Illinois State Business Income Tax
What kind of tax will you owe on Illinois business income?
Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form; more particularly, in most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, four states, Nevada, South Dakota, Washington, and Wyoming, do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax.” This is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.
Illinois has a corporate income tax, a personal property replacement tax, and a corporation franchise tax. With the exception of sole proprietorships, most businesses will be subject to at least one of these three business-related taxes. Additionally, if income from your business passes through to you personally, that income will be subject to taxation on your personal Illinois tax return.
Illinois’s corporate income tax is charged at a flat rate of 7% of federal taxable income, with adjustments. Returns are due on the 15th day of the 3rd month after the end of the corporation’s tax year. For corporations with tax years following the calendar year, this means March 15th. (For the sake of comparison, the Illinois personal income tax rate is a flat 5% of federal adjusted gross income, with adjustments.)
Illinois also requires traditional corporations, S corporations, LLCs, and partnerships to pay a personal property replacement tax. This tax is based on a business’s net income; for traditional corporations, the tax is 2.5% of net income, and for other forms of business, the tax is 1.5% of net income. Due dates vary depending on the legal form of your business.
Finally, Illinois corporations are required to pay an annual franchise tax, which is a tax on the privilege of having an Illinois corporation. The tax is due each year on the anniversary of the formation of the corporation, and essentially is based on the corporation’s net worth. For the first year, the tax is .1% of paid-in capital for the preceding twelve-month period, with a $25 minimum and $2 million maximum. For subsequent years, the tax is .15% for the preceding twelve-month period, with a $25 minimum and a $2 million maximum, plus .1% of the basis.
Let’s briefly look at additional details for five of the most common forms of Illinois business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Illinois corporations are subject to Illinois’s corporate income tax, personal property replacement tax, and corporation franchise tax.
S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect “S” status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, generally speaking, taxable income from an S corporation is passed through to the individual shareholders, and each shareholder is subject to federal tax on his or her share of that income. In other words, S corporations are “pass-through” entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) While Illinois does recognize the federal S election, it nevertheless requires Illinois S corporations to pay the personal property replacement tax at a rate of 1.5% of net income, and, as Illinois corporations, the annual corporation franchise tax. In addition, an individual S corporation shareholder will owe tax to the state on his or her share of the company’s income.
Limited Liability Companies (LLCs). Like S corporations, standard LLCs are pass-through entities and are not required to pay federal income tax. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amounts distributed to them. In Illinois, however, along with individual LLC members paying state tax on their respective distributions, standard LLCs themselves are required to pay the personal property replacement tax at a rate of 1.5% of net income.
Note that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, “disregarded entities”), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to Illinois’s corporate income tax.
Partnerships. Income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns. In Illinois, along with individual partners paying state tax on their respective distributions, partnerships themselves are required to pay the personal property replacement tax at a rate of 1.5% of net income.
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Illinois. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in Illinois, it may be subject to Illinois taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.
For further guidance on Illinois’s corporate income tax and personal property replacement tax, check the Department of Revenue website; for further guidance on the corporation franchise tax, check the Secretary of State website. For information on business-related taxes in other states, check Nolo’s 50-State Guide to Business Income Tax. And, if you’re looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Frederick Daily (Nolo).