Written By: Kylee Johnston, CPA, Manager
Illinois recently enacted its FY2027 revenue and budget legislation, which was signed into law on June 16, 2026. The legislation includes several tax changes that may affect businesses and individuals, with some provisions taking effect in 2026 and others beginning in 2027. While additional administrative guidance is expected, the new law already highlights several areas taxpayers should be monitoring.
Illinois Income Tax Changes
- One of the most significant business tax changes is a new limitation on corporate net operating loss deductions. In general, NOL deductions will be capped at $500,000 annually through 2027. For tax years ending on or after December 31, 2027, the limitation will shift to the greater of $500,000 or a percentage of net income. That percentage begins at 15% and gradually increases until it reaches 80% by 2031. Businesses with significant Illinois loss carryforwards may want to evaluate how this limitation could affect future tax liabilities and deferred tax positions.
- Illinois also adopted a new rule affecting gains excluded under IRC Section 1202. For tax years ending on or after December 31, 2026, gain excluded for federal income tax purposes on qualified small business stock (QSBS) must be added back in computing Illinois taxable income. Taxpayers anticipating a Section 1202 transaction should consider the potential state tax cost, even where the gain remains excluded federally.
- Partnerships making the Illinois pass-through entity tax election (PTE Tax) will now have an annual choice between two calculation methods: the full distributive share method or the Illinois-sourced income method. Under the full distributive share method, Illinois resident partners may be included based on their full distributive share, while nonresident partners remain limited to Illinois-sourced income. This added flexibility may create planning opportunities depending on the partnership’s ownership profile and income sourcing.
New Illinois Taxes and Fees
The legislation also introduces several new industry-specific taxes beginning January 1, 2027.
- A new targeted advertising services tax will impose a 10% tax on providers with more than $1 million of Illinois targeted advertising gross receipts during the preceding 12-month period. Because taxes on digital advertising have faced legal challenges in other jurisdictions, this provision is likely to remain an area to watch as implementation develops.
- Illinois is also imposing a new digital asset tax at a rate of 0.2% on certain digital asset business activities involving Illinois customers, including certain cryptocurrency exchange or transfer transactions. Collection and remittance obligations will generally fall on digital asset brokers. Businesses operating in the digital asset space should pay close attention to future guidance defining the scope of taxable activities and compliance responsibilities.
- Fantasy contest operators will be subject to a 15% privilege tax on adjusted gross fantasy contest receipts. The law also imposes a 1.75% tax on certain exchange wagers tied to prediction markets and sporting events, with the rate increasing to 3.5% after the applicable threshold is met.
Sales and Use Tax Developments
- Illinois will offer a temporary sales tax holiday from August 7 through August 16, 2026, for qualifying clothing and school supplies, with a 5.00% reduction in state tax, making the effective state rate 1.25%. Retailers should review product eligibility and point-of-sale procedures in advance of the holiday period.
- The legislation also expands hotel tax collection obligations. Hotel marketplace facilitators, hosting platforms, and re-renters may be required to collect and remit hotel operators’ occupation tax if they exceed the $100,000 gross receipts threshold. This change may affect online platforms and intermediaries that facilitate short-term lodging transactions in Illinois.
- The DuPage County municipal hotel operators’ tax was repealed from January 1, 2027, to January 1, 2029, allowing that tax to remain in effect for an additional two years.
- Starting August 1, 2026, Illinois is increasing the Northern Illinois Transit Authority (NITA) occupation and use tax by 0.25% in Cook, DuPage, Kane, Lake, McHenry, and Will counties. This tax is added on top of the statewide rate (generally 6.25% for general merchandise, or 1.00% for certain reduced-rate items), and any applicable local taxes collected by IDOR.
What This Means for Taxpayers
Although many of these provisions will require further guidance before their full impact is clear, the legislation signals meaningful changes across several areas of Illinois taxation. Businesses with Illinois operations, digital activity, pass-through structures, or exposure to specialized industry taxes should begin assessing how these provisions may affect compliance, estimated tax payments, transaction planning, and financial reporting.
Please contact a member of your Porte Brown advisory team if you have questions about these Illinois tax changes or would like help evaluating how they may affect you or your business.
