Illinois Makes Major Tax Code Changes | Morgan lewis
Illinois Governor JB Pritzker enacted various bills on June 17, including the State Budget Bill, SB 2017 (Budget Bill), which contains several provisions intended to increase revenue. Other bills passed by both the Illinois Senate and House, but awaiting the governor’s signature, make significant changes to the Illinois tax code, including the creation of a tax election for intermediary entities.
REVENUE INCREASE MEASURES
The budget bill does not provide for any increase in tax rates; rather, it changes the tax base. In addition, the budget bill cancels the repeal of the corporate franchise tax that had been set for 2024. Although the corporate franchise tax remains in effect, the budget bill exempts the former. $ 1,000 liability.
The finance bill caps the deduction for net business operating loss. The deduction is limited to $ 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 finance bill requires an addition for the amounts deducted for the federal depreciation deduction bonus of 100%. Illinois previously decoupled the 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 budget bill creates an addition for amounts deducted under IRC § 250 (a) (1) (B) (i) . This deduction, calculated as 50% of the low-tax intangible global income (GILTI), was enacted as part of the Law on Tax Cuts and Employment in 2017. In addition, with regard to years d ‘taxation ending on or after June 30, 2021, the Budget Bill creates an addition for the deduction taken under IRC § 245A, which under the Federal Tax Code is allowable for dividends received from foreign companies 10% owned.
Unlike the revenue-raising measures above, the Budget Bill extends the Live Theater Production Tax Credit, Affordable Housing Donation Tax Credits, and Angel Investment Credit to years beginning on or before December 31, 2026. Availability of River Edge Development Zone credits are extended to tax years ending before January 1, 2027.
PASS-THROUGH ENTITY IMPT
SB 2531 creates a flow-through entity tax election for tax years ending on or after December 31, 2021 and beginning before January 1, 2026. A partnership or S corporation can elect to pay tax on its taxable income d ‘State at the rate of 4.95%. Partnerships listed on the stock exchange cannot make the choice. The choice is made annually and is irrevocable. Partners and shareholders of the voting entity are eligible for a credit for tax paid by the entity on their behalf. Non-residents are not required to file an individual tax return if their only source of income is from the entity that made the election. Partnerships and S corporations are required to pay estimated taxes for the tax years in which the election is made.
SB 2531 also states that taxes on “substantially similar” flow-through entities paid in other states are considered paid by the partner or shareholder and, therefore, eligible for credit for other taxes paid by states. .
The tax election of the intermediary entity acts as a workaround for the cap on the tax deduction paid by the federal state. Once the IRS approved this methodology in Notice 20-75, a number of states have adopted tax choices for flow-through entities. However, there was an open question as to whether the states would allow the partner or shareholder to take credit for state taxes paid by the intermediary entity on their own resident tax returns. A handful of states, and now Illinois, have answered this question in the affirmative.
As of the date of this LawFlash, SB 2531 has been approved by both the Illinois House and Senate and awaits the governor’s signature.
Under SB 338 businesses are required to submit an “nothing to report” file to the Illinois treasurer. This requirement applies to entities with (1) annual sales of more than $ 1 million, (2) publicly traded securities, (3) net worth of more than $ 10 million, and (4) more than 100 employees.
SB 338 also discusses the handling of cryptocurrency for Illinois unclaimed property. Under SB 338, entities holding discontinued virtual currency are required to liquidate the discontinued virtual currency and return the proceeds to the Illinois treasurer. The bill also changes the definition of virtual currency to include “any type of digital unit, including cryptocurrency, used as a medium of exchange, unit of account, or form of digitally stored value, which is not not legal tender recognized by the United States. “
ADVANTAGEOUS CREDITS, REQUESTS FOR REIMBURSEMENT
SB 2279 makes changes to the Illinois Economic Development Credit for a Growing Economy (EDGE). Typically, these income tax credits are granted to businesses on the basis of an agreed number of jobs or capital invested in the state. If a taxpayer, who has an EDGE agreement with the state, decides to terminate operations in Illinois during a tax year, SB 2279 requires the taxpayer to increase their income tax for that tax year of the amount of credits authorized by virtue of its agreement with the State.
Additionally, and it is important to note that SB 2279 adjusts the limitation period with respect to refund or credit requests. If a taxpayer applies for a refund or credit within six months of the expiration of the relevant limitation period, the limitation period is automatically extended by six months and the Illinois Department of Revenue may issue a notice of deficiency. or tax due.
SB 338 and SB 2279 have both been passed by the Illinois House and Senate and are awaiting the governor’s signature.
TO TAKE AWAY
Taxpayers should assess whether the changes listed above affect their future tax liabilities in Illinois. Morgan Lewis’s state and local tax attorneys stand ready to discuss and analyze the implications of these newly enacted laws.