On Memorial Day weekend, the Illinois General Assembly closed its spring legislature with the passage of a spate of bills sent to Governor JB Pritzker’s desk for signature. Some of them, including the 2017 Senate Bill (2022 Budget Bill) and Senate Bill 2531 (Pass-Through Entity Level Tax Bill), make important tax changes that have a significant impact on Illinois businesses and their owners. Below is a summary of the most effective tax-related provisions from the 2022 Draft Budget and Company-Level Pass-Through Tax Act.
The draft budget for 2022
Illinois lawmakers approved a $ 42.2 billion budget for fiscal year 2022, including an estimated $ 650 million in additional annual revenue from the repeal of several existing provisions of the Illinois Tax Code, Governor JB Pritzker as “corporate gaps.” Although the governor originally proposed a litany of tax-related changes (see our previous Sidley update here), due to an unexpected surge in current revenue, approximately $ 8 billion in federal aid from the American Rescue Plan Act of 2021 and contained setbacks from various companies and stakeholders to certain proposals by the governor, the 2022 draft budget ultimately included only part of its proposed tax changes to increase revenue. The most notable tax-related changes include the following:
- Reversal of the withdrawal from franchise taxation. The 2022 Budget Act removes the proposed franchise tax exit for Illinois businesses that the governor previously agreed to under the 2019 budget agreement. According to the previous law, the franchise tax should be completely abolished by 2024.
- Temporary upper limit for corporate NOLs. Under the 2022 budget, a company’s use of net operating losses (NOLs) is capped at $ 100,000 per year for each tax year ending on or after December 31, 2021 and before December 31, 2024. This provision effectively restores the previous $ 100,000 limit that was in place for the 2013 and 2014 tax years. Any taxable years in which a NOL lecture cannot be used due to the $ 100,000 limit do not count towards the 12-year NOL lecture period.
- Decoupling from the TCJA bonus depreciation. The 2022 Draft Budget decouples Illinois from the federal 100 percent bonus write-off provided for in the Tax Cuts and Job Act of 2017 (TCJA) and aligns the state with the amortization rules of the modified accelerated cost recovery system under Section 168 of the Internal Revenue Code.
- Decoupling of TCJA 100% dividend deduction for foreign sources and 50% deduction for GILTI. The 2022 draft budget decouples federal deductions for dividends from foreign sources and global intangible low-taxed income (GILTI). Instead, corporation taxpayers may avail of the domestic dividend deductions authorized under Section 243 of the Internal Revenue Code.
The corporate-level pass-through tax law
The TCJA has imposed a limit on the deductibility of state and local tax payments made by or on behalf of an individual in the amount of $ 10,000, unless such taxes were paid in connection with a trade or business of the individual (state and local tax, or SALT, Restriction). This has severely constrained the individual deductions of many individual taxpayers, including transit company owners (such as partnerships and S companies) who generally levy income tax at the individual owner level at the federal and state levels.
However, the SALT restriction does not generally apply to taxes paid by a company. In IRS Notice 2020-75 (Notice 2020-75), the IRS confirmed that transit companies will be entitled to fully deduct certain state corporate income taxes that would otherwise have been paid by the owners of the transit companies (effectively). with full deductibility at the level of the individual owner). Therefore, a growing number of states are creating mechanisms by which taxes that would otherwise be paid at the individual level can be paid at the transit company level and credited at the individual level in accordance with the 2020-75 Communication to enable full deductibility of these state taxes. Illinois created such a mechanism by passing the Pass-Through Entity Level Tax Bill.
In accordance with the company-level pass-through tax assessment notice for tax years ending on or after December 31, 2021 and beginning before January 1, 2026 (corresponding to the applicable years under the TCJA for which the SALT restriction currently applies), a A partnership or an S-company may decide annually to tax their Illinois net income at an individual tax rate of 4.95%. Each individual owner of a voting legal entity would then be entitled to a credit against the tax levied in the amount of 4.95% times the distributing share of the owner in the net income of the legal entity. There are special regulations that aim to coordinate the payment of the tax and the receipt of the corresponding credit in tiered partnerships. In addition, the bill provides for a credit for taxes paid to other states that have enacted essentially similar optional transit taxes at the corporate level. Finally, while an electing company is exempt from the existing withholding tax obligations of the Illinois Source Transit Company, it will be required to make estimated payments throughout the year if it can reasonably be expected that the company’s tax liability will exceed $ 500 .