Illinois Tax Changes: The Good, The Bad, and The Ugly

The fallout from the recent passing of the Illinois budget consists of changes to tax rates and elimination of certain deductions, as well as a few taxpayer-friendly provisions. Below is a wrap-up of the tax changes from SB9’s passing (overriding the Governor’s veto) which will impact Illinois businesses and taxpayers.

State of Illinois Avoids Junk Bond Status (For Now) – Passes Budget Bill SB9 Over Governor Rauner’s Veto

Background: For over two years the state of Illinois has not had a budget due to the impasse between Republican Governor Rauner and the Democratically controlled state legislature. There have been prior temporary stop gap measures that have been passed, but with the status of Illinois bonds falling close to junk status, the democratic controlled congress (with the help of some republicans) was able to pass SB9 over the Governor’s veto shortly after the July 4th holiday.

Changes: The main changes include the well-publicized increase in the individual and corporate income tax rates, losses of certain deductions and credits, retroactive reinstatement of the research and development credit, expansion of the manufacturing sales and use tax exemption to include graphic arts equipment, and elimination of the business to business unclaimed property exemption.

Here is a summary of the tax changes made as part of SB9 (enacted as P.A. 100-0022):

Individual Income Tax Changes

Individual, trust and estate income tax rate increases from 3.75% to 4.95% on July 1.

• For 2017 the general rule is to apply the rates on a pro rata basis using the # of days in the year prior to July 1 for the 3.75% rate and # of days in the year starting with July 1 for the 4.95% rate. This essentially results in a blended rate of 4.35% for calendar year taxpayers and there will be no additional schedules or forms to be prepared as part of the income tax return when using this method.
• Alternatively, individuals can elect on the 2017 income tax return to use Specific Accounting to determine how much of their net income is subject to the 3.75% rate versus the higher 4.95% rate.
• The separate accounting election needs to be made on an original filed return and is irrevocable.
• The Illinois Department of Revenue will be issuing and making available Schedule SA, Specific Accounting on its website in the near future.
• No changes were made to the prior year estimated tax safe harbor provisions and therefore they can continue to be relied on with no need for adjustment due to the
  increase in the tax rates.
• If not utilizing the prior year safe harbor provisions for purposes of estimated taxes, taxpayers should consider utilizing the annualized installment method to minimize potential understatement of estimated tax penalties.
• Illinois Department of Revenue has released updated withholding tables in its IL-700-T Booklet to allow employers and payroll processors to begin withholding at the higher rates effective immediately

High income taxpayers will no longer be able to claim the following items starting with the 2017 tax return:

• Illinois personal exemption allowance deduction
• K-12 education expense credit
• Residential real property tax credit
• High income taxpayers are federal married filing joint taxpayers with more than $500,000 of adjusted gross income or all other taxpayers with more than $250,000 of adjusted gross income.

The Research & Development Credit has been reinstated retroactively back to the 2016 taxable year (as if it never expired) with a new sunset date of January 1, 2022.

• Consider amending 2016 business tax returns to claim and pass through Illinois research and development credit. The Illinois Department of Revenue will be providing guidance on how to do this considering that none of the 2016 forms facilitate the use of this credit.

The IRC 199 DPAD deduction will need to be added back.

The K-12 Education Expense credit has been increased from $500 to $750 for taxable years ending on or after December 31, 2017.

A new $250 Instructional Materials and Supplies Credit has been created, beginning with the 2017 taxable year.

• Credit equals the lesser of $250 or actual amounts paid for instructional materials and supplies.
• The taxpayer needs to be a teacher, instructor, counselor, principal, or aide in qualified school for at least 900 hours during a school year.
• Query: possible issue with new teachers starting in fall from being able to claim this credit as they may not have worked “900 hours during a school year” within their first taxable year of teaching.
• Materials and supplies need to be for classroom-based instruction in a qualified school.
• Unused credits can be carried forward for five years.

The Earned Income Tax Credit is increased to 14% of the federal credit for 2017 and then increased to 18% for 2018 and subsequent taxable years.

Corporate Income Tax Changes

• The prior 5.25% tax rate has been increased to 7% effective July 1 – resulting in a new rate of 9.5% after taking into account the Illinois Personal Property Replacement Tax.
• The income will be taxed using a blended rate of 6.13% for calendar year corporations (or 8.63% after taking into account the Replacement Tax) based on the number of days in the taxable year that occurred prior to July 1 (old 5.25% rate) vs the number days after June 30 (new 7% rate).
  • Alternatively corporations make an irrevocable election to utilize the specific accounting method which will need to be made on the originally filed tax return.
  • The Illinois Department of Revenue plans to issue and make available on their website Schedule SA, Specific Accounting
• The research and development credit has been reinstated as if it never expired with a new sunset date of January 1, 2022. Therefore, 2016 taxable year returns can be amended to claim Illinois research and development credits.
  • Illinois Department of Revenue will be issuing guidance as to how to claim the credit for the 2016 taxable year as current forms do not currently facilitate such filings
• The IRC 199 DPAD deduction will need to be added back starting with taxable years beginning on or after 1-1-17.
• The non-combination rule for businesses has been eliminated (for businesses that utilize different apportionment methods (for example: a Transportation Company and a Manufacturing Company) effective with the 2017 taxable year).
  • The Illinois Department of Revenue is expected to provide additional guidance on how to do a combined apportionment of companies that utilize different apportionment methods but in the meantime they have indicated that the example provided in IL Admin Code 100.Table B can be used as a guide
• U.S. unitary business areas have been expanded for tax filing purposes. “United States” has been expanded to include areas that the United States has asserted jurisdiction or claimed exclusive rights to exploration or exploitation of natural resources (i.e. the outer continental shelf), but not territories and possessions of the United States.

Sales Tax Change

• Graphic Arts Equipment has been added to the manufacturing equipment exemption effective July 1st.
• Gasohol tax is increased (effective July 1, gasohol used to be taxed on 80% of its sales price and is now taxed on 100% of its sales price).
  • Illinois Department of Revenue is looking into the issue of how taxpayers that are responsible for collecting the tax should handle the July 1 through July 6 period, as they were not authorized to collect such tax until July 7
• 100% exemptions have been extended to December 31, 2023 for sales of majority blended ethanol fuel, biodiesel, and more than 10% but no more than 99% biodiesel blends.

Note – proposals that were strongly considered as part of this Budget Bill but did not get passed included a 20% gross receipts tax on investment management services and sales taxes on several select services including repair services.

Unclaimed Property

• Replace and repeal of Unclaimed Property Act. All states require businesses to hand over to the states property that belongs to others but has had no activity (i.e. has been dormant) for a certain period of time. This often includes uncashed payroll checks, dividend payments, unused vendor credits, etc. Effective January 1, 2018, Illinois has enacted the Revised Uniform Unclaimed Property Act, effectively replacing and repealing the current Illinois Uniform Disposition of Unclaimed Property Act. Main impact of these changes are as follows:
  • Business-to-business exemption will be eliminated.
  • Five (5) year retroactive look-back period to report unclaimed property.
  • Results in property that is currently exempt (i.e. property resulting from a business to business transaction) from being subsequently subjected to unclaimed property reporting.
  • Record retention policy of 10 years from the later of the date the report was filed or the date it was due if timely filed.
  • Allows Illinois to employ reasonable methods of estimation, including extrapolation and statistical sampling when the required records are not retained.
  • 12% annual interest and $200/day – max $5,000 penalty for failure to report, pay or deliver unclaimed property.

State Tax Lien Registry System

• State tax lien registry system is to be established and maintained effective January 1, 2018. This is to help streamline the lien process and will be applicable for liens against real and personal property (tangible and intangible).

Please contact your Sikich tax advisor to discuss the impact and applicability of these tax changes, which may include:

• possible adjustments to estimated payments,
• help defining the ideal method to determine the allocation of 2017 net income between the prior low rates versus the higher current rates,
• claiming the research and development credit for 2016, and
• taking advantage of the expansion of the manufacturing equipment sales tax exemption to include graphic arts equipment.