Illinois enacts significant income and franchise tax changes

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June 2019

Overview

On June 5, Governor J.B. Pritzker (D) signed into law a $40 billion budget for fiscal year 2020. That same day, the governor also signed S.B. 687 to replace the flat-rate income tax with a graduated rate income tax; that change would take effect only if voters in next November’s general election approve a change to the Illinois Constitution to eliminate the current mandated flat tax. In May, the General Assembly, by a required 3/5 majority vote, passed Senate Joint Resolution Constitutional Amendment 0001 to remove a constitutional provision providing that a tax on income shall be measured at a non-graduated rate.

In February 2019, Governor Pritzker had identified specific tax changes that would help fund his budget. These modifications have been incorporated in S.B. 689, also signed into law on June 5. These changes include the decoupling from the federal deduction of foreign derived intangible income (FDII), a tax amnesty program for all taxes administered by the Illinois Department of Revenue, and a tax amnesty program for all franchise tax and license fees imposed by the Business Corporation Act.

S.B. 689 also provides for the phase-out and repeal of the Illinois Franchise tax.

Sales tax and tax credit changes resulting from these and other Illinois bills will be addressed in separate Insights.

The takeaway

These bills are intended to address the governor’s campaign promise of a ‘Fair Tax’ in Illinois. The voters will determine in November 2020 if they support that approach.   

The phase-out and repeal of the Illinois franchise tax is a welcome pro-business provision that took many by surprise.

The amnesty programs that will be offered later this year can provide taxpayers with the opportunity to address prior-year tax liabilities. The ability to have the State abate penalties and interest can be material.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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