Illinois’ governor has signed House Bill 2755 into law, the state’s budget for fiscal year 2026. The legislation includes several provisions that will affect taxpayers doing business in the state. Among other provisions, the law includes:
- A change to the allocation of income related to sales or exchanges of interests in S corporations or partnerships that have taxable activities in the state.
- A reduction in the Illinois dividends-received deduction for global intangible low-taxed income (GILTI).
- The elimination of certain exceptions in the addback calculation for entities that are part of “80/20 combined groups.”
- A change in the calculation of sales factor apportionments for combined groups.
House Bill 2755 also:
- Expands the application of Illinois’ service occupation tax (SOT) and service use tax (SUT) to remote sellers out of state, requiring them to collect local taxes on these sales, in addition to the uniform statewide rates.
- Creates both a general tax amnesty program and an amnesty program targeted at remote retailers.
- Includes provisions that will affect tobacco products, online sports wagering, hotel operations, intrastate telecommunications, and “innovative manufacturing.”
Here are some additional details on these key provisions.
Allocations of gains and losses on sales of S corporation and partnership interests by nonresidents
Historically, if an owner sold an equity interest in an S corporation or partnership that had taxable activity in the state of Illinois, the gain or loss on the sale would be allocated to the owner’s state of residence. HB 2755 imposes a new requirement on out-of-state owners of pass-through entities that have taxable activity within Illinois. Effective for transactions occurring on or after the June 16, 2025, the date of enactment for the bill, these owners need to apportion a percentage of the gain or loss on the sale of their interest to Illinois based on the average of the business’s Illinois apportionment factors in the year of the sale and the last two years. (The new law does exempt “investment partnerships” from this treatment.)
Illinois treatment of global intangible low-taxed income (GILTI)
At the federal level, the Tax Cuts and Jobs Act (TCJA) created the GILTI tax to impose a minimum level of tax on income from intangible assets like patents and trademarks that U.S.-based companies hold within offshore affiliates. Prior to this year’s budget act, the state hadn’t imposed any tax on income classified as GILTI on a federal return. The payments had been treated as dividends subject to a 100% dividends-received deduction.
For tax years ending on or after Dec. 31, 2025, HB 2755 cuts the Illinois dividends-received deduction in half to just 50% for offshore intangible income that qualifies as GILTI.
New Illinois sales factor apportionment for combined groups
Entities that do business in Illinois and file as part of a combined group in the state will be subject to new rules for sales factor apportionment. The state has previously used an apportionment method commonly known as the “Joyce” approach, where the numerator in the sales factor calculation included Illinois-sourced sales only from those entities in the group with nexus in the state.
HB 2755 adopts a “Finnigan” approach. This rule requires that all members of the combined group must include their Illinois sales in the numerator of the apportionment calculation instead of just entities with nexus. This change expands the calculation to include sales from entities within the group that don’t have nexus in Illinois. This new apportionment factor will apply for tax years ending on or after Dec. 31, 2025.
Changes to Illinois addbacks for “80/20” entities
Entities that are part of a combined group that have 80% or more of their total business activity outside of the United States (an “80/20 business”) are subject to special rules on their Illinois tax returns. The state requires that the entity add back any expenses claimed for interest and intangible expenses paid to the combined group. Prior to HB 2755, exceptions to the addback requirements were allowed for:
- Expenses paid to an 80/20 company that’s subject to another foreign country or state’s income tax.
- Interest expenses related to an arm’s-length transaction, as long as the main purpose isn’t to avoid federal and Illinois state income taxes.
- Expenses paid by the 80/20 company in the same taxable year to an unrelated person under an arm’s-length transaction.
- Circumstances where the addback would be unreasonable.
HB 2755 eliminates the first two exceptions to the 80/20 addback rules for tax years ending on or after Dec. 31, 2025.
Illinois sales tax changes
Beginning Jan. 1, 2026, Illinois will do away with its 200-transaction threshold for measuring economic sales tax nexus and rely solely on a sales volume threshold of $100,000 or more in the preceding 12-month period.
HB 2755 also aligns the sales and use tax obligations imposed on out-of-state service providers with those already in place on remote retailers. As of Jan. 1, 2026, service providers subject to Illinois’ service occupation tax (SOT) and service use tax (SUT) will be required to collect and remit both the Illinois state tax of 6.25% on taxable services in the state and any applicable local rates levied by the municipalities where the services are performed.
Effective June 16, 2025, Illinois will forego certain sales and use tax penalties on remote sellers and instead impose a higher “lack of documentation” sales and use tax rate of 15% on taxpayers that fail to provide supporting information, schedules, or documents for sourcing to the location where the taxpayer shipped or delivered the property or where the purchaser took possession of the property.
Illinois tax amnesty programs
HB 2755 also instructs the Illinois Department of Revenue to establish a variety of tax amnesty programs. First, there will be a general amnesty that:
- Applies to any taxes collected by the department.
- Is available for tax periods ending after June 30, 2018, and prior to July 1, 2024.
- Will run from Oct. 1, 2025, to Nov. 15, 2025.
All penalties and interest will be waived under this program. Affected taxpayers may want to consider whether participation in this amnesty or a voluntary disclosure agreement (VDA) would provide a better outcome based on their individual facts and circumstances. The amnesty may require a longer lookback but includes a waiver of interest and penalties, while the VDA generally provides a set lookback period and waives only penalties.
The general amnesty will also be available for franchise taxes and license fees but for slightly different periods ending after June 30, 2019, to on or before June 30, 2025.
The budget bill also includes a remote retailer amnesty program for businesses with no physical presence in Illinois that owe the “retailers occupation tax” (ROT). That amnesty will:
- Apply to periods from Jan. 1, 2021, to June 30, 2026.
- Be available to eligible taxpayers from Aug. 1, 2026, to Oct. 31, 2026.
- Will include a waiver of applicable penalties and interest.
HB 2755 includes capital improvement incentives
The new budget bill also includes an “Advanced Innovative Manufacturing Credit” (AIM) to support investments in research and development or manufacturing in Illinois. The new AIM credit can be used against Illinois income tax starting Jan. 1, 2026. It ranges from 3 to 7% for capital improvement investments of at least $10 million made to new or existing facilities. To qualify for the credit, a taxpayer must:
- Operate an Illinois business as a manufacturer of critically needed goods.
- Operate an Illinois business that primarily engages in research and development of critically needed goods.
- Plan to locate in Illinois for either of the two above purposes.
Applicants can’t participate in both the AIM credit and other major Illinois credit programs for the same project site and period. The credit is nonrefundable, but it can be carried forward up to 10 years.
Modifications to other Illinois taxes
HB 2755 also changed some definitions and tax rates applicable to certain other activities in the state, including:
- An amendment to the definition of “tobacco products” to include products made or derived from tobacco, or that contain any nicotine whether natural or synthetic, including nicotine pouches, lozenges, and gum, as well as an increase on the tobacco tax rate from 36 to 45%.
- The imposition of a tax on companies that operate online or mobile sports wagering. The rate will be $0.25 per wager on the first 20 million wagers and $0.50 per wager thereafter.
- An expansion of the hotel operators’ occupation tax to eliminate the exclusion of short-term rentals. The new rule will effectively require all rental properties to collect tax on short-term rentals.
- An increase in the intrastate telecommunications tax rate from 7 to 8.65%.
Plan now to manage the impact of HB 2755 changes
Many of the changes in the new law will affect calendar-year taxpayers in their current cycle that ends Dec. 31, 2025. The requirement that nonresidents allocate gain or loss on pass-through equity transactions applies to deals occurring after June 16, 2025. Other provisions like the Illinois GILTI modification and the 80/20 addback changes apply to tax years ending on or after Dec. 31, 2025, which could affect this year’s tax calculation as well as quarterly estimates. Businesses that are subject to the provisions in the 2026 Illinois budget should reach out to their tax advisors to learn more about the impact of the changes based on their specific facts and circumstances.
