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Corporate income and franchise taxes
How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?
Under the Illinois Income Tax Act, a corporation’s taxable income conforms to the definition of “taxable income” under the Internal Revenue Code (35 ILCS 5/203(e)(1)), which states that “a taxpayer’s… taxable income for the taxable year shall mean the amount of… taxable income properly reportable for federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code.”
How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?
For multi-state businesses that are non-residents of Illinois, business income is apportioned to Illinois using a single sales factor (35 ILCS 5/304(a), (h)(3); see 35 ILCS 5/304(a)(3)(A) (numerator of the sales factor is total sales in Illinois during the taxable year, and the denominator is total sales everywhere during the taxable year); see also 35 ILCS 5/301(a) (resident corporation’s income is allocated to Illinois)).
With respect to transfer pricing, the Department of Revenue has discretion to adjust a taxpayer’s income and deductions if it determines that an agreement with another party causes inaccurate reflection of income in Illinois (see 35 ILCS 5/404(a)). According to the statute:
If it appears to the Director that any agreement, understanding or arrangement exists between any persons which causes any person’s base income allocable to this State to be improperly or inaccurately reflected, the Director may adjust such items of income and deduction, and any factor taken into account in allocating income to this State, to such extent as may reasonably be required to determine the base income of such person properly allocable to this State.
How is nexus determined for corporate income tax purposes?
Illinois imposes corporate income tax “on the privilege of earning or receiving income in or as a resident of this State” (35 ILCS 5/201(a)). A detailed Illinois Department of Revenue regulation, 86 Ill. Admin. Code § 100.9720, sets out Illinois’ nexus standards for corporate income tax purposes. The regulation states that Illinois generally follows nexus standards established at the federal level, including the protection granted by Public Law 86-272. 86 Ill. Admin. Code § 100.9720(b), (c), and (e).
Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?
Generally, yes (see 86 Ill. Admin. Code § 100.9720 (income tax nexus for Illinois purposes keys to federal standard established in federal statutes and U.S. constitutional case law)). “Generally, the physical presence within a state of a taxpayer’s employees or other representatives will establish the requisite connection or substantial nexus with the state necessary to subject the taxpayer to the state’s corporate income tax” (see Illinois Dep’t of Revenue Gen. Info. Letter IT 17-0007-GIL (June 6, 2017) (citing Tyler Pipe Indus., Inc. v. Wash. State Dep’t of Revenue, 483 U.S. 232 (1987) and Scripto, Inc. v. Carson, 362 U.S. 207 (1960))). Additionally, a Department of Revenue regulation provides that nexus for income tax purposes is created by:
[e]ntering into franchising or licensing agreements; selling or otherwise disposing of franchises and licenses; or selling or otherwise transferring tangible personal property pursuant to such franchise or license by the franchiser or licensor to its franchisee or licensee with the State. (86 Ill. Admin. Code § 100.9720(c)(4)(R)).
Notably, in Capital One Fin. Corp. v. Hamer (2012 TX 001/002 (Ill. Cir. Ct., May 11, 2015)), Judge Schmidt of the Circuit Court of Sangamon County granted summary judgment for the Illinois Department of Revenue, holding that the proper test for corporate income tax nexus is whether a “significant economic presence” exists in Illinois, citing Tax Comm’r v. MBNA (260 S.E. 2d 226 (W.Va. 2006)). The circuit court rejected the plaintiff’s argument that physical presence was required to create nexus for income tax purposes, and stated that it agreed with the Department of Revenue that the significant economic presence test was the “fairest test of corporate income tax given the current internet based world.”
What are the applicable corporate income tax rates?
For taxable years beginning on or after July 1, 2017, the corporate income tax rate is 7% (35 ILCS 5/201(b)(14)). Illinois also imposes a personal property replacement tax, imposed on the same basis as the corporate income tax (35 ILCS 5/201(c)). This tax has a rate of 2.5% for corporations other than S corporations (35 ILCS 5/201(d)).
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
Because Illinois starts with federal taxable income (35 ILCS 5/203(e)(1)), every item of income and deduction taken into account at the federal level automatically will be included in base income unless adjusted per statutory modification. Generally, Illinois allows deductions from federal taxable base income, as set out in 35 ILCS 5/203(b)(2). While Illinois does not allow corporations a standard exemption (35 ILCS 5/204(b)), it does have other exemptions available to corporations (see 35 ILCS 5/203(b)(2)). A number of credits are also available to Illinois corporate income taxpayers, including credits for investing in an Enterprise Zone (35 ILCS 5/201(f)) and research and development (35 ILCS 5/201(k)).
What filing requirements and procedures apply? Are there special filing requirements for groups of company?
A corporation must file a return (Form IL-1120) for a taxable year if it is liable for tax imposed by the Illinois Income Tax Act or it is qualified to do business in the state and must file a federal income tax return (regardless of whether the corporation is liable for tax under the act) (35 ILCS 5/502(a)). With respect to a corporate group, corporations (other than S corporations) that are members of a “unitary business group” (term defined in 35 ILCS 5/1501(a)(27)(A) & 86 Ill. Admin. Code § 100.9700) must file on a combined basis as a single taxpayer and attach Schedule UB to the return (35 ILCS 5/502(e)). Illinois does not permit filing on a consolidated basis.
Corporate franchise tax
Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?
Yes. It is imposed on corporations in addition to corporate income tax (see 805 ILCS 5/15.35; 5/15.65).
If your state imposes a corporate franchise tax, please stipulate:
(a) The applicable tax base
With respect to an initial franchise tax, the tax base for domestic corporations is paid-in capital represented in Illinois as disclosed by its first report of issuance of shares (805 ILCS 5/15.40(a)). For foreign corporations (non-Illinois corporations (805 ILCS 5/1.80(b)), the tax base of the initial franchise tax is paid-in capital represented in Illinois as disclosed by its application for authority to transact business in Illinois (805 ILCS 5/15.70(a)).
With respect to the annual franchise tax, the tax base for all corporations is paid-in capital in Illinois on the last day of the third month before the anniversary month or, for a corporation which has established an extended filing month, on the last day of the corporation's fiscal year preceding the extended filing month (805 ILCS 5/15.40(d); 805 ILCS 5/15.70(d)).
For any additional franchise tax that may be owed due to a triggering event (e.g., the issuance of additional shares), the tax base (except in the case of a statutory merger or consolidation) is the increased amount of paid-in capital in Illinois (805 ILCS 5/15.40(b); 805 ILCS 5/15.70(b)).
(b) Tax rates
The rate of the annual franchise tax is 0.10% of the tax base for the 12-month period, starting on the first day of the corporation’s anniversary month or, if a corporation has established an extended filing month, the corporation’s extended filing month. The annual tax cannot be less than $25 or more than $2 million (805 ILCS Chapter 5/15.45(a); 805 ILCS Chapter 5/15.75(a)).
The rate of the initial franchise tax and additional franchise tax is 0.15% of the tax base (805 ILCS Chapter 5/15.45(d), (e); 805 ILCS Chapter 5/15.75(d), (f)).
(c) Any exemptions or deductions
(d) Filing formalities
The corporate franchise tax is administered by the Secretary of State. An annual report must be filed with the Secretary of State in the 60-day period before the first day of the corporation’s anniversary month or, for corporations with an extended filing month, its extended filing month each year (805 ILCS Chapter 5/15.80; 5/14.05; 5/14.10). Annual reports for domestic and foreign corporations are available on the Illinois Secretary of State’s website. In addition, corporations must file reports if certain events occur, such as issuance of shares not already reported to the Secretary of State or change in the number of issued shares (see, e.g., 805 ILCS Chapter 5/14.20(a), 5/14.30(a)).
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