Illinois Budget Increases Income Tax Rates and Makes Revisions to Various Other Tax Provisions

Synopsis

The Illinois legislature (Senate and House of Representatives) overrode Illinois Governor Bruce Rauner’s veto of Senate Bill 9, thus enacting the state’s 2018 budget.  The enacted budget increases the tax rates for both individuals and corporations; revises the unitary business combination rules; decouples from IRC 199; reinstates the research and development credit which had expired after 2015; provides two minor sales and use tax changes; and creates a state tax lien registry. Following is a summary of these changes. 

Corporate and Personal Income Tax Rate Increases

Effective July 1, 2017, the corporate income tax rate is increased from 5.25% to 7%.; and, the income tax rates for: (a) individuals and (b) trusts and estates are increased from 3.75% to 4.95%. (These rates do not include the replacement tax rates, which have not changed.) Taxpayers making estimated tax payments are required to pay estimated tax payments at the new tax rates.  Illinois taxpayers should consult IL DOR Information Bulleting No. FY 2018-02 for more information on 2016 tax return filing and 2017 estimated tax payments.  

Unitary Businesses Combination

Under the previous law superseded by the new budget legislation, a unitary group did not include a member whose business activities outside the United States are  equal to 80% of such member’s total business activity. For this purpose, “United States” was defined to mean only the 50 states and the District of Columbia. 

For unitary combination purposes, effective for tax years ending after December 30, 2017, the term “United States” is expanded to also include any area over which the United 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. 

Further, under the law just superseded by the new budget legislation, the term “unitary groups” did not include members required to apportion business income under different subsections of Illinois’ apportionment statute, the so called non-combination rule. 

The new budget limits the above restriction to members of a unitary group only to tax years ending prior to December 31, 2017, i.e., the non-combination rule does not apply to tax years ending on or after December 31, 2017. 

Decoupling from IRC Section 199

For tax years ending after December 31, 2017, in computing income subject to Illinois tax, taxpayers (corporate, individual, partnership, and trusts and estates) are required to add back an amount equal to the federal deduction allowed under IRC §199.

Tax Credits

• The research and development tax credit, which had expired for tax years beginning after December 31, 2015, has been extended to January 1, 2022 and is available for the period during which it had expired. 
• Beginning after December 31, 2016, taxpayers will no longer be able to claim the standard exemption, education expense credit, or credit for residential real property taxes if the taxpayer’s adjusted gross income for the tax year is more than $500,000 for spouses filing jointly, or exceeds $250,000 for all other taxpayers.
• The education expense credit is increased from $500 to $750.

Sales Tax Provisions

• Graphic arts machinery and equipment are now included in the manufacturing and assembling machinery and equipment exemption from sales and use tax.
• The sales and use tax incentives for majority blended ethanol fuel and specific biodiesel blends has been extended from December 31, 2018 to December 31, 2023.

Unclaimed Property

Effective January 1, 2018, the budget creates the Revised Uniform Unclaimed Property Act, which supersedes the Uniform Disposition of Unclaimed Property Act.

The Revised Uniform Unclaimed Property Act does not apply to foreign transactions. However, the new law eliminates several prior exemptions, including the business-to-business exemption. The result of this change is that property due or owed between business entities which is the result of transactions occurring in the normal and ordinary course of business will become subject to an Illinois unclaimed property reporting obligation and retroactively for all property types that would have been presumed abandoned during the five years prior to the 2018 report requirement. Depending on dormancy periods, B2B property with last contact dates up to 10 years ago must be included on the 2018 report. 

The new law makes other revisions with respect to gift cards.

State Tax Lien Registry Created

To provide a uniform statewide system for filing notices of tax liens that are in favor of, or enforced by, the Department of Revenue, the budget authorizes the Department of Revenue to establish and maintain a state tax lien registry effective January 1, 2018.  The tax liens included in the registry are limited to real and personal property, both tangible and intangible.

What Does CohnReznick Think?

Illinois’ budget includes a number of significant changes, including a $5 billion increase in income taxes.  As Illinois has operated without a budget since 2015, the passing of this legislation seems to be a step in the right direction, but Illinois still has significant fiscal issues (with respect to current spending and the lack of funding of its state retirement plans).  Due to the lack of steps taken to address its current obligations, we can expect significant tax increases in future years. The new Illinois tax provisions will provide many challenges to many taxpayers (such as documenting R&D expenses since 2015) and unanswered questions, which may require statutory technical corrections or regulations.

Contact

For more information, please contact Patrick J. Duffany, CPA, JD, Managing Partner - Tax, at [email protected] or at 959-200-7000.

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