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The Illinois Department of Revenue recently published revisions to the Illinois Administrative Code (PDF) (Opens a new window) regulations to implement legislative changes (Opens a new window) 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 (Opens a new window) (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). (Opens a new window)
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.
What does CohnReznick think?
This regulatory change has the effect of allowing certain previously disqualified partnerships to be classified as investment partnerships for Illinois income tax purposes while simultaneously imposing withholding obligations on all investment partnerships. Moreover, these changes also have the potential to affect a taxpayer’s PTE tax election. As such, this amendment to the Administrative Code regulations has the potential to significantly alter Illinois taxpayers’ tax compliance obligations. Taxpayers who are or may now be classified as investment partnerships should consult with their tax advisor to assist in navigating this significant change.
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