Significant 2021 Illinois Tax Legislation
September 30, 2021
The following is a summary of some of the more significant changes in Illinois law on state taxation enacted by the Illinois Legislature in its 2021 session.
Illinois Enacts SALT Deduction Limit Work-Around for Pass-Through Entity Owners
The Illinois Legislature has enacted S.B. 2531 intended to result in Illinois income tax imposed on income of individual owners of a pass-through entity (e.g. partnership, limited liability company or S corporation, but not publicly-traded partnerships) not being subject to the federal income tax $10,000 state and local tax (SALT) deduction limit enacted by the Tax Cuts and Jobs Act (TCJA).
The new law provides that for tax years beginning on or after December 31, 2021 and beginning prior to January 1, 2026 (meaning, 2021 is the first year this provision is available in Illinois), a pass-through entity may elect to pay a pass-through entity tax of 4.95% on income that would otherwise be taxable to members of the pass-through entity holding an ownership interest in it. If the pass-through entity makes this election and pays the pass-through entity tax on the entity’s income, partners and shareholders of a pass-through entity are then entitled to a state tax credit for the taxes paid on their share of the entity’s income. This credit can offset the Illinois income tax related to the pass-through entity income, but it is not allowed to reduce the Illinois Replacement Tax. The new law also allows for a credit for taxes paid to other states that have approved similar optional pass-through entity taxes.
The pass-through entity tax election is made on a yearly basis and is irrevocable. Nonresidents are not required to file an individual Illinois income tax return if their only source of income is from the electing entity. Partnerships and S corporations are also required to pay estimated taxes for those tax years in which the election is made.
The new law is intended to provide a ‘‘work-around’’ of the federal $10,000 SALT deduction limit for individuals which established a $10,000 limitation on the amount an individual could deduct for state and local tax purposes. The federal $10,000 SALT deduction limit is provided under IRC Sec. 164(b)(6), as amended by the TCJA, for taxable years beginning after December 31, 2017 and before January 1, 2026. Under the new law, because an electing pass-through entity will pay a pass-through entity tax, rather than its individual owners paying Illinois income tax on income of the entity, the federal $10,000 SALT deduction limit will not apply. Subsequent to the IRS’ approval of this methodology in Notice 20-75, numerous states enacted pass-through entity tax elections.
The FY2022 Budget Implementation Act
S.B. 2017, the FY2022 Budget Implementation Act (BIA) was signed into law on by Governor Pritzker on June 17, 2021. A number of new tax provisions enacted under the BIA make changes that significantly impact many current tax benefits.
Corporate Franchise Tax Phase Out Repealed
The Illinois legislature has eliminated the phase out of the corporate franchise tax. The Illinois corporate franchise tax imposes an annual 0.1% tax on either a corporation’s property or total paid-in-capital. Previously, the corporate franchise tax was scheduled to be completely phased out and fully repealed on December 31, 2025. Under the new law, the corporate franchise tax will remain in place indefinitely, although the current credit, which permits $1,000 of franchise tax liability to be exempt from the tax imposed continues to apply.
Decoupling from 100% Bonus Depreciation Deduction
Under the TCJA, purchasers of capital assets are permitted to expense the entire cost of the capital assets in the year the asset is placed in service (rather than depreciate the cost over several years). As enacted, the BIA decouples Illinois from this accelerated, 100% bonus depreciation and instead permit taxpayers to depreciate the cost of the asset over the schedule that would otherwise be permitted under IRC Sec. 168 (ignoring the TCJA’s acceleration provisions). The result is that this new law simply defers, and does and not eliminate, depreciation deductions.
Temporary NOL Limitation
The BIA imposes an annual $100,000 net operating loss carryover deduction limit for any taxable year ending on or after December 31, 2021 and prior to December 31, 2024 for C corporations. The net operating loss limitation does not apply to partnerships, S corporations or sole proprietorships. Although a C corporation cannot claim this deduction for the next three years while this cap remains in place, it can still carry forward losses above the $100,000 amount.
Rollback of TCJA 100% Foreign-Source Dividend Deduction and 50% Deduction for GILTI
The BIA decouples from the federal deductions for foreign-source dividends and GILTI. Instead, the new law permits corporate taxpayers to take advantage of the deductions authorized under IRC Sec. 243 for domestic dividends.
Extension of Sunset Dates for Tax Credits
Under the BIA, the following credits that were scheduled to expire after 2021 have been extended to 2026:
- Affordable Housing Donations Credit;
- Angel Investment Credit;
- Live Theater Production Credit; and
- River Edge Redevelopment Zone Credit
For additional information, or to discuss the details of the new laws and how they may apply to your particular circumstances, please contact a member of Golan Christie Taglia's Taxation Practice Group.