Illinois Pass-Through Entity Tax

Illinois has enacted an optional pass-through entity tax (PTE) to help individual taxpayers mitigate the federal $10,000 cap on state and local tax deductions. The PTE tax allows S corporations and partnerships to pay a 4.95% tax on their net income. In return, the partners or shareholders are allowed a credit against their individual Illinois income tax liability. Like most states, Illinois taxes its residents based on their federal adjusted gross income. However, it also taxes nonresident individuals based on their Illinois-source income. For this reason, it is important to carefully review your income to determine if you are subject to the PTE tax or pass-through withholding.

The due dates of Illinois taxes vary depending on the type of business. For example, if you run a small business, your returns and payments are due on April 15 of the year following the tax year. Additionally, Illinois has a “leveling the playing field” statute that requires out-of-state remote sellers to collect both state and local Retailers Occupation Taxes (ROT) on sales made in the state. This is to encourage online retailers to invest in their infrastructure, which can help create jobs and grow the economy.

How Do You File an Illinois Pass-Through Entity Tax Return?

For tax years beginning in 2021, members of a pass-through entity who made the PTET election can make voluntary prepayments of their PTE tax to reduce their total annual tax payment when they file their return. These payments can be made electronically using MyTax Illinois or ACH Credit or by mail using Form IL-1065-V, Payment Voucher for Partnership Replacement Tax, or Form IL-1120-ST-V, Payment Voucher for Small Business Corporation Replacement Tax.

Depending on your individual situation, you may be required to file Form IL-1000-E or complete Schedule IL-100-PTE-V, Pass Through Entity Tax Withholding and Credit Voucher for Nonresident Individual Members. Both forms provide a PTE member with instructions for reporting the information on his or her Illinois income tax return. Generally, the member must report the pass-through income and modifications, PTE tax credit, and pass-through withholding on his or her 1040 Illinois income tax return.

PTE Tax Credit

Partners and S corporation shareholders may claim a refundable credit against the PTE tax paid by their business. This credit is calculated by adding back their distributive share of the PTE tax to their Illinois income. The credit will flow to their IL-1040, Step 7. Nonresident individuals who receive income from a PTE that makes the election should not be required to file an Illinois income tax return if the credit they claim exceeds their Illinois tax liability. However, the nonresident must make quarterly estimated payments.