June 10, 2021
Illinois legislature approves significant tax changes affecting bonus depreciation, dividends, GILTI and net loss deductions
On June 1, 2021, the Illinois Legislature approved the state's FY 2022 budget legislation, Senate Bill 2017 (SB 2017), which includes provisions that would modify Illinois's income, franchise and sales/use tax laws and would extend the sunset date for certain credit and incentive provisions. Governor J.B. Pritzker, having proposed some of these changes in his budget address, is expected to sign the legislation in the coming weeks.
Decoupling from federal bonus depreciation
Historically, Illinois has decoupled from the federal 30% and 50% bonus depreciation rules but conformed to the 100% bonus depreciation rules. Under SB 2017, for tax years ending on or after December 31, 2021, Illinois would also decouple from the 100% bonus depreciation rule. As a result, the state depreciation deduction on assets for which the 100% federal bonus was elected would equal the federal depreciation deduction that would have been allowed under IRC Section 168 if no 100% federal bonus election had been made. SB 2017 would add a formula to compute the allowed state depreciation deduction amount on federal bonus assets other than 30%, 50% or 100%.
Dividend and GILTI income
For tax years ending on or after June 30, 2021, SB 2017 would modify the Illinois income tax treatment of federal deductions for certain dividend income, as well as the IRC Section 250 deduction for global intangible low-taxed income (GILTI, described under IRC Section 951A) to add back:
The state subtraction modification for foreign dividends, including the deductibility of GILTI, was not changed. Thus, these addback modifications would change the amount of income included in the tax base before foreign dividends are subtracted.
SB 2017, however, would amend the subtraction modification's definition of "dividend" for tax years ending on or after December 31, 2021, to exclude amounts treated as dividends under IRC Section 1248 (i.e., gains from certain sales or exchanges of stock in certain foreign corporations). Also, for tax years ending on or after December 31, 2021, dividends that have already been deducted under IRC Section 245(a) do not qualify for the state subtraction.
Limitation on net loss deductions
SB 2017 would place a $100,000 annual cap on the net loss deduction allowed for corporations (other than S corporations) for each tax year ending on or after December 31, 2021 and before December 31, 2024. For purposes of the carryover period for net loss deductions, taxpayers would not count any year in which the net loss deduction to be used would have exceeded $100,000. This temporary cap is identical to the cap on net loss deductions for tax years ending on or after December 31, 2012 and before December 31, 2014, and would be codified by merely adding the dates to the previously enacted statutory provision (see SB 2017 amending 35 ILCS 5/207(d)).
The franchise tax of the Business Corporation Act administered by the Secretary of State exempts specific tax amounts based on the year the annual report is due. Legislation enacted in June 2019 (Ill. Laws 2019, P.A. 101-0009 (SB 689)) phased out the franchise tax, with an expected sunset of the tax for annual reports due in 2024. SB 2017 would eliminate this sunset provision but retain the exemption for the first $1,000 of franchise tax. Thus, SB 2017 would eliminate previously enacted exemption increases of $10,000 in 2022 and $100,000 2023.
Other tax law changes:
Taxpayers will need to consider the impact of Illinois's decoupling from the federal bonus depreciation rules for any assets for which they planned to take 100% bonus depreciation for tax year 2021. The law does not require any recapture or modification of 100% bonus claimed in tax years preceding 2021.
Taxpayers will also need to consider the effects of the various changes to Illinois's income tax laws, which take effect in 2021.
Once the Governor signs the legislation, taxpayers will need to consider the impact of these rule changes on their estimated payments.