Illinois Governor JB Pritzker signed various bills on June 17, including the State Budget Bill, SB 2017, which contains several provisions designed to increase revenue. Other bills passed in both the Illinois Senate and House of Representatives but awaiting the governor’s signature lead to significant changes to Illinois tax law, including the creation of a transit tax election.
SALES INCREASING MEASURES
The draft budget does not contain any tax rate increases; rather, it makes changes to the tax base. In addition, the draft budget reverses the abolition of franchise tax for companies set for 2024. Although corporate franchise tax remains in effect, the draft budget exempts the first $ 1,000 from liability.
The draft budget limits the company’s net operating loss allowance. The deduction is capped at $ 100,000 for tax years ending on or after December 31, 2021 and before December 31, 2024.
For tax years ending on or after December 31, 2021, the draft budget requires offsetting for amounts deducted under the 100% federal bonus write-off. Illinois had previously decoupled from 30% and 50% bonus depreciation and is now decoupling from all accelerated depreciation mechanisms.
Effective for tax years ending on or after June 30, 2021, the Draft Budget will result in an offset for amounts deducted under IRC § 250 (a) (1) (B) (i). This deduction, which is calculated as 50% of global intangible low-taxed income (GILTI), was enacted back in 2017 under the Tax Cuts and Jobs Act. Also with regard to tax years ending on or after June 30, 2021, the draft budget creates an addition for the deduction according to IRC § 245A, which is permissible under the federal tax law for dividends received by 10% foreign companies.
In contrast to the revenue-boosting measures mentioned above, the draft budget extends the Live Theater Production Tax Credit, Affordable Housing Donation Tax Credit, and Angel Investment Credit to tax years beginning on or before December 31, 2026. River Edge Development Zone Credit availability will be extended to tax years ending before January 1, 2027.
PASS THROUGH BODY TAX
SB 2531 creates a pass-through corporate tax option for tax years ending on or after December 31, 2021 and beginning before January 1, 2026. A partnership or S-corporation may choose to tax its taxable income in a state at a rate of 4.95%. Publicly traded partnerships cannot make the choice. The election takes place annually and is irrevocable. Partners and shareholders of the electing legal entity are entitled to credit the tax paid by the legal entity on their behalf. Non-residents are not required to file an income tax return if their sole source of income is from the voting body. Partnerships and S-companies must pay estimated taxes for the tax years in which the election takes place.
SB 2531 also states that “substantially similar” transit taxes paid by companies in other states are considered to be paid by the partner or shareholder and are thus entitled to offset the other state taxes paid.
The pass-through corporate tax option acts as a workaround for the cap on deduction of state taxes paid. After the IRS blessed this methodology in Notice 20-75, a number of states introduced pass-through tax elections for businesses. The question remained, however, of whether states would allow the partner or shareholder to offset the state taxes paid by the transit company on their own income tax returns. A handful of states, and now Illinois, answered that question in the affirmative.
As of the date of this LawFlash, SB 2531 has been approved by both the Illinois House and the Senate and is awaiting the governor’s signature.
SB 338 requires companies to file a “no report” filing with the Illinois Treasurer. This requirement applies to companies with (1) annual sales greater than $ 1 million, (2) publicly traded securities, (3) net worth greater than $ 10 million, and (4) more than 100 employees.
SB 338 also deals with the treatment of cryptocurrency for unclaimed Illinois property purposes. Under SB 338, companies holding abandoned virtual currency must liquidate the abandoned virtual currency and transfer the proceeds to the Illinois Treasurer. The bill also changes the definition of virtual currency to include “any type of digital entity, including cryptocurrency, that is used as a medium of exchange, unit of account, or some form of digitally stored value that is not owned by the United States.”
COUPON, REFUND CLAIMS
SB 2279 makes changes to the Illinois Economic Development for a Growing Economy (EDGE) Credit. Generally, these income tax credits are granted to companies based on an agreed number of jobs or capital invested in the state. If a taxpayer who has an EDGE arrangement with the state elects to cease operating in Illinois during a tax year, SB 2279 requires the taxpayer to reduce its income tax liability for that tax year by the amount specified in their agreement with the state.
In addition, SB 2279 adjusts the limitation periods for reimbursement or credit claims. If a taxpayer claims a refund or credit within six months of the applicable statute of limitations, the statute of limitations will automatically be extended by six months and the Illinois Department of Revenue may issue a deficiency or tax liability notice.
Both SB 338 and SB 2279 have passed the Illinois House and Senate, awaiting the governor’s signature.
Taxpayers should consider whether the changes listed above will affect their future Illinois tax liabilities. Morgan Lewis state and local tax attorneys are on hand to discuss and analyze the implications of these newly enacted laws.