State & local tax alert: Illinois tax changes
Senate Bill 9 was passed on July 6, 2017, through an override of Governor Rauner’s veto. The below sections summarize the significant tax changes enacted by this legislation.
Net income tax
The net income tax rates for all types of taxpayers were permanently increased as follows:
- The tax rates for individuals, trusts, and estates increased to 4.95 percent for the period after June 30, 2017. The rate for the period through June 30, 2017, is 3.75 percent.
- The income tax rate for C corporations increased to 9.5 percent (including the 2.5 percent replacement tax) for the period after June 30, 2017. The C corporation income tax rate for the period through June 30, 2017, is 7.75 percent (including the 2.5 percent replacement tax).
Taxpayers whose tax years overlap with June 30, 2017, can compute their tax based on prorating their income between the period through June 30 and the period after June 30 through the end of the taxpayer’s tax year. Under this method, income attributable to the period through June 30, 2017, is computed by multiplying the total income for the year by the ratio of the number of days in the taxpayer’s tax year through June 30 over the total number of days in the tax year. For ease of computation, the Department of Revenue has provided a blended tax rate schedule that can be applied to a taxpayer’s total taxable income (see Department of Revenue's Informational Bulletin FY 2018-2).
Alternatively, taxpayers can make an irrevocable election to use the specific accounting method. This computation is required to be reported on Schedule SA, which is expected to be available on the Department of Revenue’s website soon.
Because the tax rates impact 2017, taxpayers should take into account the increased rates when making future estimated and extension tax payments. Also, employers need to adjust withholding for the rate changes and the changes to the personal standard exemption and residential real property tax credit (see Other Income Tax Changes below). The Department of Revenue has indicated it will issue revised estimated tax payment worksheets on its website soon. For employers, an updated Booklet IL-700-T, Illinois Withholding Tax Tables, is available on the Department of Revenue’s website.
Note the replacement tax, which is also imposed on net income, remained the same at 2.5 percent for C corporations and 1.5 percent for pass-through entities.
Research and development credit
- The research and development credit ("R&D") is retroactively reinstated for 2016 and will expire for tax years ending after December 31, 2021. As a result, taxpayers that have filed their 2016 income tax returns can file refunds to claim the R&D credit. Prior to the passage of Senate Bill 9, the R&D credit had sunset for the 2016 tax year for calendar year taxpayers. The Department of Revenue has indicated it will provide guidance on how to claim R&D credit refunds for previously filed 2016 returns, as well as for claiming the credit on 2016 income tax returns that have not been filed.
Other income tax changes
- The domestic production activities deduction under IRC §199 is a required tax base addition for tax years ending on or after December 31, 2017, for all taxpayers.
- Eliminates the restriction that the unitary business group includes only entities that use the same apportionment formula for tax years ending on or after December 31, 2017. Prior to the passage of Senate Bill 9, a unitary business group could include only members that used the same apportionment formula.
- For tax years ending on or after December 31, 2017, the 80/20 test, which is used to determine which entities can potentially be treated as part of a unitary business group, expands what is considered to be within the U.S. to include any area the U.S. has asserted jurisdiction with respect to the exploration or exploitation of natural resources, other than a territory or possession of the U.S.
- For tax years beginning on or after January 1, 2017, the personal standard exemption and the residential real property tax credit are both eliminated for married filing jointly taxpayers with greater than $500,000 of adjusted gross income and greater than $250,000 of adjusted gross income for all others.
- The graphic arts machinery and equipment exemption is reinstated for purchases made on or after July 1, 2017.
- The manufacturing machinery and equipment exemption is made permanent.
- The Revised Uniform Unclaimed Property Act replaced the Uniform Disposition of Unclaimed Property Act. A number of changes were made, including the elimination of the business to business exemption. As such, property between businesses subject to Illinois’ unclaimed property provisions will need to be reported on the 2018 return.