IRS Form 8873 – Are you a U.S. taxpayer with foreign trading gross receipts from qualifying exports or leases? IRS Form 8873 (Extraterritorial Income Exclusion) lets eligible taxpayers calculate and claim the extraterritorial income (ETI) exclusion on their federal tax return. Although the ETI regime was largely repealed years ago, the form remains active for specific transitional and legacy transactions.
This comprehensive, up-to-date guide (sourced directly from IRS.gov as of January 2026) explains everything: who must file, eligibility rules, computation methods, step-by-step instructions, and filing tips. Download the official Form 8873 PDF here: https://www.irs.gov/pub/irs-pdf/f8873.pdf.
What Is IRS Form 8873 and the Extraterritorial Income Exclusion?
Form 8873 calculates the amount of extraterritorial income you can exclude from gross income for the tax year. You attach it to your Form 1040, 1120, 1120-S, 1065, or other income tax return and report the exclusion on the “other deductions” line.
Extraterritorial income (ETI) is gross income attributable to foreign trading gross receipts (FTGR) from qualifying foreign trade property (QFTP). The exclusion effectively provides a tax benefit for certain U.S.-produced goods and services sold, leased, or used outside the United States and Puerto Rico.
Key IRS definition (from Instructions for Form 8873, Rev. September 2017):
“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.”
Current Status in 2026: Repealed but Still Relevant for Transitional Cases
The American Jobs Creation Act of 2004 repealed the ETI exclusion for most transactions after 2004. The Tax Increase Prevention and Reconciliation Act of 2005 further ended the binding-contract transition for tax years beginning after May 17, 2006.
However, the IRS still maintains and updates the form (current revision: December 2010; About page last reviewed January 23, 2026). You may still claim the exclusion for:
- Transactions occurring before 2005, or
- Limited legacy binding contracts meeting strict pre-2006 criteria.
No recent developments appear on the official IRS “About Form 8873” page. Partnerships required to e-file for tax year 2025 still reference Form 8873 in XML schemas, confirming ongoing (albeit narrow) applicability.
Who Must File IRS Form 8873?
Eligible taxpayers include:
- Individuals
- Corporations (including S corporations)
- Partnerships and other pass-through entities
- Foreign corporations electing domestic treatment under section 943(e)
You must file if you have extraterritorial income and want to claim the exclusion.
Exceptions and special rules:
- Do not claim if you are a member of a controlled group that includes a DISC (Domestic International Sales Corporation).
- Foreign economic process requirements generally apply (unless FTGR ≤ $5 million).
Key Definitions You Need to Know
| Term | IRS Definition (Summarized) | Why It Matters |
|---|---|---|
| Qualifying Foreign Trade Property (QFTP) | Property manufactured/produced/grown/extracted in the U.S./Puerto Rico, held for sale/lease/rental outside the U.S., with ≤50% foreign content. | Core requirement for FTGR. |
| Foreign Trading Gross Receipts (FTGR) | Receipts from sale/lease of QFTP for use outside U.S., related services, engineering/architectural services abroad, or qualifying managerial services. | Basis for all calculations. |
| Foreign Trade Income (FTI) | Taxable income (before exclusion) attributable to FTGR. | Used in 15% method. |
| Foreign Sale and Leasing Income (FSLI) | Portion of FTI from leases or sales of previously leased QFTP for foreign use. | Used in 30% method. |
Excluded property: Intangibles, oil/gas products, softwood lumber, boycott-related items, and property leased to related persons (with exceptions).
Foreign Economic Process Requirements
You generally must satisfy both:
- Foreign sales participation (solicitation, negotiation, or contract-making outside the U.S.).
- Foreign direct cost test: Either 50% of total direct costs or 85% of direct costs in any two categories (advertising, order processing, etc.) incurred outside the U.S.
Exception: Automatic if annualized FTGR ≤ $5 million.
Related persons can satisfy the test for you in some cases.
How to Calculate the Extraterritorial Income Exclusion?
Qualifying foreign trade income = the greatest of:
- 15% of Foreign Trade Income, or
- 1.2% of Foreign Trading Gross Receipts, or
- 30% of Foreign Sale and Leasing Income.
Marginal costing (Part III of the form) may produce a higher exclusion for certain product lines by focusing only on direct costs.
Final exclusion = qualifying amount minus disallowed deductions (boycotts, bribes, etc.) using the ratio method on the form.
Step-by-Step: How to Complete IRS Form 8873?
Part I – Elections and Other Information
- Line 1: Elect to exclude specific gross receipts (attach schedule).
- Line 2: Elect ETI treatment for certain FSC transactions (attach schedule).
- Line 3: Foreign corporation electing domestic status.
- Line 4: Check foreign economic process exception or test met.
- Line 5: Business activity code, product line, and reporting method (transaction-by-transaction or grouped by product line).
Part II – Foreign Trade Income and Foreign Sale and Leasing Income
- Report sales, leases, services in columns (a) and (b).
- Compute cost of goods sold and other expenses.
- Line 20 = Foreign Trade Income (stop if ≤0).
Part III – Marginal Costing (optional, if beneficial).
Part IV – Extraterritorial Income Exclusion
- Compute the greatest qualifying amount.
- Apply ratio for disallowed deductions.
- Line 52 = final exclusion to report on your return.
Grouping rules: You may aggregate by product line but cannot mix sales and leases in the same group. Maintain detailed records.
Common Filing Tips and Mistakes to Avoid (2026)
- Attach Form 8873 to your timely filed return (including extensions).
- For pass-through entities: Provide information to partners/shareholders.
- Use the official December 2010 Form 8873 and September 2017 Instructions.
- Keep tabular schedules in spreadsheet format if using grouping.
- Consult a tax professional — the rules are complex and transaction-specific.
- Boycott or illegal payments? File Form 5713 and reduce exclusion.
Download resources:
- Form 8873: https://www.irs.gov/pub/irs-pdf/f8873.pdf
- Instructions: https://www.irs.gov/pub/irs-pdf/i8873.pdf
- About page: https://www.irs.gov/forms-pubs/about-form-8873
Why This Matters for Exporters and Multinational Businesses?
Although new claims are rare in 2026, businesses with long-term contracts or legacy export income from pre-2005 transactions may still benefit. Understanding Form 8873 ensures compliance and maximizes any remaining exclusions.
Always verify with the latest IRS publications and consult a qualified tax advisor or CPA, as individual circumstances vary. Tax laws and forms can change, and this guide is for informational purposes based on official IRS sources as of February 2026.
Keywords for further reading: IRS Form 8873 instructions 2026, ETI exclusion eligibility, qualifying foreign trade property, foreign trading gross receipts, transitional ETI rules.
Need help with your specific situation? Contact a tax professional familiar with international tax provisions. The IRS website remains the authoritative source for all forms and guidance.