United States: Illinois Fiscal Year 2020 Income And Franchise Tax Changes

The Illinois General Assembly enacted a number of new tax measures in a flurry of activity at the end of its legislative session. Some of the changes are taxpayer friendly and others are not. Unlike the no-deal chaos of past years, all of the measures have been or are expected to be signed by the state's new Democratic governor, J.B. Pritzker.

This blog post summarizes the income-tax and franchise tax-related changes approved by the General Assembly. Subsequent posts will address sales/use, property and other tax changes.

Graduated Income Tax

The General Assembly approved, by a three-fifths vote in each Chamber, a referendum to appear on the November 2020 ballot in which Illinois taxpayers will be asked whether the Illinois Constitution should be amended to permit the imposition of a graduated income tax. Article IX, Section 3 of the current Constitution provides that any tax on or measured by income "shall be at a non-graduated rate," and that only one such tax shall be imposed at one time. The same section also provides that any corporate income tax shall have a rate that does not exceed the rate imposed on individuals by more than a ratio of 8 to 5. The referendum to appear will ask taxpayers whether the Constitution should be amended to delete the prohibition against a graduated tax rate and to provide that the highest corporate income tax rate cannot exceed the highest personal income tax rate by more than a ratio of 8 to 5.

Article XIV, Section 3 of the Constitution provides that in order to take effect, the referendum must be approved by either three-fifths of those voting on the question or a majority of those voting in the election.

The General Assembly also enacted a companion bill, SB 687, signed by the governor as Public Act 101-0008, which establishes the graduated rate system that would take effect if the referendum is approved. The Bill provides for the following rates, effective in 2021:

Non-Joint Filers

$0 – $10,000 – 4.75%

$10,001 – $100,000 – 4.9%

$100,001 – $250,000 – 4.95%

$250,001 – $350,000 – 7.75%

$350,001 – $750,000 – 7.85%

If income exceeds $750,000 then 7.99% of all income

Joint Filers

$0 – $10,000 – 4.75%

$10,001 – $100,000 – 4.9%

$100,001 – $250,000 – 4.95%

$250,001 – $350,000 – 7.75%

$350,001 – $1,000,000 – 7.85%

If income exceeds $1,000,000 then 7.99% of all income

SB 687 also would increase the corporate income tax rate from 7% to 7.99% (10.49% with the personal property tax replacement income tax), effective in 2021.

TCJA Conformity/Decoupling

SB 689, signed by the governor as Public Act 101-0009, included legislation that will add-back the TCJA's deduction for foreign-derived intangible income (FDII). The decoupling is effective for tax years beginning after December 31, 2018. The FDII deduction enacted in sub-part (a)(1)A of IRC section 250 provides US corporate taxpayers a deduction in the amount of 37.5% of income earned from the sale of property to a person outside the US for use outside of the US or the provision of services to a person outside the US or with respect to property not located in the US. See new IITA § 203(b)(2)(E-18). Starting in 2026, the deduction is reduced to 21.875%.

SB 689 also approved a deduction for trusts and estates equal to the amount of "excess business loss" disallowed by Internal Revenue Code § 461(1)(B). The amount disallowed under IRC § 461 is deemed a net operating loss carryover to the following taxable years(s). However, in the case of a trust or estate, because Illinois decouples from the federal net operating loss provisions, absent this amendment, an excess business loss would have been permanently disallowed to a trust or estate. See new IITA § 203(c)(2)(Z).

New/Expanded Income Tax Credits

SB 689 included the "Blue Collar Jobs Act," which provides for an EDGE-type income tax credit (Economic Development for a Growing Economy) in the form of a credit for incremental income tax withholding on construction jobs for High Impact businesses, businesses in Enterprise Zones and River Edge areas. The credit is enhanced if the construction jobs are in an "underserved" area. The amendment uses the same definition of "underserved" found in the current EDGE Tax Credit Act (see 35 ILCS 10/5-1 et seq.). The credits are equal to up to 50% (or in some instances, 75% if the project is in an underserved area) of income tax withheld from construction project contractor and subcontractor employees. Unused credits can carry forward five years; credits earned by pass-through entities flow through to the owners.

Withholding Requirements

SB 1515 requires Illinois income tax withholding for non-resident employees that spend more than 30 working days in Illinois starting in 2020. The Bill also provides that Illinois residents will receive a credit for taxes paid to other states if they are based in Illinois but pay income taxes on days spent in other states.

Franchise Tax

At long last, the Illinois Franchise Tax has been repealed (see SB 689). Sections 15.35 and 15.65 of the Business Corporation Act were amended to exempt the first $X in liability from the Franchise Tax, as follows:

2020: $30

2021: $1,000

2022: $10,000

2023: $100,000

2024 and thereafter: No tax due

Amnesty Programs

Amnesty for Taxes administered by Illinois Department of Revenue

The Legislature adopted a new amnesty program for all taxes administered by the Illinois Department of Revenue (see SB 689). The program will run from October 1, through November 15, 2019. Taxes due for any taxable period ending after June 30, 2011, and prior to July 1, 2018, are eligible. Interest and penalties are waived with payment. Unlike previous Illinois amnesties, there is no penalty interest imposed on taxpayers eligible for amnesty who do not participate in the program. See 35 ILCS 745/10.

Franchise Tax Amnesty Program

The Legislature also adopted a new amnesty program for franchise taxes and license fees imposed by Article XV of the Business Corporation Act (see SB 689). The program will run from October 1, through November 15, 2019. Taxes due for any taxable period ending after March 15, 2008, and on or before June 30, 2019, are eligible. Interest and penalties are waived with payment. See 805 ILCS 8/5-10.

Illinois Fiscal Year 2020 Income And Franchise Tax Changes

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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