
We ask for the information on this form to any Internal Revenue law. Generally, tax If you have comments concerning the
carry out the Internal Revenue laws of the returns and return information are accuracy of these time estimates or
United States. You are required to give us confidential, as required by section 6103. suggestions for making this form simpler,
the information. We need it to ensure that we would be happy to hear from you. See
you are complying with these laws and to The time needed to complete and file
allow us to figure and collect the right this form will vary depending on individual the instructions for the tax return with
amount of tax. circumstances. The estimated burden for which this form is filed.
individual and business taxpayers filing
You are not required to provide the this form is approved under OMB control
information requested on a form that is number 1545-0074 and 1545-0123. The
subject to the Paperwork Reduction Act estimated burden for all other taxpayers
unless the form displays a valid OMB who file this form is shown below.
control number. Books or records relating
to a form or its instructions must be Recordkeeping. . . . 21 hr., 3 min.
retained as long as their contents may Learning about the
become material in the administration of law or the form. . . . 1 hr., 59 min.
Preparing the form,
copying,
assembling, and
sending the form to
the IRS . . . . . . . . . 2 hr., 25 min.

Instructions for Form 8873 (Rev. 9-2017) -5-

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