Illinois enacts significant tax changes with additional potential changes

Note: Senate Bill 2279 was passed on June 25, 2021.

In what is shaping up to be an active year, Illinois Governor Pritzker signed Senate Bill 2017, the FY22 Budget Implementation Act, into law on June 17, 2021. The newly enacted tax provisions made the following changes that will significantly impact a wide range of taxpayers:

• Decoupling from the 100% bonus depreciation.
• Limiting C corporations’ net operating loss deduction carryforwards to $100,000.
• Disallowing certain foreign income deductions and different treatment of IRC Section 1248.
• Eliminating the franchise tax repeal.
• Extending the sunset date for certain credits.

Further, the Illinois legislature passed the following tax bills that await Governor Pritzker’s signature: 

• Creating a workaround to the $10,000 federal individual income tax deduction limitation on state taxes on income earned from pass-through entities (Senate Bill 2531).
• Extending the statute of limitations for assessment by six months on refunds filed within six months of the statute of limitation expiring (Senate Bill 2279).
• Allowing a sales tax credit to marketplace sellers for marketplace facilitators that remitted use tax on sales made in 2020 (Senate Bill 2066).

The enacted tax legislation and the pending law changes are described in more detail in the below sections. Plante Moran’s SALT team will continue to monitor the outstanding tax bills, and will update this SALT alert if and when the governor signs the remaining tax bills.

Enacted tax law

Decoupling from 100% bonus depreciation deduction

Illinois decouples from the 100% federal bonus depreciation for all taxpayers starting with tax years ending on or after Dec. 31, 2021. Under the new depreciation provisions, taxpayers are required to add back the full bonus depreciation and are provided a subtraction for depreciation computed using IRC Sec. 168 as if they elected out of 100% bonus depreciation.

$100,000 NOL limitation

C corporations are limited to a $100,000 net operating loss deduction for tax years ending on or after Dec. 31, 2021, and prior to Dec. 31, 2024. The carryforward period for the limitation on utilizing net operating losses will toll in years a taxpayer could have utilized more than $100,000 of net operating loss. However, if a taxpayer has a loss or uses $100,000 or less of loss during the limitation period, no additional years will be added to the carryforward. The net operating loss limitation doesn’t apply to S corporations and partnerships.

Foreign income deduction addback & IRC Section 1248 income

The bill contains several modifications related to foreign income. For taxable years ending on or after June 30, 2021, corporate taxpayers are required to add back the deduction allowed under IRC Sec. 250(a)(1)(B)(i), commonly referred to as the GILTI deduction. Additionally, taxpayers are required to add back federal dividend received deductions under IRC Sec. 243(e) and Sec. 245A(a). Note that Illinois disallowed the federal income tax deduction for foreign-derived intangible income (FDII) starting with tax years beginning after Dec. 31, 2018.

While these changes will increase the Illinois starting point of federal taxable income, the state hasn’t changed the subtraction provided for income included under IRC Sec. 951 through 965. As such, many taxpayers will likely end up in a similar, if not the same, spot as they would have prior to these legislative changes.

Illinois changed the definition of “dividend” for purposes of the Illinois dividends received deduction. No longer included for taxable years ending on or after June 30, 2021, is income treated as a dividend under IRC Sec. 1248. Under IRC Sec. 1248, a taxpayer may be required to recharacterize a portion of their gain from the sale of a foreign corporation from capital gain to dividends, to the extent of untaxed earnings and profits in the foreign corporation. However, this change doesn’t apply to dividends for which a deduction is allowed under IRC Sec. 245(a).

Elimination of franchise tax repeal

Senate Bill 2017 eliminates the phase out of the franchise tax while retaining the current $1,000 tax liability offset (i.e., tax is paid on the excess of a $1,000 liability). Pursuant to Senate Bill 689, passed in the spring of 2019, the Illinois franchise tax was set to gradually phase out starting 2020 with complete elimination for taxes due and payable after Dec. 31, 2023.

Extension of sunset dates for credits

The following credits that were set to expire after 2021 have been extended to 2026:

• Angel Investment credit
• Affordable housing donations credit
• River Edge Redevelopment Zone credit
• Live theater production credit

Tax law awaiting Governor’s signature

The following sections describe tax law changes passed by the Illinois legislature. These changes currently await Governor Pritzker’s signature.

Pass-through entity election

Senate Bill 2531 would allow partnerships, except publicly traded partnerships, and S corporations an annual election to pay a 4.95% income tax for tax years ending on or after Dec. 31, 2021, and beginning prior to Jan. 1, 2026. Tiered pass-through entity structures are also eligible for the election to pay taxes at various levels within the structure.

The intended purpose of the election is to allow individuals a federal individual income tax deduction for state taxes that are otherwise subject to the federal itemized deduction limitation of $10,000.

Eligible entities that make the election will generally compute tax in the same manner as replacement tax, except they aren’t allowed the standard exemption, net operating loss carryforward deduction, and the subtraction for owners that are themselves subject to replacement tax or are exempt organizations. Further, partnerships aren’t allowed the deduction for reasonable compensation or personal service income. This provides similar treatment between the pass-through entity income tax and the individual income tax, since individuals are generally not allowed these deductions in computing Illinois income tax.

Extension of statute of limitations on refund claims

Senate Bill 2279 would extend the statute of limitations for a taxpayer’s entire tax return by six months if a refund claim is filed with less than six months left in the statute of limitations for filing refund claims. Under current law, the Illinois Department of Revenue isn’t allowed to make an assessment on timely filed refund claims after the statute of limitation has expired.

Marketplace sellers sales tax change

Senate Bill 2066 would allow marketplace sellers a sales tax credit on the amount of use tax that a marketplace facilitator remitted to Illinois on sales of goods made from Jan. 1, 2020 to Dec. 31, 2020. The marketplace seller would be required to maintain books and records to support that the marketplace facilitator remitted Illinois use tax.