Third time’s a charm for Illinois’ budget bill as lawmakers overrode the veto by Governor Rauner last week. SB 6, 9 and 42 became the state’s first budget bill to pass through legislation after stalemated plans in both fiscal years 2016 and 2017. The $36 billion budget includes several tax law changes, as Illinois is desperate to avoid becoming the first-ever U.S. state to receive a junk credit rating.
Key changes were made that will impact both individuals and businesses operating in the state, most of which mean higher taxes for all filing within the state beginning as early as 2017. Below are some of the more significant changes and when they will take effect:
- Individual income tax rate increases to 4.95%, up from 3.75% effective July 1, 2017.
- Estates and trusts are also subject to the personal income tax increase and will be subject to an Illinois tax rate of 6.45% after taking into account the 1.5% property replacement tax.
- Certain individual income tax credits are now subject to limitations based on adjusted gross income (AGI) beginning for tax years 2017. A married filing joint couple earning more than $500,000 (or $250,000 for single filing taxpayers) may no longer claim the following:
- Education expense credits;
- The 5% credit for property taxes paid on residential real property; and
- Personal income tax exemptions.
- Corporate income tax rate increases to 7.0%, up from 5.25%, effective July 1, 2017.
- C Corporations will be subject to a combined Illinois tax rate of 9.5% when including the 2.5% property replacement tax.
- Internal Revenue Code Section 199, the domestic production activities deduction, will now be required to be added back to federal taxable income to compute Illinois tax liability for taxable years ending on or after December 31, 2017.
- 100% of gasohol sales are now subject to sales tax, service tax, use tax and service use tax, up from 80% of sales previously, effective July 1, 2017.
- The definition of a “Unitary Business Group” has been updated as it relates to who can be included in a group and how apportionment will be applied, effective for tax years ending on or after December 31, 2017.
- Under prior law a Combined Group could not include members required to use a different apportionment formula. Many times this would impact groups with a related insurance company, financial organization, transportation company, etc. This limitation has been removed under the new rule.
- Corporate income and replacement tax liabilities must continue to be calculated using the water’s edge combined reporting method, but in the bill Illinois modified the definition of United States to include: “the 50 states, the District of Columbia, and any area over which the Unites States has asserted jurisdiction or claimed exclusive rights, with respect to the exploration for or exploitation of natural resources, but does not include any territory or possession of the United States.” Taxpayers will need to evaluate whether their unitary operations are impacted by this slight modification.
- The state’s unclaimed property law has been revised with the adoption of the Revised Uniform Unclaimed Property Act, which excludes a business to business exemption.
While the budget bill focuses on reducing the more than $130 billion deficit Illinois faces, several tax breaks were passed to ease the burden of those living and working within the state. Below are some additional changes and when they will take effect:
- The sunset date for research and development (R&D) credits that may be claimed against income and replacement tax liabilities was extended through to 2021.
- Ethanol and biodiesel fuel exemptions previously exempt from sales tax, service occupation tax, use tax and service use tax were extended to December 31, 2023.
- The sales tax exemption for graphic arts machinery and equipment was restored under the manufacturing and assembling machinery and equipment exemption, effective July 1, 2017.
- Certain fees collected by the secretary of state were reduced under the Business Corporation and Limited Liability Company Acts.
- Credit allowances for education expenses were increased along with earned income credits beginning as early as 2016.
- New credit allowances are available for school instructional materials and supplies paid for by teaching professionals, effective for tax year 2017.
Overall, the budget will generate an additional $5 billion annually while cutting costs by more than $2 billion. The enacted budget will serve as a much needed first step toward addressing the state’s growing deficit, which includes $15 billion in past due bills and a severely underfunded pension fund. Assuming legislators continue to work together, taxpayers should expect more changes in Illinois in the future.
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Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.