Illinois budget legislation has been enacted over Gov. Bruce Rauner’s veto that increases corporate and personal income tax rates, creates an income and personal property replacement tax addback for the federal domestic production activities deduction under IRC §199, expands the definition of “unitary business group,” extends the sunset date for the research and development income tax credit, increases the education expense and earned income tax credits, eliminates the educational expense credit, the property tax credit, and personal income tax exemptions for certain taxpayers, and establishes a new income tax credit for teachers, instructors, counselors, principals, or aides who purchase school instructional materials and supplies.
Sales and use tax (TAXDAY, 2017/07/10, S.7) and other tax provisions (TAXDAY, 2017/07/10, S.8) are discussed in separate stories.
Income Tax Rates
Effective for taxable years beginning on or after July 1, 2017, the corporate income tax rate is increased from 5.25% to 7% and the personal income tax rate is increased from 3.75% to 4.95%.
IRC §199 Adjustment
Effective for taxable years ending on or after December 31, 2017, taxpayers computing Illinois corporate income, personal income, and replacement tax liability must addback an amount equal to any federal deduction claimed by a taxpayer under IRC §199 for domestic production activities.
Unitary Business Groups
Members of a unitary business group must compute Illinois corporate income and replacement tax liability using the water’s edge combined reporting method. Effective for taxable years ending before December 31, 2017, a “unitary business group” cannot include members that use different apportionment formulas. For example, insurance companies, financial organizations, and transportation companies must use special industry apportionment formulas and cannot be included in the same unitary group, effective for taxable years ending before December 31, 2017, with a general business corporation required to use a different one-factor formula. Effective for taxable years ending on or after December 31, 2017, the phrase “United States”, as used in the definition of “unitary business group” (e.g., 80/20 U.S. business activity rule), includes any area over which the U.S. has asserted jurisdiction or claimed exclusive rights over natural resource exploration or exploitation. Effective for taxable years ending before December 31, 2017, the phrase “United States” does not include those areas. The definition continues to exclude any U.S. territory or possession.
Research and Development Credit
The sunset date for the research and development (R&D) credit that may be claimed against Illinois corporate income, personal income, and replacement tax liability is extended from January 1, 2016 to January 1, 2022. The R&D credit is intended to apply continuously for all tax years ending on or after December 31, 2004 and before January 1, 2022, including the period beginning on January 1, 2016 and ending on the effective date of the legislation. The credit is equal to 6.5% of qualifying R&D expenditures.
Education Expense and Earned Income Tax Credits
The maximum education expense credit is increased from $500 to $750 for tax years ending on or after December 31, 2017. Resident taxpayers who were the parent or legal guardian of a full-time student, who was a resident under the age of 21 at the close of the school year and who attended kindergarten through 12fth grade at a public or nonpublic school in Illinois during the tax year, may claim a credit against Illinois personal income tax liability for qualified education expenses paid for the student if the expenses exceed $250. The Illinois education expense credit is equal to 25% of the qualified expenses each year up to the maximum allowable credit.
The Illinois earned income tax credit (EITC) that may be claimed against personal income tax liability is increased from 10% to 14% of the federal EITC for taxable years beginning after 2016 and from 14% to 18% of the federal credit for taxable years beginning after 2017.
School Instructional Materials and Supplies Credit
Effective for taxable years beginning on or after January 1, 2017, teachers, instructors, counselors, principals, or aides who work at least 900 hours in a public or non-public school during the school year may claim a credit against personal income tax liability for the amount paid or $250, whichever is less, for classroom instructional materials and supplies. Unused credits may be carried forward for up to 5 taxable years.
Personal Income Credit and Exemption Limits
Effective for taxable years beginning on or after January 1, 2017, taxpayers who have adjusted gross income for the taxable year exceeding $500,000 for taxpayers filing a joint federal return or $250,000 for all other taxpayers may not claim:
– the education expense credit;
– the 5% credit for property taxes paid on residential real property; or
– personal income tax exemptions.
The standard personal exemption is $2,050, plus an annual cost-of-living inflation adjustment based on the Consumer Price Index. An additional $1,000 exemption is allowed for each taxpayer who is 65 or older and for each taxpayer who is blind.
P.A. 100-22 (S.B. 9), Laws 2017, effective July 6, 2017 and as noted