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News Flash: Illinois Enacts Significant Tax Rate Increases

Legislative Update:      As states continue to grapple with revenue shortfalls, at least one state has taken radical, and not so taxpayer friendly, steps to help repair its ailing fiscal situation. On January, 13, 2011, Illinois Governor Patrick Quinn approved legislation that contains several provisions that aim to stop the budget shortfall gap from widening and which are estimated to increase Illinois’ revenues by approximately $6.8 billion per year. Illinois Public Act (“P.A.”) 96-1496, the Taxpayer Accountability and Budget Stabilization Act, immediately and significantly increases both the corporate and personal income tax rates. For subchapter C corporations with Illinois Net Operating Losses (INOLs), the sting from the corporate tax increase will be even more strongly felt as P.A. 96-1496 also calls for a three year suspension of certain INOLs. Finally, in what appears to be an effort to place part of the burden of reducing the Illinois deficit on the legislature, the new law will impose a four year limit on the level of state spending increases.

Corporate Tax Rate Increase

Under the new law, the Illinois corporate tax rate has been increased to 7% for all taxable years that a fall between January 1, 2011 and December 31, 2014. This represents almost a 50% percent increase from the 4.8% corporate rate that was effect through the end of 2010. The 7% corporate rate will remain in effect until December 31, 2014, is scheduled to decrease to 5.25% on January 1, 2015, and will revert to its pre-2011 rate of 4.8% on January 1, 2025. Note that the Illinois corporate tax rate is in addition to the Illinois personal property replacement tax (“PPRT”) rate which remains at 2.5%. (The PPRT is essentially a personal property tax imposed on corporations at the state level.) In summary, a corporation subject to the Illinois corporate tax will be subject to the following rates:

  • For taxable years that fall between 1/1/11 and 12/31/14, corporations will be subject to a combined rate of 9.5% (7% corporate income tax rate plus the 2.5% PPR tax rate).
  • For taxable years beginning of or after 1/1/15 through 12/31/24, corporations will be subject to combined rate of 7.75% (5.25% corporate income tax rate plus the 2.5% PPR tax rate).
  • For taxable years beginning of or after 1/1/24, the corporate rate is expected to revert to its current combined rate of 7.3% (4.8% corporate income tax rate plus the 2.5% PPR tax rate).

Personal Income Tax Rate Increase

Illinois residents and other individuals subject to the Illinois personal income tax are also likely to have a higher tax bill for the next few years. The new law increases the personal income tax rate from its current rate of 3% to 5% for taxable years that a fall between January 1, 2011 and December 31, 2014. Like the corporate tax rate, the reduction in the individual tax rate back to its pre-1/1/11 rate will occur slowly, with the first reduction from 5% to 3.75% occurring on January 1, 2015, and a second reduction to 3% on January 1, 2025. Note that the changes in the Illinois personal income tax rate also apply to trusts and estates.

One final,  and possibly positive, note on the tax rate increases is that the new law incorporates a provision which will allow both the corporate and personal rates to revert to their pre-Act rates sooner than scheduled. This would occur if the legislature exceeds the limits that have been set by the new law on general spending increases. (A spending increase limit has been set for each of the four years from 2012 through 2015.)

Temporary Suspension of Illinois Net Operating Losses (INOLs)

As I mentioned above, corporations with INOLs will feel the sting of the corporate rate increase even more as the new law imposes a three year suspension on the use of INOLs.  Under the new law, C corporations are prohibited from using their INOLs in 2011, 2012, or 2013 to offset their Illinois taxable income. This is especially bad news for corporations who had previously generated losses and were beginning to turn profitable. On the positive side, suspended INOLs are not lost, as once their use is reinstated, the carryforward period will be extended by the number of years the INOLs are suspended.

Sylvia's Summation

Illinois taxpayers are undoubtedly seeing red, as the state enacts not-so-taxpayer friendly measures to help it get out of “the red”. Yes, desperate times require desperate measures, and this is certainly what we are witnessing in Illinois. As many states across the county are experiencing budget gaps in the billions, it may be the case that tax rate increases, though unpopular, may be necessary to help mend the structural deficits that exists. It will be interesting to see if other states follow suit. At a minimum, 2011 promises to be an interesting year in the state and local tax arena.

For more on the Illinois Tax Changes see the following:

The Illinois Taxpayer Accountability and Budget Stabilization Act, Public Act (“P.A.”) 96-1496

The Illinois Department of Revenue Informational Bulletin (which provides further guidance on the impact of the rate increases on withholding, estimated payments and the impact on fiscal year taxpayers)

The Illinois Department of Revenue website for transition issue updates and additional guidance.

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