Illinois Enacts Major Tax Bills Affecting Income, Estate, Franchise, and Sales Tax
During June, the Illinois legislature enacted a slew of new tax legislation including major changes to income, estate, franchise, and sales tax provisions. These changes have far reaching implications for banks, their owners, and customers.
Potential Increase to Personal Tax Rates
Illinois currently imposes an individual tax rate of 4.95%, under the state’s constitutional mandate for flat income tax rates. The new legislation places a measure on the November 2020 ballot that would amend the Illinois constitution to allow a graduated personal income tax rate. In order to pass, this provision would require a 60% vote.
The legislation also provides that if the amendment is passed, new personal tax rates would begin in 2021 and would range from 4.75% up to 7.99%. Top rates would apply to single individuals with taxable income over $750,000 and married couples filing jointly with income over $1 million.
Corporate Tax Rate Increase
C Corporations in Illinois pay a combined income and replacement tax rate of 9.50% today. New legislation would increase the combined tax rate to 10.49% beginning in 2021. Even though the corporate tax rate increase does not involve any graduated tax rates, it will not become effective until and unless Illinois voters approve the above amendment to the Illinois constitution.
Illinois Estate Tax
The Illinois estate tax limit is currently at $4 million and impacts many Illinois families that may be exempt from the higher federal estate tax limits, which now exceed $11 million per person. Senate Bill 689 repeals the Illinois Estate and Generation Skipping Transfer Tax for persons dying on or after July 1, 2021 and for gifts made on or after July 1, 2021. This new rule only applies if the amendment to the Illinois constitution noted above is approved by Illinois voters.
Franchise Tax Phase Out
Senate Bill 689 phases out the Illinois Franchise Tax. Phase-out amounts increase each year until the entire franchise tax is eliminated for tax years beginning on or after January 1, 2024.
Sales Tax Expansion
Currently, out-of-state retailers are only required to collect Illinois use tax at a rate of 6.25% on sales to individuals and businesses located in Illinois. Effective July 1, 2020, out-of-state sellers that meet an economic nexus threshold of $100,000 in annual Illinois receipts or 200 separate transactions in a year will be required to collect and remit local sales tax as well state sales tax on all purchases. This sales tax expansion is consistent with steps taken by many other states in the wake of the Wayfair Case decided last year.
New Parking Excise Tax
One of the more obscure provisions in the law may impact commercial real estate customers. Illinois Senate Bill 690 includes a new excise tax beginning in 2020. Parking space and garage owners and operators are required to pay a 6% excise tax on parking spaces rented on an hourly, daily, or weekly basis. A 9% excise tax applies to parking spaces rented monthly or annually.
Next Steps
CLA will be closely monitoring the results of the upcoming Illinois constitutional amendment vote and other proposals. In the meantime, banks and their shareholders should consider the impact of these tax law changes on their long term strategic plans and tax structures. S Corporations in particular will want to assess whether higher personal tax rates in Illinois impact their considerations for remaining an S corporation long term.
CLA is here to help. Please contact us.
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.
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