On July 6, Illinois enacted its first budget since 2015. The legislation includes changes to Illinois taxes.
Following is a summary of the significant changes.
Corporate Tax Changes
- Corporate rate increase. The corporate income tax rate increases from 5.25 percent to 7 percent. The Illinois replacement tax rate on Subchapter C corporations remains unchanged at 2.5 percent. As a result, the combined corporate tax rate in Illinois increases from 7.75 percent to 9.5 percent.
For the 2017 calendar year, Illinois tax is calculated based on the 7.75 percent rate for the period before July 1, 2017, and 9.5 percent for the period after June 30, 2017. For fiscal year corporate filers that have tax years ending on or before June 30, 2017, the rate is 7.75 percent for the full year. For fiscal year corporate filers with tax years beginning on or after July 1, 2017, the tax rate is 9.5 percent for the full year.
Details on the computation of the rates are available in the Illinois Department of Revenue Informational Bulletin FY 2018-02.
Tax Years Ending in 2017 and 2018 Blended Illinois Income and Replacement Tax Corporate Rate July 31, 2017 7.8986% Aug. 31, 2017 8.0473% Sept. 30, 2017 8.1911% Oct. 31, 2017 8.3397% Nov. 30, 2017 8.4836% Dec. 31, 2017 8.6322% Jan. 31, 2018 8.7808% Feb. 28, 2018 8.9151% March 31, 2018 9.0637% April 30, 2018 9.2075% May 31, 2018 9.3562% June 30, 2018 9.5%
- Allocating income for midyear rate increase. The default method for computing tax for calendar year taxpayers and fiscal year taxpayers with a tax year beginning before July 1, 2017, is based on allocating total taxable income by a ratio of the number of days before July 1, 2017, divided by the total number of days in the tax year, in order to determine the amount of taxable income subject to the old tax rate. Similarly, total taxable income is allocated by a ratio based on the number of days after June 30, 2017, divided by the total number of days in the tax year, in order to determine the amount of taxable income subject to the new tax rate. This method is referred to as the apportionment method (blended rate).
Alternatively, an election can be made on a previously filed return that allows for separate accounting in order to determine the amount of income that can be taxed under the old rates. Under either method (default or the election), the full-year apportionment percentage is used to compute Illinois taxable income. The Department of Revenue refers to this as the specific accounting method. If under the specific accounting method, one period has negative income and the other has positive income, the net income for the entire taxable year is attributed to the period with positive income and the rate is determined accordingly. Even if a taxpayer plans to make the separate accounting election, the Informational Bulletin requires all estimated payments for income received on or after July 1, 2017, to be made at the higher rate.
Electing either method is considered irrevocable.
- Revisions to unitary combined group rules. Illinois provides for special apportionment methods for insurance companies, financial services companies, and companies that provide transportation services. Historically, companies that were required to apportion their income under these special methods, as well as those companies that were required to apportion their income under the generally applicable apportionment methods, were not permitted to be included in the same unitary combined return. As a result, it is common for Illinois taxpayers that have diverse operations to file more than one Illinois corporate income and replacement tax return.
Effective for tax years ending on or after Dec. 31, 2017, taxpayers generally will be required to include all entities on a single Illinois combined corporate income and replacement tax return.
Also, though Illinois has not fundamentally changed its rules regarding whether and to what extent an entity with foreign operations is required to be included or excluded from a unitary combined return (the so-called Illinois 80/20 rule), the new law expands the definition of the United States to include areas over which the federal government has asserted jurisdiction or claimed exclusive rights with respect to exploration or exploitation of natural resources. U.S. possessions and territories continue to be excluded from the definition.
- Decoupling from IRC Section 199 domestic production activities deduction. Effective for tax years ending on or after Dec. 31, 2017, Illinois will disallow the federal deduction under Internal Revenue Code Section 199. The decoupling is for all taxpayer types (corporations, individuals, trusts, estates, and partnerships entities).
- Reinstatement and extension of the Illinois research and development (R&D) tax credit. The Illinois R&D credit is 6.5 percent of qualifying research expenditures incurred in Illinois. The R&D credit expired on Dec. 31, 2015. The new law provides that it is the legislature’s intent that the credit is available retroactively to taxpayers for 2016. The credit is available through tax years ending before Jan. 1, 2022.
Individual Rate Changes
The income tax rate for individuals, trusts, and estates increases from 3.75 percent to 4.95 percent. For 2017 calendar year filers the tax is calculated based on the 3.75 percent rate for the period prior to July 1, 2017, and 4.95 percent for the period after June 30, 2017. For fiscal year filers who have tax years ending prior to July 1, 2017, the rate is 3.75 percent for the full year. For fiscal year filers who have tax years beginning on or after July 1, 2017, the tax rate is 4.95 percent for the full year.
Sales Tax Changes
- Reinstatement of graphic arts machinery and equipment exemption. The manufacturing and assembling machinery and equipment exemption is expanded to permanently include purchases of graphics arts machinery and equipment made on or after July 1, 2017. The exemption for graphic arts machinery and equipment previously had expired.
Senate Bill 9 includes significant changes to the administration of unclaimed property in Illinois as well as the creation of a new lien registry for state taxes.