The governor of Illinois has signaled his support for the state’s 2021 Budget Bill, a $42 billion dollar spending package. While the bill does not increase personal income tax rates, it does effectively increase taxes on businesses and their owners by closing several “tax loopholes” identified by the legislature. The bill also extends several state investment tax credits — such as the Rivers Edge Redevelopment Zone, Angels Investment Credit and the Affordable Housing Donation Credit — as well as sales tax exemptions on feminine products. The sales tax rate on certain food prepared and consumed at assisting living facilities is also proposed to be reduced to 1%.
In addition, the Illinois General Assembly passed House Bill 2531, which creates a workaround for pass-through entity owners searching for alternatives to the federal $10,000 cap on state tax deductions.
Below are highlights from the proposed budget bill.
4 Key Tax Loopholes the Illinois Budget Bill Will Affect
1. Net Operating Loss (NOL) Deduction Limitation
The Illinois budget bill limits corporate NOLs to $100,000 per year in any tax year ending on or after December 31, 2021, and prior to December 31, 2024, by amending 35 ILCS 5/207(d).
2. 100% Bonus Depreciation Decoupling
The Illinois bill decouples the state from the federal 100% bonus depreciation deduction. Illinois will now require an addback and future subtraction modification when calculating state taxable income, pursuant to 35 ILCS 5/203(b)(2)(T)(3). In years prior to 2021, Illinois only decoupled from federal bonus deprecation where the federal bonus deduction on an asset was less than 100%.
3. Franchise Tax Phase Out
The bill eliminates the phase-out of the franchise tax scheduled to occur after 2021 through 2024 (originally instituted with Public Act 101-0009 in 2019). As such, Illinois will provide an exemption of the first $1,000 of liability that became effective on or after January 1, 2021. However, the state will not increase the franchise tax phase-out amounts to $10,000, $100,000 and the full phase-out as originally anticipated in tax years 2022 and beyond.
4. Foreign Income Decoupling
The Illinois budget bill also decouples the state from federal global intangible low-taxed income (GILTI) provisions. Effective for tax years ending on or after June 30, 2021, Illinois will require an addback of GILTI, as well as the deductions allowed under IRC Sections 243(e) and 245A. Further, the budget bill modifies the Illinois foreign dividends subtraction for taxable years ending on or after June 30, 2021, to provide that "the term 'dividend' does not include any amount treated as a dividend under Section 1248 of the Internal Revenue Code," which are generally gains from certain sales or exchanges of stock in foreign corporations.
Pass-through Entity Tax Election Workaround for Federal Cap on State and Local Deductions
Following in the footsteps of nearly a dozen other states, Illinois passed legislation to allow a pass-through entity to annually elect to remit entity tax on behalf of its owners at a 4.95% tax rate. By doing so, the entity may deduct the state taxes paid for federal tax purposes, thereby circumventing the $10,000 federal cap individuals now face on their state and local deductions. Taxpayers may annually evaluate the potential benefit of the Illinois pass-through entity tax election for their company.
2020 Measure to Increase Tax Rates — Update
The November of 2020 ballot proposal, which permitted a significant increase to the 2021 income tax rates (P.A. 101-0008), was voted down. As such, corporate and individual tax rates have not changed.
- C corporations remain at 7% income tax rate, versus the proposed increase to 7.99% (excluding the replacement tax)
- Individuals remain at a flat 4.95% tax rate, versus the proposed graduated rates of 4.75% - 7.99%
Employer Withholding Reminder
Due to the COVID-19 pandemic, many employers have employees displaced or working from states they have not in the past. Illinois passed updated withholding tax requirements (SB 1515) prior to the pandemic, which provided that starting with tax year 2020 employers with non-resident employees spending more than 30 working days in Illinois are required to withhold Illinois Income tax. Illinois resident employees were also permitted a credit for taxes paid to other states if the tax paid related to days spent in another state.
In May of 2020, the Illinois Department of Revenue issued Informational Bulletin FY 2020-29 explaining the income tax withholding requirements when employees temporarily work from home within Illinois due to the COVID-19 pandemic:
If an Illinois resident employee performs work from their home in Illinois for more than 30 working days for an out-of-state employer, the employer may be required to register with the Illinois Department of Revenue (IDOR) and to withhold Illinois income tax from the wages of those employees.
Illinois has historically made tax reciprocity available to Illinois resident employees commuting to work at employers located in Iowa, Kentucky, Michigan or Wisconsin. As such, nonresident employers in these states may have previously created an Illinois withholding account.
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