Beginning with the 2008 tax year, a provision of SB 1544 (Public Act 095-0233), approved by Governor Blagojevich on August 16, 2007, requires partnerships (including limited liability companies that are treated as partnerships for federal income tax purposes), S corporations and trusts (“Pass-Thru Entities”) to withhold Illinois income tax with respect to each nonresident partner, shareholder or benefi ciary, unless such partner, shareholder or benefi ciary was included on a composite income tax return fi led by the partnership or S corporation (trusts are excluded from fi ling composite returns for their benefi ciaries).
The amount of Illinois income tax withheld is equal to the rates imposed under subsections (a) through (d) of section 201 of the Illinois Income Tax Act (“IITA”), multiplied by the nonresident’s distributable share (whether or not distributed) of the business income of the Pass-Thru Entity that is apportionable to Illinois. Nonbusiness income of the Pass-Thru Entity is allocated as if paid directly to the nonresident partner, shareholder or benefi ciary in his or her separate capacity pursuant to the rules set forth in IITA sections 303 and 305(b) and is, therefore, not subject to the withholding tax.
Based on the current tax rates imposed under IITA section 201(a) through (d), the new withholding tax will be imposed at a 3 percent rate for nonresident individuals and estates; a 7.3 percent rate for nonresident corporations (4.8 percent income tax and 2.5 percent personal property tax replacement income tax (“replacement tax”)); a 4.5 percent rate for trusts (3 percent income tax and 1.5 percent replacement tax); and at the rate of 1.5 percent for partnerships and S corporations. There are currently no exemptions from withholding for nonresident partners, shareholders or benefi ciaries, including any partners, shareholders or benefi ciaries that are themselves Pass-Thru Entities.
The Pass-Thru Entity must report and pay over to the Illinois Department of Revenue (“Department”) the amounts withheld for each nonresident partner, shareholder or benefi ciary no later than the due date (without extensions) of the income tax return of the Pass-Thru Entity for the taxable year. Any amounts withheld can be claimed as an estimated tax payment by the nonresident partner, shareholder or benefi ciary and shall be deemed a payment of Illinois estimated tax on the last day of the taxable year for which the income from the withholding is computed. The Pass-Thru Entity must provide each nonresident partner, shareholder or benefi ciary with a statement of the amounts withheld on or before January 31 of the succeeding calendar year.
A Pass-Thru Entity is liable for the income taxes it withholds or is required to withhold for its nonresident partners, shareholders or benefi ciaries, including any penalties or interest that may be imposed or due thereon. Even if the nonresident partner, shareholder or benefi ciary fi les an Illinois income tax return and pays his or her Illinois income tax liability, the Pass-Thru Entity may still be liable for any penalties or interest that may be due if the Pass-Thru Entity did not withhold or timely remit the required withholding tax to the Department.
FEDERAL TAX NOTICE: By reason of IRS Circular 230, Treasury Regulations require us to inform you that any federal tax advice contained herein is not intended or written to be used, and cannot be used by any person or entity, for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.