Illinois State Business Income Tax

What kind of tax will you owe on Illinois business income?

Updated by , J.D.

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. 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 most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. 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, six states—Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming—do not have a corporate income tax. However, four of those states—Nevada, Ohio, Texas, and Washington—do have some form of gross receipts tax on corporations. Moreover, five of those states—Nevada, South Dakota, Texas, Washington, and Wyoming—as well as Alaska, Florida, and Tennessee currently have no personal income tax. Individuals in New Hampshire 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 tax is frequently justified as a tax simply for the 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.

How Illinois State Business Income Tax Works

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 4th month after the end of the corporation's tax year (if the corporation tax year ends on June 30 then returns are due on the 15th day of the 3rd month after the end of the tax year). For corporations with tax years following the calendar year, this means April 15th. (For the sake of comparison, the Illinois personal income tax rate is a flat 4.95% 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.

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. Corporations receive an exemption for the first $1,000 of liability for this tax—that is, it need be paid only if, and to the extent, more than $1,000 is owed. For the first year, the tax is .15% of paid-in capital for the preceding twelve-month period. For subsequent years, the tax is .1% for the preceding twelve-month period and a $2 million maximum, plus .1% of the basis. Additional franchise tax will be due each month for a year after any increase in paid-in capital.

Finally, Illinois enacted an optional pass-through entity (PTE) tax for 2022 through 2025. During these years, S corporations, partnerships, and LLCs taxed as partnerships may elect to pay a 4.95% tax on their net income. The partners, LLC members, or shareholders of the pass-through entity are allowed a credit against their own state income taxes in the amount of the PTE tax. The purpose of the PTE tax is to enable Illinois residents to get around the $10,000 federal cap on deducting state taxes on individual tax returns.

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 their 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 their 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 might be considered to have nexus with those states and, therefore, might 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 might 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.

Additional Information

For further guidance on Illinois's corporate income tax and personal property replacement tax, check the Illinois Department of Revenue website; for further guidance on the corporation franchise tax, check the Office of the Illinois Secretary of State. 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).

Updated February 9, 2022

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