Illinois lawmakers have passed laws that are both good and bad news for Illinois taxpayers. The good news is that if approved by Governor Pritzker, Illinois taxpayers will be able to enjoy a $ 10,000 state and local tax workaround (SALT). The bad news is that if Gov. Pritzker approves some of the tax breaks that are currently available to companies, they will disappear.
Let’s start with the good news.
Prior to the 2017 tax law changes brought about by the Tax Cuts and Jobs Act (TCJA), an individual could make an unlimited deduction for SALT payments on their federal income tax return. However, the TCJA has capped such a SALT withholding tax to $ 10,000 for tax years beginning after December 31, 2017 and before January 1, 2026.
Senate Act 2531, which is expected to be signed by Governor Pritzker, provides a workaround for partnership or S-company owners to the federal SALT $ 10,000 deduction cap for tax years ending on or after December 31, 2021 start before January 1, 2026.
Under the law, a partnership or an S-company (each a “Transit Company”) may elect to pay Illinois income tax at the company level (which the transit company will allow as a withholding on its federal income tax return).
The IRS issued a notice in 20201 late last year blessing this type of workaround. About a dozen other states have similar workarounds.
Here’s how the workaround works
A pass-through entity must conduct an annual irrevocable election (PTE election) to take advantage of this workaround. Selecting forwarding company pays 4.95% PTE tax on its federal taxable income, with certain changes, which is the same rate that applies to individual Illinois taxpayers. The elective transit company can deduct PTE tax when calculating their federal taxable income in the year in which the PTE tax is paid, thereby reducing the distributing portion of each owner’s income from the transit company. Each owner of the selected transit company is entitled to a credit towards their individual Illinois income tax equal to 4.95% of their distributing portion of the federal taxable income of the transit company (plus passport-deducted PTE tax). -by legal entity), up to the owner’s share of the PTE tax.
For example, Partnership X has two equal partners and makes the PTE election for the calendar year 2022. Partnership X has federal taxable income of $ 1,000,000 before the deduction of PTE tax. Partnership X pays $ 49,500 PTE tax, and each partner receives a $ 24,750 credit toward their individual Illinois income tax (4.95% times $ 500,000, each partner’s distributing portion of taxable income of Partnership X in Illinois), which is equal to each partner’s individual income tax liability in Illinois. Partnership X’s federal taxable income is reduced by $ 49,500 for the year that the PTE tax of $ 49,500 is paid, which also reduces each partner’s federal taxable income by $ 24,750.
An electing conduit company must pay quarterly estimated taxes for the tax year for which it makes the election if the company can reasonably expect the estimated taxes to exceed $ 500.
A choosing transit company is liable for the PTE tax. However, if the company fails to pay any portion of the tax, its owners will be liable for the amount not paid, including penalties and interest (based on their proportional ownership) of the company.
ELIMINATION OF CERTAIN TAX ADVANTAGES
And here’s the bad news: The Budget Implementation Act (BIA) for fiscal year 2022 will make certain changes to the current tax breaks, subject to Governor Pritzker’s approval.
Decoupling of bonus depreciation. One of the changes made by the TCJA was to allow a 100 percent bonus write-off for properties acquired and put into operation by any company after September 27, 2017 and before January 1, 2023. Prior to the BIA, Illinois required taxpayers to reverse the effects of the federally allowed 30, 40, or 50 percent bonus depreciation amount by adding back the bonus depreciation amount when determining Illinois taxable income, but it did not require the inversion of the 100 % Bonus depreciation. Effective for real estate acquired on or after December 31, 20212, Illinois will de-couple itself from federal law by requiring that the amount of any bonus write-offs be added back in determining Illinois taxable income.
None with corporate NOLs. For any tax year ending after December 31, 2021 and before December 31, 2024, a company’s net operating loss (NOL) deduction is capped at $ 100,000 for that tax year. This change applies to companies only and does not apply to NOLs of transit companies (including S companies) or sole proprietorships.
The franchise tax for companies has been extended. Corporations are subject to an annual concession tax of 0.1% on the value of company assets or all paid-in capital. The franchise tax for companies should gradually be abolished with exemptions increasing every year and completely abolished by December 31, 2025. Now the phasing out and abolition of the corporate franchise has been abolished, even though the first $ 1,000 in corporate taxes have been abolished and the franchise tax remains tax-free.
GILTI and foreign dividends. In determining a company’s taxable income, Illinois previously followed state treatment that allowed the deduction of a company’s global intangible low-taxed income (GILTI) and certain foreign dividends. For tax years ending on or after June 30, 2021, Illinois treats GILTI and certain foreign dividends like domestic dividends, eliminating the current corporate allowance.
1 communication 2020-75
2 This provision also applies to properties that were acquired before December 31, 2021 but put into operation on or after December 31, 2021.