Corporate Close-Up: Mid-Year Crisis? Illinois Raises its Corporate Income Tax

Illinois flying money

In January, Bloomberg BNA’s Alex Dowd noted in his blog post “Corporate Close-Up: Seven States Lower 2017 Corporate Tax Rates” that while many states have lowered their corporate income tax rates in 2017, Illinois was considering legislation to raise its rate by 25 percent. As of July 1, 2017, this sharp increase became reality for Illinois corporate taxpayers. 

The tax increase appeared to die upon Illinois Gov. Bruce Rauner’s (R) veto of the state’s first budget in two years on July 4. However, both houses of the Illinois General Assembly overrode the governor’s veto on July 6, resuscitating the $5 billion revenue package, S.B. 9, which raises the state’s corporate income tax rate from 5.25 percent to 7 percent. The increase is a tax hike of 33.3 percent, higher than the 25 percent increase anticipated in January.

Formerly, Illinois had anticipated decreasing the tax rate to 4.8 percent, effective in 2025. Now, corporate income tax will be imposed at a rate of 7 percent effective July 1, 2017, and remain at that rate for the foreseeable future.

The rate increase is compounded by the Illinois personal property replacement tax on corporations subject to the state’s taxing jurisdiction, imposed in addition to the corporate income tax. The personal property replacement tax rate will remain 2.5 percent, bringing the total corporate rate to a steep 9.5 percent. 

With this new increase, Illinois leaps over 13 other states to become the state with the fourth highest possible corporate income tax rate, behind only Iowa, Pennsylvania, and Minnesota. Further, unlike Iowa and Minnesota that have a tiered rate based on income, the new Illinois tax rate applies to all taxpayers regardless of income. Illinois corporate taxpayers can expect to part with more tax dollars than taxpayers in nearly every other state in the nation.

Further complicating matters, the tax rate is effective July 1, 2017, meaning it applies to net income earned after June 30, 2017. “Taxpayers who file a 2016 fiscal year return with a tax year ending after July 1, 2017, or who file on the basis of a calendar year ending on Dec. 31, 2017, will find that two tax rates apply,” noted Fred O. Marcus, Principal at Horwood Marcus & Berk, co-author of the Illinois Corporate Income Tax Navigator (subscription required), and contributing author of the Illinois Pass-Through Entity Navigator (subscription required). “Income earned prior to July 1, 2017, is taxed at 5.25 percent, while income earned after July 1, 2017, is taxed at 7 percent. Taxpayers may select one of two methods for calculating their total tax due: an apportionment or blended rate method, or a specific accounting method. Taxpayers must elect one of these two methods on or before the extended due date of their returns. Once an election is made, it is irrevocable. Any estimated payments for income received on or after July 1, 2017, must be made at the 7 percent rate.”

Taxpayers should also be aware of other changes triggered by the rate increase. Illinois requires pass-through entities to withhold income tax from nonresident corporate owners at the current corporate income tax rate.[1] Further, the increase may cause issues for taxpayers using “GAAP” accounting. “Corporations are required to record deferred tax liabilities. Permanent tax rate increases require a recalculation of deferred tax liabilities. When tax rates are permanently increased, existing deferred tax liabilities must be restated at the higher rate, requiring the corporation to  recognize additional income tax expense in the year of the rate increase, which will directly impact its bottom line,” noted Marcus.

In a year where many states decreased corporate tax rates, Illinois stands alone as the only state to implement a mid-year increase, creating a chain reaction of other changes to the Illinois state tax scheme. Will other states follow this bold move, or will the trend toward decreasing corporate income tax rates continue?

Continue the discussion on LinkedIn: What other issues may arise as a result of the mid-year corporate income tax rate increase in Illinois?

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 [1] Pass-through entities (PTEs) should note that Illinois also increased the individual income tax rate from 3.75 percent to 4.95 percent, effective July 1, 2017. PTEs in Illinois are required to withhold income tax from nonresident individual or estate and trust owners at the current individual income tax rate.