Illinois Governor J.B. Pritzker on June 7, 2024 signed the FY 2025 revenue omnibus legislation, House Bill 4951 (HB 4951), which modifies the state's income, franchise and sales/use tax laws and extends the sunset date for certain credits and incentives.¹

The legislature has also approved other sales and use tax bills (SB 3282, SB 3362 and HB 3144) and a bill (HB 5005) that would create new, and enhance existing, business tax credits and incentives, which will be sent to the governor for his consideration.

The following is a summary of these enacted and proposed changes.

Financial organization investment and trading activities

For tax years ending on or after December 31, 2024, HB 4951 modifies the method for determining the portion of receipts from investments and trading assets and activities (investment and trading income) attributable to Illinois. HB 4951 did not modify the types of investment and trading assets and activities to be included in Illinois taxable income (e.g. investment securities, federal funds, options, etc.).

Under the new method, total receipts from investment and trading income will be multiplied by a fraction consisting of the financial organization's Illinois receipts (as determined using the sourcing provisions specific to financial organizations, excluding the investment and trading income) divided by total gross receipts from all financial organization activities, excluding the investment and trading income.

The result will be included in the financial organization's sales apportionment factor numerator. This new method, essentially, attributes income to Illinois in the same proportion as the financial organization's other Illinois business activities. On this point, consideration should be given to Illinois' long-standing application of the Joyce rule, where each financial organization member within a unitary group will need to apply the new method based on its own activities.

Under existing law, which applies to tax years ending before December 31, 2024, investment and trading income is attributed to the financial organization's fixed place of business where the preponderance of substantive contacts with the assets and activities takes place. 

Limitation on net loss deductions (NLDs)

HB 4951 places a $500,000 annual cap on the NLD allowed for corporations (other than S corporations) for each tax year ending on or after December 31, 2024 and before December 31, 2027. For purposes of the NLD carryover period, taxpayers will not count any year in which the NLD to be used would have exceeded $500,000. This temporary cap is identical in length to prior caps on NLDs, but more generous due to the higher $500,000 cap. (A $100,000 cap on NLDs applies to tax years ending on or after December 31, 2021 and before December 31, 2024. See Tax Alert 2021-1154.)

Franchise tax exemption increased

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. HB 4951 increases the $5,000 exemption to $10,000 for annual reports due on or after January 1, 2025. The current $5,000 exemption remains in place for any annual reports due for the remainder of 2024 (Public Act 103-0008, formerly HB 3817; See Tax Alert 2023-1098).

Sales and use tax changes

Enacted changes

Leases: HB 4951 extends sales and use tax² to the retail lease of tangible personal property (other than motor vehicles, watercraft, aircraft and semitrailers), effective for leases in effect, entered into, or renewed on or after January 1, 2025. An exemption applies for (1) a lessee's use of software that was transferred under a license that meets certain requirements and (2) those licenses subject to tax by a home-rule jurisdiction (i.e., licenses taxed under the Personal Property Lease Transaction Tax in Chicago will be exempt).

Revenue from lease transactions is sourced as follows: (1) for leases requiring recurring periodic payments for property delivered to the lessee, each periodic payment is sourced to the primary property location for each period covered by the payment, and (2) for all other leases, the payment is sourced as provided for sales at retail, other than leases. Such leases are also subject to applicable local sales and use taxes.

Vendor discount: HB 4951 caps the vendor discount at $1,000 per month beginning with returns due on or after January 1, 2025.

Pending changes

Direct permit holders: For Retailers' Occupation Tax (ROT) purposes, SB 3282 (passed by the General Assembly on May 24, 2024) would require Direct Pay Permit holders to review all purchase activity for the prior year to verify that purchases were properly sourced and the correct tax rate was applied. A $6,000 penalty would apply for failure to properly verify purchase activity and correct sourcing and tax rate errors. The penalty would not apply if at least 95% of the permit holder's transactions for the applicable 12-month review period are correctly sourced and the correct taxes have been remitted, or the permit holder acted with ordinary business care and prudence.

Sourcing remote sales: SB 3362 (passed by the General Assembly on May 28, 2024) would deem a retailer that maintains a place of business in Illinois and makes retail sales of tangible personal property from a location outside Illinois to be engaged in selling at retail in Illinois for ROT purposes, starting in 2025. Such sales would be sourced to the Illinois location where the tangible personal property is shipped or where the purchaser takes possession (i.e., destination sourcing), similar to the sourcing of sales by remote retailers.

Exemption for food: HB 3144 (sent to the Governor on June 6, 2024) would exempt from sales tax food sold for off-premise human consumption, beginning in 2026, and allow local jurisdictions to impose a 1% tax for such sales. Alcoholic beverages, soft drinks, candy, food prepared for immediate consumption and food infused with adult-use cannabis would not qualify for this exemption.

Research and development credit extension

HB 5005 (sent to the governor on June 6, 2024) would extend the Illinois research and development income tax credit to any tax year ending before January 1, 2032. The credit is currently set to sunset for any tax year ending before January 1, 2027. This change would provide assurances that the credit will remain available for the foreseeable future.

Other noteworthy law changes

HB 4951 also makes the following changes:

• Beginning July 1, 2025, the hotel operators' occupation tax will apply to re-renters of hotel rooms. If the re-renter is remote and has no presence in Illinois, it is subject to tax if its cumulative gross receipts from Illinois rentals are $100,000 or more, or it enters into 200 or more separate rental transactions in Illinois.
• The income tax credit for ex-felons is renamed to the returning citizens income tax credit. The maximum credit allowable increases from $15,00 to $7,500 for each returning citizen employed. Qualifying wages for calculating the credit will increase from 5% of qualifying wages to 15% of qualifying wages. The total credit awarded to a taxpayer in any tax year is capped at $1 million. These changes take effect for tax years beginning on or after January 1, 2025.
• Effective July 1, 2025, payment processors, acquirer banks or card issuers are prohibited from charging merchants an interchange fee for the tax (limited to Illinois sales or excise taxes) or gratuity portion of any electronic payment. A civil penalty of $1,000 per transaction may be imposed for violations.
• Effective July 1, 2024, the tax rate for the privilege of holding a license to operate sports wagering (i.e., sports betting) changes from a flat 15% rate to graduated rates ranging from 20% to 40% of sports wagering receipts.

Provisions in other bills that have been approved by the General Assembly, if enacted, would do the following:

• Expand the Reimagining Electric Vehicle (REV) incentives to include green steel manufacturers, manufacturers of electric vertical takeoff and landing aircraft, and manufacturers of electric vehicle powertrain technology (See HB 5005)
• Create new exemptions and credits for tenants in a designated quantum computing campus (HB 5005)
• Enhance various credits, including the Economic Development for a Growing Economy (EDGE) credit, the Illinois job relocation credit, the High Impact Business Construction Job credits, the film production services credit, and the Manufacturing Illinois Chips for Real Opportunity Act (HB 5005)
• Study the state's property tax system and recommend improvements, with the final report due to the Governor and General Assembly by July 1, 2026 (SB 3455, which was approved by the General Assembly on May 20, 2024.)

Implications

Reinstituting the cap on Illinois net loss deductions is another way for Illinois to continue to limit taxpayers' ability to use their losses. Taxpayers may consider using all available tax credits while the cap is in place.