Illinois Enacts Significant Tax Changes

On June 16, Illinois enacted H.B. 2755, which includes several significant tax changes. Following are highlights of some of those changes.

50% tax on GILTI

For tax years ending on or after Dec. 31, 2025, Illinois allows a 50% deduction of IRC Section 951A GILTI. Under the prior law, GILTI was subject to a 100% dividend received deduction (DRD) for GILTI from an 80% or more ownership in a controlled foreign corporation (CFC) or a 65% DRD from a less than 80% ownership in a CFC.

Addback exceptions repealed

Illinois requires an addback for interest and intangible expenses paid to an entity, regardless of where it was created or organized, that would be a member of the taxpayer’s unitary business group but for the fact that its business activity outside the US is 80% or more of its total business activity (an 80/20 company). Under prior law, there were four exceptions:

1. The expense is paid to an 80/20 company that is subject to a tax in a foreign country or state (other than a state that requires unitary reporting) measured by net income with respect to that interest.
2. The 80/20 company, in the same taxable year, paid the expense to an unrelated person under an arm’s-length agreement.
3. The expense relates to a contract entered into at arm’s-length rates and terms, and the principal purpose for the payment is not federal or Illinois tax avoidance. This exception applies only to the interest expense addback.
4. The addback is unreasonable.

The new law removes exceptions 1 and 3 for tax years ending on or after Dec. 31, 2025.

Change in combined unitary group treatment

Prior to 2025, a Joyce approach applied to combined unitary groups for certain Illinois tax purposes. Under this approach, members are viewed as individual entities. For apportionment, a member’s Illinois sales were not included in the unitary business group’s Illinois sales factor numerator unless the member was subject to Illinois tax. Additionally, a member’s sale of property to a state where the entity is not subject to tax is thrown back to Illinois.

For tax years ending on or after Dec. 31, 2025, Illinois will be adopting a Finnigan approach, which views all group members as a single taxpayer. For apportionment, all group members include their Illinois sales in the group’s Illinois sales factor numerator, regardless of each member’s Illinois tax status. Tax is not thrown back to Illinois if a member sells property to a state where any member of the group is subject to tax.

New manufacturing credit

H.B. 2755 establishes the advancing innovative manufacturing (AIM) credit ranging from 3% to 7% for capital improvements of at least $10 million made to a new or existing facility for the purpose of modernizing, upgrading, automating, or streamlining a manufacturing or production process.

A taxpayer generally qualifies for the credit if the taxpayer:

• Operates an Illinois business as a manufacturer of critically needed goods
• Operates an Illinois business that primarily engages in research and development that will result in the manufacturing of critically needed goods
• Plans to locate in Illinois for either of the above two purposes

An applicant cannot participate in other major Illinois credit programs (for example, the economic development for a growing economy tax credit) for the same project site and period. The credit is available against the Illinois corporate and individual income tax for tax years beginning on or after Jan. 1, 2026, and is not refundable but may be carried forward for 10 years.

The Department of Commerce and Economic Opportunity may begin awarding credits on Jan. 1, 2027, and cannot enter into any new agreements after Dec. 31, 2030.

Sourcing for pass-through entity sales

Under prior law, gain or loss from the sale of a pass-through entity generally was sourced based on the taxpayer’s state of residence. Under H.B. 2755, gains and losses from the sale of an interest in an S corporation or a partnership (other than an investment partnership) are allocated to Illinois if the pass-through entity is taxable in Illinois based on the average of the pass-through entity’s Illinois apportionment factor for the current year and prior two tax years.

If the pass-through entity was not in existence during both of the preceding two years, then only the years in which it was in existence shall be considered. The change is effective as of June 16.

Crowe observation

Under the new treatment, a nonresident would have Illinois-sourced income to the extent of the apportionment factors of the pass-through entity. Nonresidents should evaluate whether they would get a credit in their state of residence for Illinois tax paid.

The new rule not only impacts owners selling their businesses but also partners who retire from a professional services firm that operates in Illinois.

The Department of Revenue indicated that the change would be effective for years ending on or after June 16, 2025, the date the bill was signed, a position that could be challenged.

Tax for lack of documentation

Also effective on June 16 is a new 15% tax on gross receipts imposed for failure to provide documents necessary to determine whether tangible personal property is shipped or delivered or if possession is taken by a purchaser in Illinois. The new tax is in lieu of penalties for an unprocessable return if the taxpayer fails to provide the documentation required.

Looking ahead

Businesses with a meaningful presence in Illinois should consult their tax advisers to assess recent Illinois tax changes and evaluate how they might be affected and identify potential planning opportunities.