On August 27, 2021, Illinois Governor Pritzker signed into law Senate Bill 2531, which provides small businesses a work around to the $10,000 cap placed on their state and local income tax deductions. The bill creates an elective pass-through entity (PTE) level tax for businesses. Currently, small business owners must report their share of business income on their individual income tax making them subject to this $10,000 cap—not applicable to large corporations. The PTE tax election is an annual election that allows partnerships, S Corporations, and limited liability companies to pay a new “entity level” tax at 4.95%.
Illinois PTE Election
By making a PTE tax election to pay Illinois income tax at the entity level, it is allowed as a deduction by the pass-through entity on its federal income tax return – effectively resulting in a bypass of the $10,000 SALT deduction cap. Once the PTE tax is paid, each owner of the pass-through entity receives a credit on their individual state income tax return equal to its share of the amount paid by the pass-through entity to offset the tax incurred at the partner/shareholder level. This new law also grants a PTE level tax credit for similar entity-level taxes paid to other states.
However, making this PTE tax election may not always be advantageous. Particularly if you have shareholders or partners who are a mix of Illinois residents and non-residents, making the pass-through entity tax election can be advantageous for some and disadvantageous for others. Other disparate outcomes can arise when NOLs, state apportionment, credit carryovers, and other items are considered as well.
The law does sunset in five years consistent with the sunset of the federal SALT deduction limit. The law is effective “retroactively” as it can be applied to taxable years ending on or after December 31, 2021, and beginning prior to January 1, 2026.
As an owner or partner of an Illinois pass-through entity, if you are considering taking this election, we are able to assess your current situation and provide tax planning support to determine if this election will create tax savings. If you have questions about this latest change or need assistance with a tax planning or compliance need, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.