Illinois passes several bills proposing significant tax changes

In detail

GILTI deduction addback

For tax years ending on or after June 30, 2021, S.B. 2017 requires an addback equal to the 50% GILTI deduction under IRC Section 250(a)(1)(B)(i). 

Observation: Prior to the enactment of S.B. 2017, Illinois allowed the GILTI Section 250 deduction by virtue of the state’s adoption of the IRC, starting its state taxable income calculation with Line 30 of the federal Form 1120, and not requiring an addition modification. Illinois then applied its foreign dividend received deduction (DRD) to the net GILTI inclusion (i.e., the IRC 951A inclusion less the IRC 250(a)(1)(B)(i) deduction) as reflected in Schedule J of the Illinois Form IL-1120. This resulted in the application of either a 100%, 65%, or 50% DRD on the net GILTI amount, depending on ownership. Following S.B. 2017, in the absence of contrary guidance, taxpayers will add back the Section 250 deduction and apply the DRD to the gross GILTI amount. 

Additional observation: The addback in S.B. 2017 does not include the Section 78 element of the GILTI Section 250 deduction in IRC Section 250(a)(1)(B)(ii). In addition, Illinois previously enacted an addback for the Section 250 FDII deduction (i.e. IRC Section 250(a)(1)(A)), applicable starting with tax years beginning after December 31, 2018. 

Addback for Sections 245A and 243(e)

For tax years ending on or after June 30, 2021, S.B. 2017 requires an addback equal to the deduction allowed under IRC Sections 245A(a) and 243(e).

IRC Section 245A(a) provides a federal deduction for the foreign source portion of dividends received by domestic corporations from specified 10% owned foreign corporations. IRC Section 243(e) provides a federal deduction for certain dividends from foreign corporations related to earnings and profits accumulated when it was a domestic corporation.

Observation: It appears that the dividend under IRC Section 243(e) and 245A would still be considered a foreign dividend and therefore under 35 ILCS 5/203(b)(2)(O) still be eligible for an Illinois DRD based on reference to the ownership rules under IRC Section 243. 

Foreign dividends received deduction - Section 245(a) excluded

Prior to S.B. 2017, Illinois generally allowed a DRD for foreign dividends.

Applicable to tax years ending on or after June 30, 2021, the Illinois DRD does not apply to dividends for which a deduction is allowed under IRC Section 245(a). IRC Section 245(a) allows dividends from a qualified 10%-owned foreign corporation to qualify for the federal DRD percentages in IRC Section 243. 

Observation: Illinois’ decoupling from Section 245(a) disallows an Illinois foreign DRD; however, it appears that the DRD allowed for federal purposes would be allowed through Illinois conformance to federal taxable income. 

Illinois’ 100% foreign DRD remains applicable to dividends and deemed dividends under IRC Sections 951 through 964. 

Foreign dividends received deduction - Section 1248 excluded

Applicable to tax years ending on or after June 30, 2021, Section 1248 dividends are removed from the definition of “dividends” for purposes of Illinois' DRD. 

Observation: Generally an IRC Section 1248 dividend for federal purposes is afforded IRC Section 245A DRD treatment, although some exceptions may apply. Under S.B. 2017, Illinois's definition of dividend for the state DRD now excludes IRC Section 1248 dividends. Coupled with the new addback of IRC Section 245A deduction under S.B. 2017, it appears that Section 1248 dividends do not qualify for the state's DRD. 

Three-year NOL deduction cap 

For tax years ending on or after December 31, 2021, and prior to December 31, 2024, no net loss carryover deduction shall exceed $100,000 per year.

Observation: The cap is implemented in a fashion similar to the $100,000 cap the state applied for tax years ending on or after December 31, 2012 and prior to December 31, 2014.

Bonus depreciation decoupling

Applicable for tax years ending on or after December 31, 2021, S.B. 2017 provides that Illinois decouples from 100% federal bonus depreciation. Depreciation is treated as if the taxpayer elected not to claim bonus depreciation on such 100% federally depreciable property. This results in 100% bonus property being depreciated under regular Section 168 treatment.

Franchise tax phase-out repealed

Enacted on June 5, 2019, S.B. 689 provided for a phase-out and repeal of the Illinois Franchise Tax. Starting in the 2021 tax year, taxpayers received an exemption for their first $1,000 of liability. In 2022, the exemption was scheduled to increase to $10,000. In 2023, the exemption was scheduled to increase to $100,000. The franchise tax liability would have been completely phased out starting with the 2024 tax year. 

S.B. 2017 extends the $1,000 exemption to years beyond 2021 and repeals the phase-out and eliminates the prior language. 

Income tax credit extensions

S.B. 2017 extends the following credit expirations from 2021 to 2026:

• Affordable housing donation credit 
• Angel investment credit
• Rivers edge zone credits
• Live theater production credit

Additionally, qualifying investments under the new markets development program are extended through fiscal year 2024. 

Passthrough entity-level tax

For tax years ending on or after December 31, 2021, and beginning prior to January 1, 2026, S.B. 2531 allows partnerships and S corporations to elect to pay a 4.95% tax of the taxpayer's net income for the tax year. A separate election is made for each tax year. The election is available only with respect to tax years for which the IRC Section 164(b)(6) limitation on individual deductions applies. 

Partners or shareholders of the electing entity are allocated a credit reflecting their share of the entity-level tax that can then be used against their own tax liability within Illinois, and Illinois withholding requirements are suspended for any year in which a partnership has elected into the tax. The credit is equal to 4.95% of their distributive share of the net income of the electing partnership or S corporation.

Marketplace sellers tax exemption

From January 1, 2020, to December 31, 2020, S.B. 2066 provides a retailers occupation tax exemption for sales of tangible personal property made by a marketplace seller when use tax has been collected and remitted by a marketplace facilitator. Marketplace sellers may request refunds on such taxes that they remitted to the Department. 

Observation: From January 1, 2020 to December 31, 2020, marketplace facilitators were required to collect use tax on sales to Illinois customers made through their marketplace by out-of-state marketplace sellers. However, marketplace sellers who maintained a place of business in Illinois were obligated to collect and remit retailers occupation tax on their sales made via a marketplace. This created substantial complexity for marketplace facilitators, many of whom simply collected and remitted use tax on behalf of all marketplace sellers. Under S.B. 2066, it appears the legislature has acknowledged this complexity and is providing protection for in-state marketplace sellers who were not able to collect retailers occupation tax on these sales. Furthermore, a refund opportunity may exist for any Illinois-based marketplace sellers that remitted state and/or local retailers occupation tax separately from any use tax remitted by the marketplace facilitator. 

Statute of limitations extended

Effective upon enactment, S.B. 2279 provides that, upon filing a claim for a credit or for a refund, if the statute of limitations will expire less than six months after the date a taxpayer files the claim for credit or refund, there will be an automatic six-month extension of the statute of limitations for assessing additional tax due. The change applies to income tax and sales tax (retailers occupation tax, use tax, service occupation tax, and service use tax).