On June 7, 2023, Illinois Governor J.B. Pritzker signed into law the Revenue Omnibus Act, SB 1963 (Pub. Act 103-0009), which makes a number of tax changes, and the FY24 Budget Implementation Bill, HB 3817 (Pub. Act 103-0008). The tax changes made by SB 1963 and HB 3817 (1) modify the definition of an investment partnership, (2) modify pass-through entity tax provisions related to retirement income, (3) increase the franchise tax exemption, (4) extend various sales and use tax exemptions, and (5) extend and enhance certain tax credit and incentive programs, among other things. The changes discussed below have various effective dates.

Investment partnerships

Under Illinois law, investment partnerships are not subject to the entity level replacement tax and their partners treat the income as nonbusiness income allocable to their state of residence or commercial domicile. For tax years ending before December 31, 2023, the definition of an investment partnership requires the partnership not be a dealer in a qualifying security and that no less than 90% of a partnership's cost of its total assets¹ and its gross income be from qualifying investment securities.² Under this definition, many partnerships that are partners in lower-tier partnerships never met the test because of the flow-up of the lower-tier partnership operating activities.

For tax years ending on or after December 31, 2023, the definition of a qualifying investment security, for purposes of determining whether a partnership is an investment partnership, is expanded to include lower-tier partnership interests if it qualifies, in the hands of the partnership, as a security within the meaning of 15 USC Section 77b(a)(1). Further the revised definition of an investment partnership does not change the 90% total asset requirement (as previously defined) but modifies the gross income provision to require that no less than 90% of the investment partnership's gross income is from qualifying investment securities (as previously defined) and the distributive share of partnership income from lower-tier partnership interests meets the definition of qualifying investment security (gross income does not include income from a partnership operating at a federal taxable loss).³ (Emphasis added to highlight new language.)

Accompanying the modification to the definition of investment partnership, new paragraph (d) is added to the nonresident withholding requirements of 35 ILCS 5/709.5. For tax years ending on or after December 31, 2023, an investment partnership that now qualifies because of the modification to the investment partnership definition, must withhold tax from each nonresident partner (except for partners exempt from certain taxes) based on the amount of business income that would be apportioned to Illinois and nonbusiness income that would be allocated to Illinois, if not for the modification of the investment partnership definition. If the partner is a partnership or a subchapter S corporation, the applicable tax rate is the individual tax rate of 4.95%, rather than the entity's applicable replacement tax rate. The withholding for all other partners is based on the partner's applicable tax rate. Generally, partnerships that previously qualified as investment partnerships under the historic provisions will likely not see a change to their withholding requirements.

Modification of pass-through entity tax (PTET) for retirement income

For tax years ending on or after December 31, 2023, SB 1963 modifies the definition of net income to allow a new deduction in computing base income (i.e., income before apportionment) for income distributions to a retired partner to the extent the partner's distribution is retirement income, which includes income that is excluded from the computation of net earnings from self-employment by IRC Section 1402.

This change solves the unintended problem of PTET credits being attributable to retired partners who would not file a return because Illinois does not tax retirement income.

Franchise tax exemption increase

HB 3817 increases the exemption from the annual franchise tax paid by registered corporations to the first $5,000 of liability for reports due on or after January 1, 2024. The $1,000 exemption remains in place for reports due on or after January 1, 2021 and before January 1, 2024. (805 ILCS 5/15.35)

Sales, use and excise taxes

SB 1963 modifies various sales, use and excise tax provisions as follows:

Parking excise tax: Effective January 1, 2024, a booking intermediary⁴ that facilitates the processing and fulfillment of a reservation for a parking space for an operation not registered under 35 ILCS 525/10-30, is required to collect the parking excise tax on the purchase price from the purchaser and remit it to the Illinois Department of Revenue (Department). The booking intermediary and unregistered operator are jointly and severally liable for the payment of tax. Booking intermediaries are also required to collect the tax on (1) the purchase price paid by the purchaser on behalf of registered operators and (2) separate service charges that are included in the purchase price (even separate charges the booking intermediaries retain). Beginning January 1, 2024, booking intermediaries are liable for and must remit tax to the Department on any separately stated fees that it charges to the customer. Booking intermediaries that collected the tax on behalf of registered operators, however, must remit the tax to the operator who then remits the tax to the State. Operators remain liable for remitting tax on the remainder of the purchase price. Penalty and interest provisions apply to booking intermediaries required to register for the parking excise tax.

Aircraft exemption: Extends through December 31, 2029 (from December 31, 2024) the exemption for materials, parts, equipment, components and furnishings incorporated into an aircraft for the repair, maintenance, refurbishment, modification, completion, or replacement of the aircraft. (This exemption applies for purposes of the Use Tax Act (UTA), the Service Use Tax Act (SUTA), the Service Occupation Tax Act (SOTA), and the Retailers' Occupation Tax Act (ROTA).) Effective until January 1, 2024, the law also limits the application of the exclusion from this exemption for any materials, parts, equipment, components and consumable supplies used in the modification, replacement, repair and maintenance of aircraft engines or power plants. Starting in 2024, the definition of what the exemption applies to is expanded to include persons that modify, replace, repair, and maintain aircraft engines or power plants.

Ethanol blended fuel: Modifies the taxable portion of proceeds from sales of gasohol, mid-rate ethanol blends and majority blended ethanol fuel and modifies the definitions of gasohol and majority blended ethanol and adds the definition of mid-rate ethanol blends. Before 2024 and after 2028, UTA and ROTA applies to 100% of the proceeds of gasohol sales; the amount is reduced to 90% for years 2024 through 2028. For years 2024 through 2028, UTA and ROTA applies to 80% of the proceeds from sales of mid-range ethanol blends, with the tax applying to 100% of such proceeds for sales made after 2028. UTA and ROTA, however, will apply to 100% of the proceeds if at any time during this period the tax rate is 1.25%. The law extends the UTA and ROTA exemption for majority blended ethanol fuel to sales made before December 31, 2028 (from December 31, 2023). Similar changes were made for SUTA and SOTA purposes; SUTA and SOTA is imposed on the selling price of property transferred as an incident to the sale of services.

Farm machinery and equipment exemption: Expands the farm machinery and equipment exemption to include electrical power generation equipment used primarily for production agriculture, effective January 1, 2024. The exemption applies for UTA, SUTA, SOTA and ROTA.

Credits

SB 1963 expands the REV credits to address agreements entered into after the enactment of SB1963 (June 7, 2023) and before June 1, 2024, for applicants that (1) are electric vehicle manufacturers, electric vehicle component manufacturers or renewable energy manufacturers, or (2) convert or expand existing facilities in Illinois to these capabilities. To be eligible, the applicant must make an investment of at least $500 million in capital improvements within a 60-month period and retain at least 800 full-time jobs at the project.

SB 1963 also modifies various credit and incentive provisions as follows:

• Extends the historic preservation credit through December 31, 2028 (from December 31, 2023)
• Allows the Department to certify two additional pilot River Edge Redevelopment Zones, including one in Joliet and one in Kankakee
• Expands designation as a "high impact business" to include a business that intends to establish a new cultured cell material food production facility in Illinois
• Modifies the definition of "startup taxpayer" for purposes of the Economic Development for a Growing Economy (EDGE) Tax Credit Act
• Modifies the Angel Investment Credit by increasing the amount of the credit to 35% for an investment made in a new business venture that is (1) a minority-owned business, a woman-owned business or a business owned by a person with a disability, or (2) located in a county with a population of 250,000 or less
• Modifies the New Markets Development Program's definition of "qualified equity investments," increases the credit's annual cap and extends the credit's sunset date to fiscal years following fiscal year 2031 (from fiscal year 2024)
• Adds guidance and structure to the aviation fuel purchase credit

Implications

Any partnership that qualifies as an investment partnership under the revised provisions is no longer required to pay the entity level replacement tax. Modification of the nonresident withholding rules, however, may still require a tax return to be filed to report withholding for the partners.

The Illinois Invest in Kids credit was not extended as part of either the omnibus tax bill or the budget implementation bill. It is possible that an extension of the program could be considered later this year.

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Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor

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ENDNOTES

¹ Specifically, "(i) no less than 90% of the partnership's cost of its total assets consists of qualifying investment securities, deposits at banks and other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership; … ".

² Specifically, "(ii) no less than 90% of its gross income consists of interest, dividends, and gains from the sale or exchange of qualifying investment securities; … ".

³ The law also removes the requirement that the partnership is not a dealer in qualifying investment securities.

⁴ Definition section is expanded to include "booking intermediary" and modifies the definition of "operator" to specifically exclude a booking intermediary (except if the booking intermediary is required to be registered under 35 ILCS 525/10-30).