Note, this LawFlash has been updated as legislation discussed below has been signed into law.
Illinois Governor J.B. Pritzker signed into law various bills on June 17, including the state budget bill, S.B. 2017 (Budget Bill), which contains several provisions intended to raise revenue. Other bills passed in both the Illinois Senate and House but waiting for the governor’s signature make significant changes to the Illinois tax code, including the creation of a pass-through entity tax election.
The Budget Bill does not include any tax rate increases; rather, it makes changes to the tax base. Additionally, the Budget Bill reverses the corporate franchise tax repeal that was set for 2024. Although the corporate franchise tax will remain in effect, the Budget Bill exempts the first $1,000 of liability.
The Budget Bill caps the corporate net operating loss deduction. The deduction is limited to $100,000 for tax years ending on or after December 31, 2021 and prior to December 31, 2024.
For tax years ending on or after December 31, 2021, the Budget Bill requires an addback for amounts deducted under the federal 100% bonus depreciation deduction. Illinois had previously decoupled from 30% and 50% bonus depreciation and now decouples from all accelerated depreciation mechanisms.
Effective for tax years ending on or after June 30, 2021, the Budget Bill creates an addback for amounts deducted under IRC § 250(a)(1)(B)(i). This deduction, computed as 50% of global intangible low-taxed income (GILTI), was enacted as part of the Tax Cuts and Jobs Act back in 2017. Also, with respect to tax years ending on or after June 30, 2021, the Budget Bill creates an addback for the deduction taken under IRC § 245A, which under the federal tax code, is allowable for dividends received from 10%-owned foreign corporations.
In contrast to the above revenue raising measures, the Budget Bill extends the Live Theater Production Tax Credit, tax credits for affordable housing donations, and the Angel Investment Credit to tax years beginning on or before December 31, 2026. The availability of River Edge Development Zone Credits is extended to tax years that end prior to January 1, 2027.
S.B. 2531 creates a pass-through entity tax election for tax years ending on or after December 31, 2021 and beginning prior to January 1, 2026. A partnership or S corporation can elect to pay tax on its state taxable income at a rate of 4.95%. Publicly traded partnerships cannot make the election. The election is made on a yearly basis and is irrevocable. Partners and shareholders of the electing entity are eligible to take a credit for the tax paid by the entity on their behalf. Nonresidents are not required to file an individual income tax return if their only source of income is from the electing entity. Partnerships and S corporations are required to pay estimated taxes for those tax years in which the election is made.
S.B. 2531 also states that “substantially similar” pass-through entity taxes paid in other states are considered paid by the partner or shareholder and, thus, eligible to take a credit for the other state taxes paid.
The pass-through entity tax election acts as a workaround for the cap on the federal state taxes paid deduction. Once the IRS blessed this methodology in Notice 20-75, a number of states enacted pass-through entity tax elections. However, there was an outstanding question of whether states would allow the partner or shareholder to take a credit for state taxes paid by the pass-through entity on their own resident income tax returns. A handful of states, and now Illinois, have answered that question in the affirmative.
S.B. 2531 was signed into law as Public Act 102-0658 and is effective August 27, 2021.
Under S.B. 338 (Public Act 102-0288) companies are required to submit a “nothing to report” filing with the Illinois Treasurer. This requirement applies to entities with (1) annual sales of more than $1 million, (2) publicly traded securities, (3) a net worth over $10 million, and (4) more than 100 employees.
S.B. 338 also addresses the treatment of cryptocurrency for Illinois unclaimed property purposes. Under S.B. 338, entities holding abandoned virtual currency are required to liquidate the abandoned virtual currency and remit the proceeds to the Illinois Treasurer. The bill also modifies the definition of virtual currency to include “any type of digital unit, including cryptocurrency, used as a medium of exchange, unit of account, or a form of digitally stored value, which does not have legal tender status recognized by the United States.”
S.B. 338 was signed into law as Public Act 102-0288 and is effective August 6, 2021.
S.B. 2279 makes changes to the Illinois Economic Development for a Growing Economy (EDGE) Credit. Generally, these income tax credits are awarded to companies based on an agreed upon number of jobs or invested capital in the state. If a taxpayer, who has an EDGE agreement with the state, decides to terminate its Illinois operations during any taxable year, S.B. 2279 requires the taxpayer to increase its income tax liability for that taxable year by the amount of credits allowed under its agreement with the state.
Further, and of important note, S.B. 2279 adjusts the statute of limitations with respect to claims for refund or credit. If a taxpayer makes a claim for refund or credit within six months of the expiration of the relevant statute of limitations, the statute of limitations is automatically extended for six months and the Illinois Department of Revenue may issue a notice of deficiency or tax due.
S.B. 2279 was signed into law as Public Act 102-0288 and is effective August 6, 2021.
Taxpayers should evaluate whether the above listed changes affect their future tax liabilities in Illinois. The state and local tax lawyers at Morgan Lewis stand ready to discuss and analyze the implications of these newly enacted laws.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
New York, NY
Cosimo A. Zavaglia
Justin D. Cupples