On Memorial Day, and stretching into the early hours of June 1, the Illinois Legislature approved the state’s $42 billion budget for fiscal year 2022. It is anticipated that the budget’s tax provisions are expected to generate more than $600 million in additional revenue by addressing what governor J.B. Pritzker and others in the General Assembly have deemed corporate tax “loopholes.” While there are many provisions included in the bill aimed at raising that additional revenue, below are four of the most impactful:
First, taxpayers will be required to addback certain deductions for purposes of computing their Illinois base income subject to tax under 35 ILCS 5/203(b)(2)(E-19) and (E-20) for taxable years ending on or after June 30, 2021: (i) GILTI deductions under IRC § 250(a)(1)(B)(i); (ii) dividends received from foreign corporations under IRC § 243(e); and (iii) deduction for the foreign source-portion of dividends received by domestic corporations from specified 10% owned foreign corporations under IRC § 245A(a). The budget also modifies the definition of the term “dividend” for purposes of the foreign dividend subtraction, such that dividend “does not include any amount treated as a dividend under Section 1248 of the Internal Revenue Code”, which governs the treatment of gain from certain sales or exchanges of stock in certain foreign corporations.
Second, Illinois joins numerous other states in decoupling from federal 100% bonus depreciation provided in the Tax Cuts and Jobs Act. Under § 203(b)(2)(T)(3)(iii), Illinois now treats property on which a 100% bonus depreciation deduction was taken at the federal level as if the taxpayer made the election offered under IRC § 168(k)(7) to not claim the bonus depreciation. Section 203(b)(2)(T)(3)(iv) provides a calculation for taxpayers to use in determining their resulting allowable Illinois depreciation, after accounting for the state’s modified bonus depreciation calculation.
Third, the bill limits corporations’ use of net operating losses up to $100,000 per year for “any taxable year ending on or after December 31, 2021 and prior to December 31, 2024” by amending 35 ILCS 5/207(d). This section brings back the previous $100,000 net operating loss limitation that had been in effect for tax years ending on or after December 31, 2012 through December 31, 2014. It is noteworthy, however, that taxable years for purposes of determining a taxpayer’s net operating loss carryforward period are not counted when the $100,000 net operating loss cap is in place, and a taxpayer’s net operating loss deduction would have exceeded $100,000 but for the cap.
Fourth, the budget eliminates the phase-out of the state’s franchise tax previously found in ILCS § 5/15.65(e). Under prior law, the franchise tax was set to completely expire for tax years beginning on or after January 1, 2024, and was gradually being minimized in the interim. While it is little consolation to taxpayers who had been anticipating the elimination of the franchise tax, the budget does retain the exemption for the first $1,000 in liability.
While there are other revenue raisers in the budget the General Assembly approved, and the Governor is expected to sign, these are four of the most impactful. The Eversheds Sutherland SALT Team will continue to monitor developments as the budget is implemented, and will keep you apprised of any Departmental guidance that is provided as these tax changes take effect.