ARTICLE | August 30, 2021
On Aug. 27, 2021, Illinois Gov. J.B. Pritzker signed into law Senate Bill 2531, adopting an elective pass-through entity level tax as a workaround to the $10,000 limitation on the federal deduction for state and local taxes. The Illinois measure passed both houses of the state legislature unanimously.
The pass-through entity election allows partnerships, S Corporations and limited liability companies to elect annually to pay the entity level tax at 4.95%. The law is effective for taxable years ending on or after Dec. 31, 2021 and beginning prior to Jan. 1, 2026. Partners and shareholders are granted a credit against their Illinois income tax for their share of the entity-level tax. Nonresidents who are partners or shareholders of electing entities are not required to file an Illinois income tax return if the individual’s only income is from the entity making the election and the credit allowed equals or exceeds the individual’s liability for the tax. Also noteworthy, partners and shareholders are liable for the entity-level tax if the electing entity fails to pay the full amount.
Finally, the law grants a credit to partners and shareholders for similar entity-level taxes paid to other states.
At 4.95%, the Illinois entity level tax is imposed at the same rate as the Illinois individual income tax. Two aspects of the Illinois law are worth noting. First, the law sunsets in five years (does not apply to tax years beginning on or after Jan. 1, 2026), corresponding with the sunset of the federal SALT deduction limitation. Second, the Illinois law specifically grants a credit for pass-through entity taxes paid to other states. Whether states are allowing credit for pass-through entity-level taxes is a major determinant as to whether the election should be made.
Illinois joins a growing number of states that have adopted similar workaround laws: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Louisiana, Maryland, Minnesota, New Jersey, New York, Oklahoma, Oregon, Rhode Island, South Carolina and Wisconsin. Several other states are still considering proposed workarounds in 2021 sessions including North Carolina and Pennsylvania. A Massachusetts proposal with a 90% credit was vetoed, but is expected to be overridden by the legislature this fall.
Illinois pass-through entities considering electing into the new tax are cautioned that not all owners may benefit from such an election. As in other states that have adopted the workaround tax, making the election may, or may not, create significant tax savings when aggregating federal and state tax liabilities. Additionally, subsequent federal changes in the SALT deduction or other state and federal tax provisions may further impact whether the election is ultimately beneficial. Taxpayers are encouraged to contact their state and local adviser to discuss the Illinois and other state SALT deduction limitation workarounds.
Questions or Want to Talk?
Call us directly at 972.221.2500 (Flower Mound) or 940.591.9300 (Denton),
or complete the form below and we’ll contact you to discuss your specific situation.
This article was written by Eric Manus, Tom Blaze and originally appeared on Aug 30, 2021.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
KHA Accountants, PLLC is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how KHA Accountants can assist you, please call 972.221.2500.