On August 27th, Governor Pritzker signed into law the pass-through entity tax (S.B. 2531), which is effective for tax years ending on or after December 31, 2021 and beginning prior to January 1, 2026.
So what does this mean? It means that for a few years instead of no one getting the benefit of the Illinois tax paid at the partner/shareholder level the entity will now get the benefit! That’s great news!!!! Under the old rules, the shareholder/partner would pay the Illinois tax at the individual level for their share of the K-1 income allocated to Illinois. In the year paid, the individual would be able to claim a deduction for any Illinois taxes paid on their Federal Schedule A. However, a few years back the IRS started to cap the taxes reported on their Schedule A to $10,000. And being in Illinois, we definitely go over the $10,000 limit with Illinois withholding, state income tax, and our real estate taxes.
So how does this work? Each year the entity makes an irrevocable election electing to apply the pass-through entity tax. The entity pays the 4.95% tax for the partner/shareholders and takes the deduction at the entity level. The deduction then lowers the income that is allocated to the partner/shareholder. Then the partner/shareholder claims a credit on their return for the taxes paid by the partnership/S Corp.
Any nonresident individuals where their only activity in Illinois is this K-1, do not have to file an Illinois individual income tax return.
Estimated payments are required. However, the publication does not lay out the specifics, and since this was signed into law so late we will have to see how they address estimate requirements for the first year.
If the partnership or S Corp files in other states that has a similar SALT PTE, Illinois will allow a credit for taxes paid to another state at the individual level.
This election may not be beneficial to all shareholders/partners the same way. Therefore, please review with your tax professional. If you have any additional questions our Porte Brown tax team is here to help.
Get in touch today and find out how we can help you meet your objectives.