Press Room: Tax Release

July 13, 2017

Illinois Passes Budget, Tax Rate Increases and Other Changes

For the first time since 2014, Illinois has passed a complete budget. The state seemed to be headed for a third straight year without a complete budget until the passage of a number of Senate Bills on July 6, 2017. After a number of failed attempts at reaching a compromise budget before the May 31 deadline, the General Assembly convened for a special session at the end of June to pass a budget plan that politicians on both sides of the aisle could agree on, overriding Governor Bruce Rauner’s veto of Senate Bill 9. The following is a brief overview of the changes in Illinois tax laws.


INCOME TAX

Tax Rate

Effective July 1, 2017, the individual income tax rate has permanently increased from 3.75% to 4.95%. The corporate income tax rate has also increased from 5.25% to 7%. Corporations, partnerships and trusts continue to be subject to the personal property replacement tax at 2.5% and 1.5% respectively.  Employers should immediately address the changes for withholding purposes.  For part-year residents and businesses with multi-state activity, an election is available to compute pre-tax income using either a special accounting or an apportionment method.  The election is a one-time election made on the original return and cannot be changed upon amendment.  

Definition of Unitary Group

The state non-combination rule for unitary businesses using special apportionment formulas has been repealed for taxable years ending on or after December 31, 2017. Historically, Illinois has disallowed related businesses using special statutorily prescribed apportionment formulas (e.g., financial organizations, transportation companies, etc.) from filing as the same unitary group. 

Businesses that conduct more than 80% of their business outside of the United States continue to be barred from reporting within the Illinois unitary group.  However, for purposes of the 80-20 foreign business activities rule, Illinois has broadened the definition of the “United States.” The legislation expands the definition of United States to include any area in which the United States has asserted jurisdiction or claimed exclusive rights with respect to the exploration or exploitation of natural resources, but does not include any possession or territory of the United States.

Other Income Tax Changes

Other business-related changes include the elimination of the domestic production activities deduction (DPAD) under Section 199 of the Internal Revenue Code for tax years ending on or after December 31, 2017 and extension of the credit afforded to taxpayers for increasing research activities in Illinois until December 31, 2021. It should be noted that it is the intent of the Illinois General Assembly that the credit apply continuously for all tax years ending on or after December 31, 2004 through December 31, 2021, without regard to the period between January 1, 2016 and the effective date of this change. 

Finally, for taxpayers with adjusted gross incomes above $500,000 in the case of spouses filing a joint federal tax return; or $250,000 in the case of all other taxpayers the standard exemption and the credit for residential real property is phased-out for taxable years beginning January 1, 2017 and after.


SALES TAX

Senate Bill 09 revives a sales and use tax exemption for graphic arts machinery and equipment used in the production of graphic arts, which expired on August 30, 2014. Effective July 1, 2017, the sales tax exemption for machinery and equipment provided for in 35 ILCS 105/3-5)(18) and 35 ILCS 120/2-45 includes graphic arts machinery and equipment.


THE FUTURE

Several hotly debated legislative proposals for tax changes did not pass before the legislature recessed. These include the expansion of the sales tax base to certain services, the expansion of the manufacturing, machinery and equipment exemption from sales tax to include production-related tangible personal property, and the extension of the Economic Development for a Growing Economy (EDGE) Tax Credit program. The EDGE Tax Credit was the State of Illinois’ main incentive program to encourage companies to locate or expand operations in the state. Notably absent as well was a property tax rate freeze, which was one of the items consistently included in Governor Rauner’s agenda.

There is concern among legislators as to the constitutionality of the proposed sales taxes on services under the uniformity clause. But with a push by Democratic legislators and many social service providers for an expansion of the sales tax base to address the unmet state pension obligations, it is likely that these and other new taxes will continue to be debated.  Finally, many questions are likely to arise in the implementation of the special accounting election and the income tax unitary group definitions.  We expect the Illinois Department of Revenue to provide guidance on these matters in the near future. 

Please consult with your Andersen Tax state and local tax advisor for any questions regarding this legislation.