Illinois recently enacted major changes to its income tax, as well as a franchise tax amnesty and a small change to its sales tax. Public Act 095-0233. These changes affect almost every type of entity that does business in Illinois. Most of the income tax changes occur for years ending after December 31, 2008, (the amnesty starts in October 2007 and the sales tax change appears immediately) and include:

Illinois Income Tax Changes

Apportionment Changes —

  • Services and Intangibles - Changing the apportionment of gross receipts from services by sourcing such receipts to the state in which the benefit of the service is received rather than where the service is performed. This puts Illinois with a small minority of states in the country and will have a major impact on how non-Illinois service companies are taxed in Illinois.
  • Insurance Companies - Changes apportionment with respect to what is included in direct premiums written.
  • Financial Institutions - Totally changes the apportionment for banks and financial institutions, making most sourcing based on a type of benefit rule rather than a receipt rule currently used. Essentially eliminates lock box rule. (The lock box rule is where the financial institution recognized receipts at the location the money is received, e.g., a lock box.)
  • Transportation Companies - Changes the apportionment for these companies to include Illinois pass-through miles in the numerator of its apportionment factor, except for airlines that will now use takeoffs and landings as their apportionment factors.
  • Alternative Apportionment - The Illinois Director of Revenue has been given more flexibility in approving alternative apportionment.

Add Backs and Deduction Modifications — Providing for certain add backs for interest and intangible expense payments to certain affiliates, interest and other expenses on exempt bonds, and certain insurance premium expenses.

Real Estate Investment Trusts — These trusts will now be considered corporations for tax purposes and there are special rules for captive real estate trusts.

NOL Carryovers and Bankruptcy — Requires the offset of NOL carryforwards for bankrupt companies to be offset by a portion of the debt discharged in bankruptcy.

Withholding for Nonresident Shareholders and Partners — Requires partnerships, S corporations and trusts to withhold income tax on their nonresident shareholders, partners and beneficiaries.

New Franchise Tax Amnesty

Illinois has instituted a new amnesty program for persons who owe back franchise taxes and fees. The amnesty starts on October 1, 2007, and goes through November 15, 2007. Almost all corporations qualify for the amnesty and it waives all interest and penalty.

Sales Taxation of Automobiles Subject to AROT

A small change occurred to the sales taxation of motor vehicles subject to the Illinois Automobile Renting Occupation Tax (AROT). Under this change motor vehicles subject to the AROT will no longer be exempt from the Illinois Retailers Occupation Tax. Problems with the wording of the law, however, can create planning opportunities.

NOTE: There are proposals to change portions of the above laws pending in the Illinois General Assembly that could be acted upon before the end of this year.