New Pass-Through Entity Tax Legislation

Pass-Through Entity Tax

A bill proposing significant changes to the Illinois tax code, including the creation of a pass-through entity tax, has been passed by Illinois Governor J.B. Pritzker.

What’s Going to Change and What’s a Pass-Through Entity Tax?

Great question. The bill creates a pass-through entity tax election for tax years ending on or before December 31, 2021, and before January 1, 2026. If a partnership or S corporation elects to pay taxes on its state taxable income, it would be at a rate of 4.95%. This election is made on a yearly basis, is irrevocable, and is unavailable for publicly traded corporations. The PTE tax is in addition to the already existing Replacement Tax and will not impact the Replacement Tax calculation.

Things to Consider

• For the PTE tax, net income includes all income allocable to the state.
• Certain Replacement Tax deductions are disallowed for the PTE tax.
• Payments and income distributed to all partners, including tax exempt partners, are included in the tax base.
• Entities making the election are not required to make withholding payments for their owners, but estimated PTE tax payments are accelerated compared to the partnership and S corporation withholding payments, which are due at extension time.
• Nonresident partners or shareholders of an entity making the election may not be required to file an Illinois tax return for the applicable year if the credit equals or exceeds their income tax liability.

PTE Tax Credit

Partners of an electing S corporation or partnership are allowed a credit against their Illinois Income Tax equal to 4.95% times the partner’s distributed share of the corporation’s net income.

That’s a lot to digest. Don’t worry, we can help. If you have any questions, contact us and we’ll discuss how this potential change can impact your tax liabilities.