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Law firms with offices in Illinois should note that Governor J.B. Pritzker has signed Public Act 102-0658 (the Act), establishing an elective income tax regime for pass-through entities (PTEs), including partnerships, S corporations and LLCs, effective for tax years ending on or after December 31, 2021, and beginning before January 1, 2026. Illinois already subjects the income of PTEs to the state's personal property replacement tax — this new PTE tax regime is an additional, elective entity-level income tax. Under the Act, eligible PTEs will pay an entity-level tax, with a proportionate share of the paid PTE tax credited to the PTE owners' Illinois income tax liability. Publicly traded partnerships are not eligible to elect this new PTE tax.

The PTE tax is intended to allow Illinois individual income taxpayers to deduct, for federal income tax purposes, Illinois taxes that are paid on PTE income and exceed the $10,000 annual limitation imposed by IRC Section 164(b)(6) (the SALT deduction limitation). This benefit is accomplished by treating PTE tax paid at the entity level as an "above the line" deduction by the trade or business, rather than as an itemized deduction at the individual PTE owner level that would otherwise be subject to the SALT deduction limitation.

The Act presents significant income tax implications for PTEs, and for their individual and corporate owners. For electing PTEs, the Act creates new reporting and payment requirements.

EY Tax Alert 2021-1616 details the new tax.

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