The Illinois Department of Revenue recently published revisions to the Illinois Administrative Code regulations to implement legislative changes made in 2023 regarding the treatment of investment partnerships resulting from the enactment of Senate Bill 1963 on June 7, 2023.

Updated definition

Prior to the amendment, to qualify as an investment partnership, a partnership was required to have no less than 90% of its gross income from interest, dividends, or gains from qualifying investment securities. The definition of an investment partnership was revised for taxable years ending on or after Dec. 31, 2023 to include in the 90% of gross income test, the distributive share of partnership income from lower-tier partnership interests meeting the definition of a qualifying investment security as defined under the United States Code, including, but not limited to, investment contracts. The effect of this change exempts from the Personal Property Tax Replacement Income Tax (Replacement Tax) investment partnerships that were previously subject to the Replacement Tax because they did not qualify as investment partnerships due to their ownership interests in partnerships meeting the definition of a security under 15 U.S.C. § 77b(a)(1). 

Withholding requirement

The updated regulations amend the definition of an investment partnership and require that any investment partnership with income apportioned or allocated to Illinois withhold on its nonresident partners, with certain federal and state statutory exemptions. The withholding tax rate applicable to nonresident individual partners, partnerships, and S corporations is 4.95%, and the tax rate on behalf of nonresident corporations is 9.5%. The regulations are effective July 11, 2024 and are applicable for taxable years ending on or after Dec. 31, 2023.

Pass-Through Entity tax

Under the new rules, investment partnerships may still elect to pay the Pass-Through Entity (PTE) tax. However, electing to do so does not exempt the investment partnership from the nonresident withholding requirement. Rather, the investment partnership may elect to subtract its income subject to the withholding requirement when computing its PTE tax. 

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