Your U.S. source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property.
U.S. source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property.
Real property
Real property is land and buildings and generally anything built on, growing on, or attached to land. Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States.
The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country or located in a foreign country and sold in the United States, is partly from sources in the United States. For information on determining that part, see Treasury Regulation 1.863-1(b).
Summary of source rules for income
| Item of income | Factor determining source |
| Salaries, wages, other compensation | Where services are physically performed |
| Business income | |
| Personal services | Where services performed |
| Sale of inventory—purchased | Where sold (title, risk of loss) |
| Sale of inventory—produced | Allocation |
| Interest | Residence of payer |
| Dividends | Whether a U.S. or foreign corporation* |
| Rents | Location of property |
| Royalties | |
| Natural resources | Location of property |
| Patents, copyrights, and so on | Where property is used |
| Sale of real property | Location of property |
| Sale of personal property | Seller’s tax home with exceptions |
| Pension distributions attributable to contributions | Where services were performed that earned the pension |
| Investment earnings on pension contributions | Location of pension trust |
| Sale of natural resources | Allocation based on fair market value of product at export terminal (For more information, see Treasury Regulation 1.863-1(b).) |
*Exceptions include
a. Dividends paid by a U.S. corporation are foreign-source if the corporation elects the American Samoa economic development credit.
b. Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the three tax years before the year in which the dividends are declared.
Knowledge check
1 An employee receives a lump sum as compensation for services rendered both within and outside the United States. The income should generally be apportioned on what basis?Facts and circumstances of the particular case.Residency of the individual receiving the compensation.Geographic basis.Time basis.
Personal property
Personal property is property, such as machinery, equipment, or furniture that is not real property. Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States.
A tax home is the general area of one’s main place of business, employment, or post of duty, regardless of where one maintains one’s family home. A tax home is the place where a person permanently or indefinitely works as an employee or a self-employed individual. If a person does not have a regular or main place of business because of the nature of one’s work, then one’s tax home is the place where one regularly lives. If a person does not fit either of these categories, the person is considered an itinerant and one’s tax home is wherever one works.
Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of one’s trade or business. Income from the sale of inventory that you purchased is sourced where the property is sold. Generally, this is where title to the property passes to the buyer. For example, income from the sale of inventory in the United States is U.S. source income, whether you purchased it in the United States or in a foreign country.
The basic rule for determining the source of income from the sale of inventory property depends on whether the inventory was (a) purchased for resale or (b) manufactured by the seller.
The regulations under Section 863 indicate that income from the purchase and sale of inventory is sourced to the country where the sale takes place (that is, where the contract is closed). Prior to the TCJA, if the seller manufactured the property, gross income was generally sourced under a “50/50 allocation method” between the country of manufacture and the country of sale. The TCJA revises Section 863(b) to provide that gains, profits, and income derived from the sale or exchange of inventory property produced by the taxpayer in the United States will be sourced in the United States. Conversely, income derived from the sale or exchange of inventory property produced by the taxpayer in a foreign country will be foreign-source income. For a U.S. manufacturer or producer, the revised Section 863(b) lowers the overall foreign-source income. The application of the provision will lower the amount of FTC that can be used to offset total U.S. tax liability for the year.
Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. These rules apply even if one’s tax home is not in the United States.
To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. You allocate this part of the gain to sources in the United States based on the ratio of U.S. depreciation adjustments
