Choices for Illinois Taxpayers in Implementing the 2017 Income Tax Rate Increase
Last year, Illinois enacted a mid-year income tax rate increase. Effective July 1, 2017, Illinois increased the income tax rate for individuals, trusts and estates from 3.75 percent to 4.95 percent, and for corporations from 5.25 percent to 7 percent. The Illinois Personal Property Replacement Tax (imposed on corporations, partnerships, trusts, S corporations and public utilities at various rates) was not changed.
As we previously reported, the Illinois Income Tax Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two income tax rates applicable in 2017. 35 ILCS 5/202.5(a). The default rule is a proration based on the number of days in each period (181/184). For taxpayers choosing this method, the Department of Revenue (Department) has recommended the use of a blended tax rate to calculate tax liability. A schedule of blended rates is included in the Department’s instructions for the 2017 returns. The blended rate is 4.3549 percent for calendar year individual taxpayers and 6.1322 percent for calendar year C corporation taxpayers.
Alternatively, taxpayers may elect to determine net income on a specific accounting basis, allocating income to different portions of the year. 35 ILCS 5/202.5(b). This election may be beneficial to taxpayers that have more income attributable to the first half of 2017, such as compensation income from bonuses received or stock options exercised early in the year, or gains from property sales prior to July 1. The election may also help taxpayers that recognized significant losses in the second half of 2017. The Department has issued a specific schedule SA on which taxpayers may make this election. The election is irrevocable.
Taxpayers choosing to determine their net income on a specific accounting basis should keep in mind the following:
(1) Apportionment factors may not be specifically allocated (in other words, a taxpayer must calculate its 2017 apportionment ratio on a full-year basis). (35 ILCS 5/202.5(c)(2));
(2) Taxpayers may not report negative income for one portion of the year but not the other. Instead, any negative income amounts must be used to reduce the income reported in the portion of the year in which income is reported (35 ILCS 5/202.5(c)(4)); and
(3) Taxpayers reporting items of income, deduction and loss passed through by a partnership, S corporation, trust or estate must treat that income, deduction or loss as having been received on the last day of the pass-through entity’s taxable year. Consequently, taxpayers with significant pass-through income from an entity with a calendar year-end may achieve a better tax result by using the default methodology of prorating all income equally over the year, whereas taxpayers with significant losses from a pass-through entity may benefit from an election to specifically allocate income to the two periods.