The Illinois General Assembly on January 11th passed SB 2505, which was signed into law on January 13th, dramatically increasing Illinois’ individual and corporate income tax rates, as follows:

Individual Income Tax Rates

  • 2010 Rate (Under Current Law) – 3%
  • 2011 - 2014 – 5%
  • 2015 - 2024 – 3.75%
  • Beginning in 2025 – 3.25%

Corporate Income Tax Rates1

  • 2010 Rate (Under Current Law) – 7.3%
  • 2011 - 2014 – 9.5%
  • 2015 - 2024 – 7.75%
  • Beginning in 2025 – 7.3%

The corporate income tax rate increase will vault Illinois’ corporate income tax rate from the 21st to the 3rd highest state corporate income tax rate.

The rate increase is needed in order to plug a projected annual $13-$15 billion budget shortfall. While the drastic rate increase as enacted is only temporary, there is widespread speculation that the increase eventually will be made permanent.

Other changes adopted as part of SB 2505:

  • Taxpayers that have fiscal years straddling 2010 and 2011 can either choose a daily pro rata application of the increased tax rate, or instead elect to specifically account for income earned before and after the January 1, 2011 tax rate increase.
  • Estimated tax payments are increased for the first year of the tax rate increase. Normally taxpayers are entitled to a safe harbor from Illinois estimated tax underpayment penalties if they pay estimated taxes for a given year equal to 100% of their previous year’s tax liability. This safe harbor increases to 150% of previous year’s tax liability for estimated tax installments due after January 31, 2011 and prior to February 1, 2012.
  • Corporate net loss deduction carryforwards are disallowed as an offset in computing tax liabilities due for the 2011 to 2014 tax years. However, the period for carryforward of such losses is extended four years, making this a deferral rather than an actual loss of the benefit of these loss deductions.