Compliance Problem
We have determined that a signifi cant number of taxpayers that took the “Extraterritorial Income Exclusion” (EIE)
for federal income tax purposes, under Internal Revenue Code (IRC) Section 114, are not correctly completing their
Illinois business tax returns. Specifi cally, taxpayers are not properly taking into account the EIE when computing the
Illinois sales factor.
Solution
If you take the EIE, you must exclude the corresponding portion of your foreign trading gross receipts from
both the numerator and denominator of your Illinois sales factor. See the example on Page 2 of this alert,
which may help you make the correct calculations.
Review Illinois regulations 86 ILCS 100.3370(a)(2)(B) for guidance in correctly computing your sales factor.
If you made an error in the computation on your original return, you should fi le an amended return to
correctly report the EIE for Illinois Income and Replacement Tax purposes.
Background
In 2000, Congress enacted IRC Section 114, which excludes extraterritorial income from gross income and disallows
related deductions. The exclusion is limited to the amount of the qualifying foreign trade income, which is defi ned as
the gross income from a qualifying transaction that, if excluded, would result in a reduction of taxable income equal to
the greatest amount of:
(1) 30 percent of foreign sales and leasing income;
(2) 1.2 percent of foreign trading gross receipts; or
(3) 15 percent of foreign trade income.
In 2004, Congress repealed IRC Section 114, but included a phase-out provision that allowed an 80 percent
exclusion of extraterritorial income for 2005 and a 60 percent exclusion for 2006. The exclusion is calculated on U.S.
Form 8873, Extraterritorial Income Exclusion.
For Illinois Income Tax purposes, department regulations state that gross receipts that are excluded from or deducted
in the computation of federal taxable income, and that are not added back in the computation of base income, are
excluded from both the numerator and denominator of the taxpayer’s sales factor. Therefore, if a taxpayer has
claimed the exclusion from gross income for extraterritorial income, the taxpayer must exclude from its sales factor
an amount of gross receipts attributable to the excluded gross income. In general, this may be done by excluding
tax.illinois.gov
1 800 732-8866
217 782-3336
TDD 1 800 544-5304
COMPLIANCE ALERT
August 2007
CA-2008-01 Front (N-8/07)
