As part of its fiscal year 2022 budget (FY 2022 Budget Implementation Act), Illinois enacted legislation (S.B. 2017) containing numerous tax law changes. The budget bill was signed by the governor on June 17, 2021. The legislation impacts both corporate and personal income taxes, as well as various income tax credit provisions, and it eliminates the planned phase-out of the franchise tax. The following is a summary of the tax changes as set forth in the FY 2022 Budget Implementation Act.
Income Tax Changes
- Net Operating Losses (NOL): The use of corporate NOLs is limited to $100,000 for tax years ending on or after December 31, 2021 and before December 31, 2024. The limitation does not apply to S corporations or partnerships for purposes of the Illinois replacement tax. Any tax years in which an NOL carryforward cannot be used due to the $100,000 limitation does not count against Illinois’ 12-year NOL carryforward period.
- Bonus Depreciation: Illinois decouples from the 100% federal bonus depreciation deduction under Internal Revenue Code Section 168(k) for assets placed in service on or after January 1, 2021. Illinois will now require the depreciation deduction to be recalculated using MACRS (modified accelerated cost recovery system) rules.
- Global Intangible Low-Taxed Income (GILTI): Illinois decouples from the IRC Section 250(a)(1)(B)(i) deduction attributable to GILTI for tax years ending on or after June 30, 2021. The new legislation did not change Illinois’ subtraction modification for foreign dividends, which includes the deductibility of GILTI. So, after the addback of the now-disallowed GILTI deduction, Illinois taxpayers can take a foreign dividend deduction for the GILTI income based on their ownership percentage, as follows:
- 100% deduction, if 80% or greater owned foreign corporations.
- 65% deduction, if 20% or more but less than 80% owned foreign corporations.
- 50% deduction, if less than 20% owned foreign corporations.
- Divided Received Deduction (DRD): For tax years ending on or after June 30, 2021, the subtraction modification for dividends received has been amended to exclude amounts treated as dividends under IRC Section 1248, which are gains from certain sales or exchanges of stock in certain foreign corporations. The subtraction modification also excludes dividends received from a foreign corporation for which a deduction is allowed under IRC Section 243(e), as well as the foreign-source portion of dividends received by domestic corporations allowed under IRC Section 245A(a).
Credits and Incentives
The budget bill also included numerous changes to various Illinois credits. Notably, it amends the Economic Development for a Growing Economy (EDGE) Tax credit, which provides annual corporate tax credits for qualifying businesses that create jobs, invest in capital and improve the standard of living for all Illinois residents. The changes to the EDGE credit include the New Construction EDGE Agreement, requiring a capital investment of at least $1 million in a qualified rehabilitation plan for River EDGE Income Tax Credit, and requiring capital investment of at least $10 million to authorize New Construction EDGE credits. Illinois would recapture EDGE credits by increasing the company’s tax liability for the current year. This only changes how credits are recaptured and does not expand the scenarios in which credits are recaptured.
Additionally, the budget bill extends the sunset dates on income tax credits for the New Markets Development Credit, the Invest in Kids Credit, the Affordable Housing Donation and Angel Investment Credits, and the credits for the River Edge Redevelopment Zone, and live theater productions.
Finally, Illinois also adopted a rule that implements a data center investment credit. Eligible taxpayers can claim the credit against Illinois corporate and personal income tax liability for wages paid to employees for construction of a new data center in the state.
The budget bill also eliminates the planned phase-out of the corporate franchise tax. Under previous legislation from 2019, the franchise tax was set to be phased out by 2024. The franchise tax exemption was set to increase to $10,000 in 2022 and $100,000 in 2023. Instead, the franchise tax remains, and only the first $1,000 of the franchise tax is exempt.
- In light of the changes to GILTI and DRDs, the Illinois Department of Revenue (IDOR) issued Information Bulletin FY 2021-27 to discuss the foreign dividend reporting changes for corporate filers, effective for tax years ending on or after June 30, 2021. In addition to the updated guidance, the IDOR updated the instructions for Schedule M, Other Additions and Subtraction (for business), and Schedule J, Foreign Dividends.
- The new $100,000 NOL limitation, the decoupling from bonus deprecation, and amendments to Illinois treatment of GILTI and the DRD may affect Illinois estimated tax payments and provision calculations.
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