Illinois Bank Holding Companies Should Review Their Franchise Tax Filings
The State of Illinois will be phasing out their franchise tax beginning in 2020 and it will be fully eliminated in 2024. But in the meantime, we are hearing from several banks around the state that Illinois has stepped up their reviews of holding company franchise tax filings in effort to collect any underpaid franchise tax.
Franchise Tax Apportionment
The inquiries by the Secretary of State appear to be focusing on the apportionment factors used by some corporations to reduce their franchise tax liability. For franchise tax purposes, Illinois uses a unique apportionment methodology that takes into account both the value of property (gross assets) and the amount of business transacted by the corporation (gross receipts). As part of the property factor, intangible assets, including stock in a subsidiary bank, are included.
As part of apportionment, corporations need to determine if their bank stock is considered to be Illinois or non-Illinois property. Because the state rules focus on the physical location of assets including intangible assets, a number of bank holding companies have historically held their bank stock certificates outside of Illinois to avoid having them classified as Illinois property and thereby reducing their franchise tax liability.
Increased Enforcement
To our knowledge, the rules regarding Illinois franchise tax apportionment have not changed, but the state appears to be reinterpreting the historic practice of holding stock certificates out of state in order to reduce franchise tax. Numerous holding companies have already received inquiries from the Secretary of State, but many are still waiting to hear back on final resolution of the issue.
Potential for Amnesty
Beginning this week, a new amnesty program will be available for corporations that may have underpaid their franchise tax liability. The program, which continues until November 15th abates penalties and interest associated with unpaid or underpaid franchise tax. However, all outstanding franchise tax due must be paid as part of the program, which has a look back period of seven years.
Next Steps
Illinois bank holding companies should review their franchise tax filings to determine if they have historically reduced their apportionment by holding their bank stock certificates out of state or may have potentially underpaid their franchise tax liability in some other way. The amnesty program is available for only a limited time so if your institution may be impacted management should carefully consider whether or not to apply. We recommend consulting with your legal counsel if you believe your institution may be impacted.
CLA is here to help you address state tax issues. Please contact us for more information.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
Comments are closed.