Tax laws

Pending Illinois Tax Law Changes Include SALT Workaround | Gould & Ratner LLP


Illinois lawmakers have passed legislation that is both good and bad news for Illinois taxpayers. The good news is, if approved by Governor Pritzker, Illinois taxpayers will be able to take advantage of a workaround to the $ 10,000 Federal Tax Deduction Cap for States and Local Authorities (SALT). . The bad news is that, if approved by Governor Pritzker, some tax benefits currently available to businesses will be eliminated.

Let’s start with the good news.

BYPASS SALT

Background

Prior to the 2017 tax law changes made by the Tax Cuts and Jobs Act (TCJA), an individual could have an unlimited deduction on their federal income tax return for SALT payments. However, the TCJA has capped this SALT tax deduction at $ 10,000 for tax years beginning after December 31, 2017 and before January 1, 2026.

Senate Bill 2531, expected to be signed by Governor Pritzker, gives owners of partnerships or S corporations a workaround to the federal SALT deduction limit of $ 10,000 in effect for tax years ending on or after December 31, 2021 and starting before January 1, 2026.

Under the law, a partnership or S corporation (each a “flow-through entity”) can elect to pay Illinois income tax at the entity level (which will be allowed as a deduction by flow-through entity on its federal income tax return), and each flow-through entity owner can claim a credit on their Illinois personal income tax return equal to their share of the amount paid by the flow-through entity, thereby bypassing the SALT deduction limit of $ 10,000.

IRS issued notice in 20201 blessing this type of workaround at the end of last year. About a dozen other states have adopted similar workarounds.

How the workaround works

An intermediary entity must make an annual irrevocable choice (PTE choice) to take advantage of this workaround. The selected flow-through entity pays Illinois income tax of 4.95% (PTE tax) on its federal taxable income, with certain modifications (federal taxable income), which is the same tax rate applicable to taxpayers Illinois individuals. The selected flow-through entity can deduct PTE tax in computing its taxable income for federal purposes in the year the PTE tax payment is made, which will reduce each owner’s distributive share of the entity’s income. intermediate. Each owner of the selected flow-through entity is entitled to a credit against their Illinois personal income tax equal to 4.95% of their distributive share of the taxable income of the flow-through entity in Illinois (taxable income federal, plus PTE tax deducted by the intermediary entity (through an entity), up to the share of the PTE tax owner.

For example, Partnership X has two equal partners and makes the PTE election for calendar year 2022. Partnership X has $ 1,000,000 in federal taxable income before the PTE tax deduction. Partnership X pays a PTE tax of $ 49,500, and each partner receives a credit of $ 24,750 on their Illinois personal income tax (4.95% times $ 500,000, the distributive share of each partner of Partnership X’s taxable income in Illinois), which is equal to the Illinois personal income tax payable for each partner. . Partnership X’s federal taxable income is reduced by $ 49,500 in the year the $ 49,500 PTE tax is paid, which will also reduce each partner’s federal taxable income by $ 24,750.

A flow-through entity making the election is required to pay quarterly estimated taxes for the taxation year for which it makes the election if the entity can reasonably expect the estimated tax to exceed $ 500.

An intermediary electing entity is liable for the PTE tax. However, if the entity does not pay part of the tax, its owners are responsible for the unpaid amount, including penalties and interest (based on their proportionate ownership) of the entity.

ELIMINATION OF CERTAIN TAX BENEFITS

And here’s the bad news: The Fiscal Year 2022 Budget Implementation Act (BIA), pending Governor Pritzker’s approval, will make some changes to the current tax benefits.

Decoupling of bonus amortization. One of the changes made by the TCJA was to allow 100% bonus depreciation for goods acquired and put into service after September 27, 2017 and before January 1, 2023, by any business. Prior to the BIA, Illinois required taxpayers to reverse the effects of the 30%, 40% or 50% bonus amortization allowed by federal law by adding back the amount of bonus amortization in determining taxable income. of Illinois, but it did not require the cancellation of the 100% bonus. depreciation. In effect for goods acquired on or after December 31, 20212, Illinois will disassociate itself from federal law by requiring that the amount of all bonus write-offs be added back in determining Illinois taxable income.

Capping of company NOLs. For any tax year ending after December 31, 2021 and before December 31, 2024, a corporation’s deduction for carry forward of its net operating losses (NOL) is limited to $ 100,000 for that tax year. . This change only applies to corporations and does not apply to NOLs of flow-through entities (including S corporations) or sole proprietorships.

Extended business franchise tax. Companies are subject to an annual franchise tax of 0.1% on the value of the company’s assets or on the total of its paid-up capital. The business franchise tax was to be phased out, with increasing exemptions each year, and repealed in full on December 31, 2025. Now, the phasing out and repeal of the business franchise tax has been phased out, although the first $ 1,000 franchise tax continues to be exempt.

GILTI and dividends from foreign sources. In determining a corporation’s taxable income, Illinois previously followed the federal treatment of allowing a deduction for a corporation’s low-tax global intangible income (GILTI) and certain foreign-source dividends. For tax years ending on or after June 30, 2021, Illinois will treat GILTI and certain foreign source dividends as domestic dividends, thereby eliminating the currently permitted corporate deduction.


1 Notice 2020-75

2 This provision also applies to goods acquired before December 31, 2021 but put into service as of December 31, 2021.


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