AUTHORITY: Implementing Section 505 of the Illinois Income Tax Act [35 ILCS 5] as authorized by Section 1401 of the Illinois Income Tax Act [35 ILCS 5] and Section 2505-795 of the Civil Administrative Code of Illinois (Department of Revenue Law) [20 ILCS 2505].
SOURCE: Filed July 14, 1971, effective July 24, 1971; amended at 2 Ill. Reg. 49, p. 84, effective November 29, 1978; amended at 5 Ill. Reg. 813, effective January 7, 1981; amended at 5 Ill. Reg. 4617, effective April 14, 1981; amended at 5 Ill. Reg. 4624, effective April 14, 1981; amended at 5 Ill. Reg. 5537, effective May 7, 1981; amended at 5 Ill. Reg. 5705, effective May 20, 1981; amended at 5 Ill. Reg. 5883, effective May 20, 1981; amended at 5 Ill. Reg. 6843, effective June 16, 1981; amended at 5 Ill. Reg. 13244, effective November 13, 1981; amended at 5 Ill. Reg. 13724, effective November 30, 1981; amended at 6 Ill. Reg. 579, effective December 29, 1981; amended at 6 Ill. Reg. 9701, effective July 26, 1982; amended at 7 Ill. Reg. 399, effective December 28, 1982; amended at 8 Ill. Reg. 6184, effective April 24, 1984; codified at 8 Ill. Reg. 19574; amended at 9 Ill. Reg. 16986, effective October 21, 1985; amended at 9 Ill. Reg. 685, effective December 31, 1985; amended at 10 Ill. Reg. 7913, effective April 28, 1986; amended at 10 Ill. Reg. 19512, effective November 3, 1986; amended at 10 Ill. Reg. 21941, effective December 15, 1986; amended at 11 Ill. Reg. 831, effective December 24, 1986; amended at 11 Ill. Reg. 2450, effective January 20, 1987; amended at 11 Ill. Reg. 12410, effective July 8, 1987; amended at 11 Ill. Reg. 17782, effective October 16, 1987; amended at 12 Ill. Reg. 4865, effective February 25, 1988; amended at 12 Ill. Reg. 6748, effective March 25, 1988; amended at 12 Ill. Reg. 11766, effective July 1, 1988; amended at 12 Ill. Reg. 14307, effective August 29, 1988; amended at 13 Ill. Reg. 8917, effective May 30, 1989; amended at 13 Ill. Reg. 10952, effective June 26, 1989; amended at 14 Ill. Reg. 4558, effective March 8, 1990; amended at 14 Ill. Reg. 6810, effective April 19, 1990; amended at 14 Ill. Reg. 10082, effective June 7, 1990; amended at 14 Ill. Reg. 16012, effective September 17, 1990; emergency amendment at 17 Ill. Reg. 473, effective December 22, 1992, for a maximum of 150 days; amended at 17 Ill. Reg. 8869, effective June 2, 1993; amended at 17 Ill. Reg. 13776, effective August 9, 1993; recodified at 17 Ill. Reg. 14189; amended at 17 Ill. Reg. 19632, effective November 1, 1993; amended at 17 Ill. Reg. 19966, effective November 9, 1993; amended at 18 Ill. Reg. 1510, effective January 13, 1994; amended at 18 Ill. Reg. 2494, effective January 28, 1994; amended at 18 Ill. Reg. 7768, effective May 4, 1994; amended at 19 Ill. Reg. 1839, effective February 6, 1995; amended at 19 Ill. Reg. 5824, effective March 31, 1995; emergency amendment at 20 Ill. Reg. 1616, effective January 9, 1996, for a maximum of 150 days; amended at 20 Ill. Reg. 6981, effective May 7, 1996; amended at 20 Ill. Reg. 10706, effective July 29, 1996; amended at 20 Ill. Reg. 13365, effective September 27, 1996; amended at 20 Ill. Reg. 14617, effective October 29, 1996; amended at 21 Ill. Reg. 958, effective January 6, 1997; emergency amendment at 21 Ill. Reg. 2969, effective February 24, 1997, for a maximum of 150 days; emergency expired July 24, 1997; amended at 22 Ill. Reg. 2234, effective January 9, 1998; amended at 22 Ill. Reg. 19033, effective October 1, 1998; amended at 22 Ill. Reg. 21623, effective December 15, 1998; amended at 23 Ill. Reg. 3808, effective March 11, 1999; amended at 24 Ill. Reg. 10593, effective July 7, 2000; amended at 24 Ill. Reg. 12068, effective July 26, 2000; emergency amendment at 24 Ill. Reg. 17585, effective November 17, 2000, for a maximum of 150 days; amended at 24 Ill. Reg. 18731, effective December 11, 2000; amended at 25 Ill. Reg. 4640, effective March 15, 2001; amended at 25 Ill. Reg. 4929, effective March 23, 2001; amended at 25 Ill. Reg. 5374, effective April 2, 2001; amended at 25 Ill. Reg. 6687, effective May 9, 2001; amended at 25 Ill. Reg. 7250, effective May 25, 2001; amended at 25 Ill. Reg. 8333, effective June 22, 2001; amended at 26 Ill. Reg. 192, effective December 20, 2001; amended at 26 Ill. Reg. 1274, effective January 15, 2002; amended at 26 Ill. Reg. 9854, effective June 20, 2002; amended at 26 Ill. Reg. 13237, effective August 23, 2002; amended at 26 Ill. Reg. 15304, effective October 9, 2002; amended at 26 Ill. Reg. 17250, effective November 18, 2002; amended at 27 Ill. Reg. 13536, effective July 28, 2003; amended at 27 Ill. Reg. 18225, effective November 17, 2003; emergency amendment at 27 Ill. Reg. 18464, effective November 20, 2003, for a maximum of 150 days; emergency expired April 17, 2004; amended at 28 Ill. Reg. 1378, effective January 12, 2004; amended at 28 Ill. Reg. 5694, effective March 17, 2004; amended at 28 Ill. Reg. 7125, effective April 29, 2004; amended at 28 Ill. Reg. 8881, effective June 11, 2004; emergency amendment at 28 Ill. Reg. 14271, effective October 18, 2004, for a maximum of 150 days; amended at 28 Ill. Reg. 14868, effective October 26, 2004; emergency amendment at 28 Ill. Reg. 15858, effective November 29, 2004, for a maximum of 150 days; amended at 29 Ill. Reg. 2420, effective January 28, 2005; amended at 29 Ill. Reg. 6986, effective April 26, 2005; amended at 29 Ill. Reg. 13211, effective August 15, 2005; amended at 29 Ill. Reg. 20516, effective December 2, 2005; amended at 30 Ill. Reg. 6389, effective March 30, 2006; amended at 30 Ill. Reg. 10473, effective May 23, 2006; amended by 30 Ill. Reg. 13890, effective August 1, 2006; amended at 30 Ill. Reg. 18739, effective November 20, 2006; amended at 31 Ill. Reg. 16240, effective November 26, 2007; amended at 32 Ill. Reg. 872, effective January 7, 2008; amended at 32 Ill. Reg. 1407, effective January 17, 2008; amended at 32 Ill. Reg. 3400, effective February 25, 2008; amended at 32 Ill. Reg. 6055, effective March 25, 2008; amended at 32 Ill. Reg. 10170, effective June 30, 2008; amended at 32 Ill. Reg. 13223, effective July 24, 2008; amended at 32 Ill. Reg. 17492, effective October 24, 2008; amended at 33 Ill. Reg. 1195, effective December 31, 2008; amended at 33 Ill. Reg. 2306, effective January 23, 2009; amended at 33 Ill. Reg. 14168, effective September 28, 2009; amended at 33 Ill. Reg. 15044, effective October 26, 2009; amended at 34 Ill. Reg. 550, effective December 22, 2009; amended at 34 Ill. Reg. 3886, effective March 12, 2010; amended at 34 Ill. Reg. 12891, effective August 19, 2010; amended at 35 Ill. Reg. 4223, effective February 25, 2011; amended at 35 Ill. Reg. 15092, effective August 24, 2011; amended at 36 Ill. Reg. 2363, effective January 25, 2012; amended at 36 Ill. Reg. 9247, effective June 5, 2012; amended at 37 Ill. Reg. 5823, effective April 19, 2013; amended at 37 Ill. Reg. 20751, effective December 13, 2013; recodified at 38 Ill. Reg. 4527; amended at 38 Ill. Reg. 9550, effective April 21, 2014; amended at 38 Ill. Reg. 13941, effective June 19, 2014; amended at 38 Ill. Reg. 15994, effective July 9, 2014; amended at 38 Ill. Reg. 17043, effective July 23, 2014; amended at 38 Ill. Reg. 18568, effective August 20, 2014; amended at 38 Ill. Reg. 23158, effective November 21, 2014; emergency amendment at 39 Ill. Reg. 483, effective December 23, 2014, for a maximum of 150 days; amended at 39 Ill. Reg. 1768, effective January 7, 2015; amended at 39 Ill. Reg. 5057, effective March 17, 2015; amended at 39 Ill. Reg. 6884, effective April 29, 2015; amended at 39 Ill. Reg. 15594, effective November 18, 2015; amended at 40 Ill. Reg. 1848, effective January 5, 2016; amended at 40 Ill. Reg. 10925, effective July 29, 2016; amended at 40 Ill. Reg. 13432, effective September 7, 2016; amended at 40 Ill. Reg. 14762, effective October 12, 2016; amended at 40 Ill. Reg. 15575, effective November 2, 2016; amended at 41 Ill. Reg. 4193, effective March 27, 2017; amended at 41 Ill. Reg. 6379, effective May 22, 2017; amended at 41 Ill. Reg. 10662, effective August 3, 2017; amended at 41 Ill. Reg. 12608, effective September 21, 2017; amended at 41 Ill. Reg. 14217, effective November 7, 2017; emergency amendment at 41 Ill. Reg. 15097, effective November 30, 2017, for a maximum of 150 days; amended at 42 Ill. Reg. 4953, effective February 28, 2018; amended at 42 Ill. Reg. 6451, effective March 21, 2018; recodified Subpart H to Subpart G at 42 Ill. Reg. 7980; amended at 42 Ill. Reg. 17852, effective September 24, 2018; amended at 42 Ill. Reg. 19190, effective October 12, 2018; amended at 43 Ill. Reg. 727, effective December 18, 2018; amended at 43 Ill. Reg. 10124, effective August 27, 2019; amended at 44 Ill. Reg. 2363, effective January 17, 2020; amended at 44 Ill. Reg. 2845, effective January 30, 2020; emergency amendment at 44 Ill. Reg. 4700, effective March 4, 2020, for a maximum of 150 days; emergency expired July 31, 2020; amended at 44 Ill. Reg. 10907, effective June 10, 2020; emergency amendment at 44 Ill. Reg. 11208, effective June 17, 2020, for a maximum of 150 days; emergency expired November 13, 2020; amended at 44 Ill. Reg. 17414, effective October 13, 2020; amended at 45 Ill. Reg. 2006, effective January 29, 2021; amended at 45 Ill. Reg. 5523, effective April 15, 2021; amended at 46 Ill. Reg. 13312, effective July 12, 2022; amended at 46 Ill. Reg. 14550, effective August 2, 2022; amended at 46 Ill. Reg. 15317, effective August 24, 2022; amended at 46 Ill. Reg. 18102, effective October 26, 2022; amended at 47 Ill. Reg. 1402, effective January 10, 2023; amended at 47 Ill. Reg. 2093, effective January 24, 2023; amended at 47 Ill. Reg. 5726, effective April 4, 2023; amended at 47 Ill. Reg. 6030, effective April 12, 2023; amended at 47 Ill. Reg. 13669, effective September 11, 2023; emergency amendment at 47 Ill. Reg. 17214, effective November 6, 2023, for a maximum of 150 days; amended at 48 Ill. Reg. 1677, effective January 10, 2024; amended at 48 Ill. Reg. 2243, effective January 29, 2024; amended at 48 Ill. Reg. 4433, effective March 11, 2024; amended at 48 Ill. Reg. 10281, effective June 25, 2024; amended at 48 Ill. Reg. 10846, effective July 11, 2024; emergency amendment at 48 Ill. Reg. 17848, effective November 26, 2024, for a maximum of 150 days; amended at 49 Ill. Reg. 1295, effective January 15, 2025; amended at 49 Ill. Reg. 1861, effective January 31, 2025; amended at 49 Ill. Reg. 3115, effective February 26, 2025.
SUBPART A: TAX IMPOSED
Section 100.2000 Introduction
a) In general. The Illinois Department of Revenue is an agency of the government of the State of Illinois under the immediate direction of the Director of Revenue. The Director has general administrative responsibility for the assessment and collection of the Illinois Income Tax. Offices of the Department are in Springfield (101 West Jefferson, Springfield, Illinois 62708) and there are District Offices (as of May 31, 1999) in Rockford, Des Plaines, Fairview Heights, Marion, Rock Island, Peoria, Springfield, Chicago, Evergreen Park, West Chicago, Park City and Urbana, Illinois; and Culver City, California; Garland, Texas; Cleveland, Ohio; and Paramus, New Jersey.
b) Scope. The procedural rules of the Department set forth in this Part apply to the taxes imposed by the Illinois Income Tax Act. These regulations provide a descriptive statement of the general course and method by which the Department's functions are channeled and determined, insofar as such functions relate generally to the assessment and collection of the Illinois income tax and enforcement of the Illinois Income Tax Act.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.2050 Net Income (IITA Section 202)
a) A taxpayer's net income under the IITA is that portion of the taxpayer's base income (determined under IITA Section 203) for the taxable year that is allocable or apportionable to Illinois under the provisions of Article 3 of the IITA, less the Illinois net loss deduction allowed by IITA Section 207 and the exemptions allowed by IITA Section 204 and Section 100.2055. (IITA Section 202) In computing net income, any Illinois net operating loss deduction shall be subtracted before the subtraction for the exemptions.
b) For tax years ending on or after December 31, 1986, net income for income tax (IITA Section 201(a) and (b)) and for replacement tax (IITA Section 201(c) and (d)) are identical amounts. For prior tax years, the net income amount for replacement tax was usually a greater amount than net income for income tax. For purposes of the net loss deduction that may be subtracted from net income in those prior years, the amount deductible for income tax purposes shall govern, and the amount that may be deducted for replacement tax purposes in a given tax year shall be the same amount as may be deducted for income tax purposes.
(Source: Amended at 41 Ill. Reg. 14217, effective November 7, 2017)
Section 100.2055 Standard Exemption (IITA Section 204)
a) In computing net income, there shall be allowed as an exemption the sum of the basic amounts provided under subsections (b) and (c) plus the additional exemptions allowed under subsection (d), multiplied by a fraction, the numerator of which is the amount of the taxpayer's base income allocable to this State for the taxable year and the denominator of which is the taxpayer's total base income for the taxable year. (IITA Section 204(a))
b) Each taxpayer shall be allowed an exemption in the basic amount equal to:
1) in the case of an individual:
A) for taxable years ending prior to December 31, 1998, $1,000; (IITA Section 204(b))
B) for taxable years ending on or after December 31, 1998 and prior to December 31, 1999, $1,300; (IITA Section 204(b)(1))
C) for taxable years ending on or after December 31, 1999 and prior to December 31, 2000, $1,650; (IITA Section 204(b)(2))
D) for taxable years ending on or after December 31, 2000, and prior to December 31, 2012, $2,000; (IITA Section 204(b)(3))
E) for taxable years ending on or after December 31, 2012 and prior to December 31, 2013 and for taxable years beginning on or after June 1, 2017, $2,050; (IITA Section 204(b)(4))
F) for taxable years ending on or after December 31, 2013 and on or before December 31, 2022, $2,050 plus the cost-of-living adjustment under subsection (e); (IITA Section 204(b)(5))
G) for taxable years ending on or after December 31, 2023 and prior to December 31, 2024, $2,425; (IITA Section 204(b)(6))
H) for taxable years ending on or after December 31, 2024 and on or before December 31, 2028, $2,050 plus the cost-of-living adjustment under subsection (e); and (IITA Section 204(b)(7))
I) for taxable years ending after December 31, 2028, zero.
2) for taxable years ending on or after December 31, 1992, an individual taxpayer whose Illinois base income exceeds the basic amount and who is claimed as a dependent on another person's tax return under the Internal Revenue Code shall not be allowed any basic amount under this subsection (b). (IITA Section 204(b))
3) in the case of a corporation, $1000 for taxable years ending prior to December 31, 2003 and $0 for taxable years ending on or after December 31, 2003. (IITA Section 204(b))
4) in the case of an organization exempt from tax under IITA Section 205(a), $0. (See IITA Section 205.)
5) in all other cases, $1,000. (See IITA Section 204(b).)
c) Each individual taxpayer shall be allowed an additional exemption equal to the basic amount for each exemption in excess of one allowable to that individual taxpayer for the taxable year under IRC section 151. (IITA Section 204(c))
d) Additional Exemptions
1) Each individual taxpayer is allowed:
A) an additional exemption of $1,000 for the taxpayer if he or she has attained the age of 65 before the end of the taxable year; (IITA Section 204(d)(1))
B) an additional exemption of $1,000 for the taxpayer if he or she is blind at the end of the taxable year; (IITA Section 204(d)(2))
C) an additional exemption of $1,000 for the spouse of the taxpayer if the spouse has attained the age of 65 before the end of the taxable year plus an additional exemption of $1,000 for the spouse of the taxpayer if the spouse is blind as of the end of the taxable year and, in either case:
i) a joint return is not made by the taxpayer and his or her spouse;
ii) for the calendar year in which the taxable year of the taxpayer begins, the spouse has no gross income and is not the dependent of another taxpayer. (IITA Section 204(d)(1) and (2))
2) For purposes of this subsection (d), an individual is blind only if his or her central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his or her visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual fields subtends an angle no greater than 20 degrees. A spouse who dies before the end of a taxpayer's taxable year and who is blind at the time of his or her death shall be treated as blind as of the end of the taxable year. (IITA Section 204(d)(2))
e) The cost-of-living adjustment for any calendar year and for taxable years ending prior to the end of the subsequent calendar year is equal to $2,050 times the percentage (if any) by which the Consumer Price Index for the preceding calendar year exceeds the Consumer Price Index for the calendar year 2011. For purposes of this subsection (e):
1) The Consumer Price Index for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of that calendar year.
2) The term "Consumer Price Index" means the last Consumer Price Index for All Urban Consumers published by the United States Department of Labor or any successor agency.
3) If any cost-of-living adjustment is not a multiple of $25, that adjustment shall be rounded to the next lowest multiple of $25. (IITA Section 204(d-5))
f) In the case of a taxable year for a period of less than 12 months, the standard exemption allowed under this Section shall be prorated on the basis of the number of days in that year to 365. (IITA Section 401(b))
g) Notwithstanding any other provision of law, for taxable years beginning on or after January 1, 2017, if the taxpayer's adjusted gross income for the taxable year exceeds $500,000, in the case of spouses filing a joint federal tax return or $250,000, in the case of all other taxpayers, the exemption allowed under this Section is zero. (IITA Section 204(g)) For purposes of this provision, each spouse is a separate taxpayer. This provision applies to partnerships, trusts and estates as well as to individuals. For estates and trusts, adjusted gross income is defined in IRC section 67(e). Because partnerships are not required to compute adjusted gross income, partnerships may use taxable income as defined in IITA Section 203(e)(2)(H) for purposes of this subsection (g).
(Source: Amended at 48 Ill. Reg. 1677, effective January 10, 2024)
Section 100.2060 Compassionate Use of Medical Cannabis Pilot Program Act Surcharge (IITA Section 201(o))
a) In general. For each taxable year beginning or ending during the Compassionate Use of Medical Cannabis Pilot Program, a surcharge is imposed on all taxpayers on income arising from the sale or exchange of capital assets, depreciable business property, real property used in the trade or business, and Section 197 intangibles of an organization registrant under the Compassionate Use of Medical Cannabis Pilot Program Act [410 ILCS 130]. (IITA Section 201(o))
b) Definitions. For purposes of this Section:
"Act" means the Compassionate Use of Medical Cannabis Pilot Program Act [410 ILCS 130].
"Organization Registrant" means a corporation, partnership, trust, limited liability company, or other organization, but not an individual, that holds either a medical cannabis cultivation center registration issued by the Department of Agriculture under Section 85 of the Act or a medical cannabis dispensary registration issued by the Department of Financial and Professional Regulation under Section 115 of the Act.
"Transactions Subject to the Surcharge" means sales and exchanges of capital assets, depreciable business property, real property used in the trade or business, and Section 197 intangibles of an organization registrant. (IITA Section 201(o)) Although a unitary business group filing combined Illinois returns under IITA Section 502(f) is treated as a single taxpayer and its members are jointly and severally liable for any surcharge imposed on the group, the group itself is not an organization registrant and transactions of any member that is not itself an organization registrant are not subject to the surcharge.
c) Imposition of the Surcharge. The surcharge is imposed on any taxpayer who incurs a federal income tax liability on the income realized on a transaction subject to the surcharge, including individuals and other taxpayers who are not themselves the organization registrant that engaged in the transaction. An entity that is exempt from federal income tax and therefore incurs no liability with respect to a transaction otherwise subject to the surcharge will incur no surcharge. For example:
1) A disregarded entity, whose existence separate from that of its owner is disregarded under 26 CFR 301.7701-3, and a grantor trust will incur no federal income tax liability because income of these entities is taxed to the owner or the grantor. The disregarded entity or grantor trust will therefore incur no surcharge. Rather, the surcharge is imposed on the owner of the entity, or the grantor of the trust, who is taxable on the income from a transaction subject to the surcharge.
2) A partnership incurs no federal income tax liability because its income is taxed to its partners, and so will incur no surcharge. In the case of an organization registrant that is a partnership, the surcharge is imposed on each partner who is taxable on the income from a transaction of the partnership that is subject to the surcharge.
3) A Subchapter S corporation will generally incur no federal income tax liability because its income is taxed to its shareholders, and so will generally incur no surcharge. However, a Subchapter S corporation subject to federal income tax on built-in gains or passive income from transactions subject to the surcharge is subject to the surcharge. The surcharge is imposed on a shareholder for income from transactions of the Subchapter S corporation that are subject to the surcharge, including transactions on which the surcharge is also imposed on the Subchapter S corporation.
4) A trust will incur no federal income tax liability for transactions subject to the surcharge if the income from a transaction subject to the surcharge is distributed or deemed distributed to its beneficiaries, who are then taxed on the income. In those situations, the trust will incur no surcharge, but the beneficiary to whom the income is taxable will incur the surcharge.
d) Amount of the Surcharge. The amount of the surcharge is equal to the amount of federal income tax liability of the taxpayer for the taxable year attributable to transactions subject to the surcharge. (IITA Section 201(o))
1) The federal income tax liability attributable to transactions subject to the surcharge means the federal income tax liability of the taxpayer for the taxable year, minus the federal income tax liability of the taxpayer for the taxable year computed as if the transactions subject to the surcharge made in that year had not been made by the organization registrant.
2) If taxpayer is a member of an affiliated group of corporations that files a federal consolidated income tax return, the federal income tax liability attributable to transactions subject to the surcharge means the consolidated federal income tax liability of the affiliated group for the taxable year, minus the federal income tax liability of the affiliated group for the taxable year computed as if the transactions subject to the surcharge for which taxable income or gain was recognized in that taxable year had not been made, multiplied by a fraction equal to the amount of the separate taxable income of that member that is attributable to transactions subject to surcharge divided by the sum of the separate taxable incomes attributable to transactions subject to surcharge of all members of the affiliated group.
e) Transactions Exempt from the Surcharge. Under IITA Section 201(o)(1) and (2), the surcharge does not apply to a transaction if:
1) the transaction occurs in connection with the transfer of the medical cannabis cultivation center registration, medical cannabis dispensary registration, or the property of the organization registrant as a result of any of the following:
A) a bankruptcy, receivership or debt adjustment initiated by or against the organization registrant;
B) the cancellation, revocation or termination of the organization registrant's registration by the Illinois Department of Public Health;
C) a determination by the Illinois Department of Public Health that transfer of the organization registrant's registration is in the best interests of Illinois qualifying patients;
D) the death of an owner of the equity interest in a organization registrant;
E) the acquisition of a controlling interest in the stock or substantially all of the assets of an organization registrant that is a publicly traded company;
F) a transfer by a parent company to a wholly owned subsidiary; or
G) the transfer or sale to or by one person to another person where both persons were initial owners of the registration when the registration was issued; or
2) the cannabis cultivation center registration, medical cannabis dispensary registration, or the controlling interest in a registrant's property is transferred in a transaction to lineal descendants or because of a transaction under 26 USC 351, so long as no gain or loss is recognized.
f) Special Rules and Provisions
1) Because the surcharge is imposed under Article 2 of the IITA, the taxpayer's surcharge liability for a taxable year is included in the tax liability for which estimated payments must be made for that taxable year. (See IITA Section 804(f).)
2) Because the surcharge is imposed under IITA Section 201, refunds of overpayments of the surcharge may be made from funds in the Income Tax Refund Fund. (See IITA Section 901(d)(1).)
(Source: Added at 38 Ill. Reg. 17043, effective July 23, 2014)
SUBPART B: CREDITS
Section 100.2100 Replacement Tax Investment Credit Prior to January 1, 1994 (IITA 201(e))
a) Scope of this Section. Hereinafter, unless specifically provided otherwise the term "investment credit" refers to the credit against the Personal Property Tax Replacement Income Tax provided by IITA Section 201(e).
b) A taxpayer shall be allowed a credit equal to .5% of the basis of qualified property placed in service during the taxable year, provided such property is placed in service on or after July 1, 1984 (IITA Section 201(e)(1)).
c) There shall be allowed an additional credit equal to .5% of the basis of qualified property placed in service during the taxable year provided such property is placed in service on or after July 1, 1986, and the taxpayer's base employment within Illinois has increased by 1% or more over the preceding year as determined by the taxpayer's employment records filed with the Illinois Department of Employment Security. If, in any year, the increase in base employment over the preceding year is less than 1%, the additional credit shall be limited to that percentage times a fraction, the numerator of which is .5% and the denominator of which is 1%, but shall not exceed .5% (IITA Section 201(e)(1)).
1) Base employment. For purposes of calculating the additional investment credit, base employment in Illinois is defined as the average monthly total of individuals employed in Illinois by a taxpayer during the taxable year. To calculate base employment for a particular taxable year, the taxpayer need only total the number of individuals he employed in Illinois during each month of the taxable year as reported to the Illinois Department of Employment Security on Line 1 of Form UC-3/40 or UI-3/40M and divide this total by the number of months in the taxable year.
2) Example of the Additional Investment Credit Computation. During the calendar year 1991, Corporation A reported 500 employees each month on Line 1 of Form UC-3/40. Therefore, Corporation A's base employment in Illinois for 1991 was 500 ((500 x 12)/12 = 500). In 1992, Corporation A reported 500 employees for each of the first six months, and 505 employees for each of the remaining six months of the taxable year. Therefore, Corporation A's base employment for 1992 was 502.5 ((500 x 6) + (505 x 6)/12 = 502.5). Corporation A's percentage of increase in 1992 base employment over 1991 base employment is .5%. This figure is computed by subtracting the 1991 base employment from the 1992 base employment and dividing the remainder by the 1991 base employment ((502.5 - 500)/500 = .005 or .5%). Corporation A will be allowed an additional investment credit for 1992 of .25% (one-half the percentage of increase) times the adjusted basis of qualified property placed in service in Illinois during the taxable year and on or after July 1986.
d) The investment credit is not allowed to the extent it would decrease the taxpayer's replacement tax liability for the taxable year to less than zero, nor may any credit for qualified property be allowed for any year other than the year in which the property was placed in service in Illinois.
1) No carryback or carryforward of unused credit is allowed for tax years ending prior to December 31, 1985.
2) For tax years ending on or after December 31, 1987, and on or before December 31, 1988, the credit shall be allowed for the tax year in which the property is placed in service, or, if the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit years if the taxpayer:
A) makes investments which cause the creation of a minimum of 2,000 full-time equivalent jobs in Illinois,
B) is located in an enterprise zone established pursuant to the Illinois Enterprise Zone Act, and
C) is certified by the Department of Commerce and Community Affairs as complying with the requirements specified in subsections (d)(2)(A) and (B) above, by July 1, 1986 (IITA Section 203(e)(1)).
3) For tax years ending after December 31, 1988, the credit shall be allowed for the tax year in which the property is placed in service, or, if the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a liability. If there is credit from more than one tax year that is available to offset a liability, earlier credit shall be applied first.
e) Qualified property. In order to qualify for the investment credit, property must be tangible; depreciable pursuant to Internal Revenue Code Section 167, except that "3-year property" as defined in IRC Section 168(c)(2)(A) is not eligible; and acquired by purchase as defined in Internal Revenue Code Section 179(d). IRC Section 168(c)(2)(A), as in effect at the time the credit was enacted, defined "3-year property" to mean "section 1245 property: with a present class life of 4 years or less; or used in connection with research and experimentation." In addition to the above requirements, property must be used in Illinois, by the taxpayer, in manufacturing, retailing, coal mining or fluorite mining in order to qualify for the IITA Section 201(e) credit against the replacement tax. Qualified property can be new or used; but cannot have been previously used in Illinois, in such a manner and by such a person as would qualify for the investment credit, or for the Section 201(f) Enterprise Zone Investment Credit, and includes buildings and structural components thereof.
1) Tangible property. Tangible property can consist of personalty or realty and includes, but is not limited to, buildings, component parts of buildings, machinery, equipment, and vehicles. Certain property, though tangible in nature, does not qualify as investment credit property because it is not depreciable.
2) Depreciable. In order to qualify for the investment credit, property must also be depreciable pursuant to IRC Section 167. IRC Section 167 provides that depreciable property is property used in the taxpayer's trade or business or held for the production of income which is subject to wear and tear, exhaustion, or obsolescence.
A) Property which is depreciated under the Modified Accelerated Cost Recovery System (MACRS) as provided by IRC Section 168, is considered depreciable pursuant to IRC Section 167 for purposes of the investment credit. Property assigned to a MACRS class of less than 4 years does not qualify for the investment credit.
B) Examples of tangible property which is not depreciable are land, inventories or stock in trade, natural resources, and coin or currency.
C) The provisions of Treasury Reg. Section 1.167(a)-4 shall govern in determining whether leasehold improvements are depreciable.
D) IRC Section 179 allows taxpayers, under certain circumstances, to expense up to $10,000 of equipment purchased in a single tax year. Based on this provision, if the total cost of the property was $10,000 or less, the taxpayer has the option of expensing the cost all in one year as a depreciation expense. While the property does have a useful life of four or more years, since the election was made to completely expense the cost of the property in one year, the property has no federal depreciable basis and does not have a basis upon which to compute the Illinois investment tax credit. Property not fully expensed under Section 179 would qualify for the credit based on the cost of the depreciable property reduced by the Section 179 deduction.
3) Placed in service. For purposes of the Illinois investment credit, "placed in service" has the same meaning as under IRC Section 46. Property will be considered to have been placed in service in the same taxable year in which it is taken into account in determining the federal investment tax credit. See Treasury Reg. Section 1.46-3(d).
A) Even though property is placed in service in the same taxable year in which it is taken into account in determining the Federal investment tax credit only property placed in service in Illinois after June 30, 1984 and before January 1, 1997 can qualify for consideration in determining the credit against the replacement tax. Qualifying property shall be considered placed in service in Illinois on the date on which the property is placed in a condition or state of readiness and availability for a specifically assigned function. See Treasury Reg. Section 1.46-3(d)(2).
B) Property which is disposed of or which ceases to qualify for any other reason during the same taxable year it was placed in service in Illinois will not be considered in computing the investment credit for the taxable year.
4) Adjusted basis. The basis of qualified property for purposes of the investment credit is the property's basis used to compute the depreciation deduction for federal income tax purposes.
A) In computing the amount of investment credit available for a taxable year, the proper investment credit rate will be applied to the total basis of all qualified property placed in service in Illinois during the taxable year, provided the property continues to qualify on the last day of the taxable year.
B) If the basis of property placed in service during a taxable year is increased or decreased during the same taxable year, the increased or decreased basis will be used to compute the investment credit for the taxable year.
5) Acquired by purchase. In order to qualify for the investment credit, the property must have been acquired by purchase as defined in IRC Section 179(d). For purposes of determining whether property is acquired by purchase as defined by IRC Section 179(d), the family of an individual includes only his spouse, ancestors and lineal descendants. Also, for these purposes only, a controlled group has the same meaning as in IRC Section 1563(a), except stock ownership of only 50% or more is required. See Treasury Reg. Section 1.179-4 under the Internal Revenue Code. Property which the taxpayer constructs, reconstructs or erects itself is generally considered acquired by purchase. IRC Section 179 defines purchase as any acquisition of property except:
A) an acquisition from a person whose relationship to the acquiring person is such that a resulting loss would be disallowed under IRC Section 267 or 707(b);
B) an acquisition by one component member of a controlled group from another component member of the group; an acquisition of property, if the basis of the property in the hands of the person acquiring it is determined in whole or in part by its adjusted basis in the hands of the person from whom the property was acquired; or
C) an acquisition of property, the basis of which is determined under IRC Section 1014(a). IRC Section 1014(a) covers property acquired from a decedent. Property acquired by bequest or demise is not acquired by purchase.
6) Used in Illinois. Mobile property such as vehicles must be used predominantly in Illinois. Removal of such property from Illinois for a temporary and transitory purpose will not disqualify the property so long as it continues to be used predominantly in the Illinois operation of the taxpayer. For purposes of this Section, mobile property is considered to be predominantly used in Illinois if usage in Illinois exceeds usage outside of Illinois. Example. A retailer sometimes uses its trucks based in Illinois to deliver goods both in Illinois and to out-of-State buyers. Such temporary absence of its trucks from Illinois does not disqualify them.
7) Manufacturing, retailing, coal or fluorite mining. In general, in order to qualify for the investment credit against the replacement tax, property must be used in Illinois by the taxpayer exclusively in manufacturing operations, retailing, coal mining, or fluorite mining. See subsection (d) of this regulation for the method of apportioning the cost of a building or structural component thereof when a portion of such building or structural component is used in a non-qualifying operation. A lessor of otherwise qualifying property, which property is used by the lessee in manufacturing, retailing, or coal or fluorite mining operations, would not qualify for the credit because the property is not used "by the taxpayer".
8) Manufacturing operations. "Manufacturing operations" is defined in IITA Section 201(e)(3) as the material staging and production of tangible personal property by procedures commonly regarded as manufacturing, processing, fabrication or assembling which changes some existing material into new shapes, new qualities, or new combinations. It is not necessary that such procedures result in a finished consumer product. Procedures commonly regarded as manufacturing, processing, fabrication or assembling are those so regarded by the general public. The use of otherwise qualifying property in any industrial, commercial or business activity which may be distinguished from manufacturing, processing, fabrication or assembling will not be considered a manufacturing operation for purposes of the Section 201(e) credit. For example, a building constructed to house the administrative services division of a manufacturing company would not be used for manufacturing operations and would not qualify for the Section 201(e) credit. By way of further example, otherwise qualifying property used in the following operations will not qualify for the investment credit because the activities described are generally not considered manufacturing operations:
A) Agricultural activities such as cultivating the soil; raising or harvesting crops; the production of seed or seedlings; and the development of hybrid seeds, plants, or shoots are not manufacturing operations. The raising or breeding of livestock, poultry, fish or any other animals, as well as commercial fishing or beekeeping is not manufacturing.
B) Manufacturing operations do not include mining; quarrying; logging; drilling for oil, gas or water; or any other operations which result in the extraction or procurement of a natural resource. However, the refining or processing of such natural resources into a product of a different form or a product which has different qualities is manufacturing.
C) Persons engaged in the construction, reconstruction, alteration, remodeling, or improvement of real estate are not considered engaged in manufacturing operations.
D) Manufacturing operations do not include research and development of new products or production techniques.
E) Manufacturing operations do not include the use of machinery or equipment in managerial or other non-production, non-operational activities including disposal of waste, scrap or residue, inventory control, production scheduling, work routing, purchasing, receiving, accounting, fiscal management, general communications, plant security, or personnel recruitment, selection or training.
9) Retailing. Retailing is defined as the sale of tangible personal property or services rendered in conjunction with the sale of tangible consumer goods or commodities (IITA Section 203(e)(3)). It is not required that such tangible personal property be finished consumer goods, or that the property be sold to its ultimate consumer. For example, sales of tangible personal property for resale are included in the definition of retailing. Also included in the definition of retailing for these purposes are any services rendered in conjunction with the sale of tangible consumer goods or commodities such as uncrating, cleaning, assembling, delivery or installation, provided such services are in conjunction with a specific sale. For example, a delivery truck would qualify for the Section 201(e) credit as it is used in conjunction with specific sales but a company jet used by the president of the company for general or personal purposes would not. Similarly, equipment used by the payroll division of a company would not be used in a retailing operation or in a service rendered in conjunction with the sale of tangible consumer goods. The following activities are not considered retailing operations:
A) The construction, reconstruction, alteration, remodeling, or improvement of real estate;
B) The operation of a hotel or motel or other institution providing only lodging facilities;
C) Other service professions which do not involve the transfer of tangible personal property other than as an incident to the service performed. For guidance in distinguishing service professions from retailing professions, the Department will rely on rules promulgated under the Service Occupation Tax Act at 86 Ill. Adm. Code 140;
D) Farming operations related to crop and livestock production do not constitute retailing. However, the marketing of such products would constitute a retailing operation and otherwise qualifying property used in marketing farm produce would qualify for the Section 201(h) credit.
10) Mining of coal or fluorite. Mining has the same meaning as in Section 613(c) of the Internal Revenue Code, but shall be limited to the mining of coal and fluorite (IITA Section 203(e)(3)). Mining as defined in IRC Section 613(c) includes not only extraction, but also treatment processes such as cleaning, breaking, sorting, sizing, dust allaying, and loading for shipment.
11) New or used. Qualifying property can be new or used; however, used property does not qualify if it was previously used in Illinois in such a manner and by such a person as would qualify for the Illinois investment credit.
A) Example: Corporation A purchases a used pick-up truck, for use in its manufacturing business in Illinois, from an Illinois resident who used the truck for personal purposes in Illinois. If the truck meets all the other requirements for the investment credit it will not be disqualified, merely, because it was previously used in Illinois for a purpose which did not qualify for the credit. However, had Corporation A purchased the used truck from an Illinois taxpayer in whose hands the truck qualified for the investment credit, the truck would not be qualified property to Corporation A, even though the party from whom the truck was acquired had never received an investment credit for it.
B) Property which would otherwise qualify for the credit will not be disqualified because it was previously used in such a manner and by such a person as would have qualified for the investment credit before the time such credit came into effect. Example: In August of 1983, Corporation A purchased a drill press for use in its manufacturing operation in an Illinois Enterprise Zone from Corporation B. Corporation B originally placed the drill press into service in its Illinois manufacturing operation in January of 1980, before the investment credit came into effect. Even though Corporation B would have qualified for the Illinois investment credit had there been a credit in 1980, this will not disqualify Corporation A from claiming a credit for this property, provided the property is otherwise qualified. However, should Corporation A sell the property to Corporation C for use in its Illinois manufacturing operation, the property would not qualify for the investment credit, even though it would otherwise qualify. Because the property was used in such a manner and by such a person as would have qualified for the investment credit at a time when at least one of the credits was in effect. The fact that the credit was not yet effective when Corporation A placed the property in service will not cause the property to qualify for the credit in the hands of Corporation C because IITA Section 201(e) specifically provides that the property is disqualified if it previously qualified under either IITA Section 201(e) or 201(f).
f) Apportioning cost when a building is used for both qualifying and non-qualifying operations. To qualify for the Section 201(e) credit, property must be used exclusively in one of the qualified operations, such as manufacturing, but the taxpayer need not be exclusively engaged in such operations. Therefore, situations may arise where a building or structure is used to house both qualifying and non-qualifying operations. In such cases, the portion of the cost associated with that part of the building used exclusively in manufacturing operations would qualify for the credit, but not that part of the building, or any part of a separate building, used for non-qualified operations. The cost of the building can be apportioned by multiplying the cost of the building by a fraction, the numerator of which is total square footage devoted to qualifying operations and the denominator of which is total square footage.
g) Recapture. If within 48 months after being placed in service, any property ceases to be qualified property in the hands of the taxpayer or the situs of any qualified property is moved outside of Illinois, or outside of the enterprise zone, for other than a temporary or transitory purpose, then the personal property tax replacement income or the income tax (whichever was reduced by the credit) for the taxable year in which such event occurred will be increased.
1) Any property disposed of by the taxpayer within 48 months of being placed in service ceases to qualify. Also, any property converted to personal use ceases to qualify. Any property used in other than manufacturing, retailing, coal mining or fluorite mining ceases to qualify.
2) A taxpayer disposes of property when he sells the property, exchanges or trades in worn-out property for new property, abandons the property or retires it from use. Property destroyed by casualty, stolen, or transferred as a gift is treated as having been disposed of. Property which is mortgaged or used as security for a loan does not cease to qualify provided the taxpayer continues to use the property in its business within Illinois. Property transferred to a trustee in bankruptcy is considered disposed of in the year the property is transferred to the trustee. A transfer of property by foreclosure is treated as a disposition.
3) The reduction of the basis of qualified property resulting from the redetermination of the purchase price is a disposition of qualified property to the extent of such reduction in the taxable year the reduction takes place. This occurs, for example, when property is purchased and placed in service in one year, and in a later year the taxpayer receives a refund of part of the original purchase price. See Treasury Reg. Section 1.47-2(c) under the Internal Revenue Code.
4) In order to determine the amount by which the personal property tax replacement income tax or the income tax must be increased in the taxable year in which the property ceased to qualify, was moved outside of Illinois or the enterprise zone, the taxpayer must recompute the investment credit for the taxable year in which the property was placed in service by eliminating from his calculations any such property. This recomputed investment credit is subtracted from the amount of credit actually used in the year in which the disqualified property was placed in service. The difference between the recomputed credit and the credit actually used is added to the personal property tax replacement income tax or the income tax for the year in which the property ceased to qualify or was moved outside of Illinois. If the recomputed credit is greater than the credit actually used in the year the property was placed in service, no addition to the current taxable year's personal property tax replacement income tax or income tax is required.
EXAMPLE: In 1985, Corporation A places qualifying property with a basis of $55,000 into service in an enterprise zone located in Illinois and computes a Section 201(g) investment credit for the year of $275 ($55,000.00 x .5%) and a Section 201(h) investment credit of $275 ($55,000 x .5%). Corporation A's 1985 personal property tax replacement income tax is $260 and its income tax liability for the year is $420. After application of the investment credit, Corporation A has no remaining replacement tax liability and its remaining income tax liability is $145. In the following year, Corporation A moved a qualifying asset having a basis in 1985 of $5,000 from Illinois and is therefore required to recapture a portion of the investment credit applied against its replacement tax. In order to determine its additional income tax for 1986, Corporation A must recompute its 1985 investment credit by eliminating the disqualified property ($55,000 - $5,000 x .5% = $250). This recomputed credit is subtracted from the investment credit actually used in 1985 against the income tax ($260 - $250 = $10) and the difference is added to Corporation A's 1986 income tax after application of the 1986 investment credit.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.2101 Replacement Tax Investment Credit (IITA 201(e))
a) A taxpayer shall be allowed a credit against the Personal Property Replacement Income Tax for investment in qualified property ("the investment credit"). The qualified property must be used in Illinois by a taxpayer who is primarily engaged in manufacturing, retailing, coal mining or fluorite mining.
b) A taxpayer shall be allowed a credit equal to .5% of the basis of qualified property placed in service during the taxable year, provided such property is placed in service on or after July 1, 1984 (IITA Section 201(e)(1)). However, the basis of qualified property shall not include costs incurred after December 31, 2013, except for costs incurred pursuant to a binding contract entered into on or before December 31, 2013 (IITA Section 201(e)(8)).
c) There shall be allowed an additional credit equal to .5% of the basis of qualified property placed in service during the taxable year, provided such property is placed in service on or after July 1, 1986, and the taxpayer's base employment in Illinois has increased by at least 1% over the preceding year. If, in any year, the increase in base employment within Illinois over the preceding year is less than 1%, the additional credit shall be limited to that percentage times a fraction, the numerator of which is .5% and denominator of which is 1%, but shall not exceed .5% (IITA Section 201(e)(1)).
1) Base employment. For purposes of calculating the additional investment credit, base employment in Illinois is defined as the average monthly total of individuals employed in Illinois by a taxpayer during the taxable year. To calculate base employment for a particular taxable year, the taxpayer need only total the number of individuals he employed in Illinois during each month of the taxable year as reported to the Illinois Department of Employment Security on Line 1 of Form UC-3/40 or Form UI-3/40M and divide this total by the number of months in the taxable year.
2) Example of the Additional Investment Credit Computation. During the calendar year 1994, Corporation A reported 500 employees each month on Line 1 of Form UC-3/40. Therefore, Corporation A's base employment in Illinois for 1994 was 500 ((500 x 12) divided by 12 = 500). In 1995, Corporation A reported 500 employees for each of the first six months, and 505 employees for each of the remaining six months of the taxable year. Therefore, Corporation A's base employment for 1995 was 502.5 ((500 x 6) + (505 x 6) divided by 12 = 502.5). Corporation A's percentage of increase in 1995 base employment over 1994 base employment is .5%. This figure is computed by subtracting the 1994 base employment from the 1995 base employment and dividing the remainder by the 1994 base employment ((502.5 - 500) divided by 500 = .005 or .5%). Corporation A will be allowed an additional investment credit for 1995 of .25% (one-half of the percentage of increase) times the adjusted basis of qualified property placed in service in Illinois during the taxable year and on or after July 1, 1986.
d) The investment credit is not allowed to the extent it would decrease the taxpayer's replacement tax liability for the taxable year to less than zero, nor may any credit for qualified property be allowed for any year other than the year in which the property was placed in service in Illinois. No carryback or carryforward of unused credit is allowed for tax years ending prior to December 31, 1985. For tax years ending after December 31, 1988, the credit shall be allowed for the tax year in which the property is placed in service, or, if the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a liability. If there is credit from more than one tax year that is available to offset a liability, earlier credit shall be applied first.
e) Qualified property. In order to qualify for the investment credit, property must be tangible; depreciable pursuant to Internal Revenue Code Section 167, except that "3-year property" as defined in IRC section 168(c)(2)(A) is not eligible; and acquired by purchase as defined in Internal Revenue Code section 179(d). IRC section 168(c)(2)(A), as in effect at the time the credit was enacted, defined "3-year property" to mean "section 1245 property: with a present class life of 4 years or less; or used in connection with research and experimentation". In addition to the above requirements, property must be used in Illinois by the taxpayer who is engaged primarily in manufacturing, retailing, coal mining or fluorite mining, in order to qualify for the IITA Section 201(e) credit against the replacement tax. Qualified property can be new or used, but cannot have been previously used in Illinois, in such a manner and by such a person as would qualify for the investment credit, or for the Section 201(f) Enterprise Zone Investment Credit, and includes buildings and structural components of buildings.
1) Tangible property, whether new or used, can consist of personalty or realty and includes, but is not limited to, buildings and structural components of buildings, signs that are real property, machinery, equipment, and vehicles. Certain property, though tangible in nature, does not qualify as investment credit property because it is not depreciable.
2) Depreciable. In order to qualify for the investment credit, property must also be depreciable pursuant to IRC section 167. IRC section 167 provides that depreciable property is property used in the taxpayer's trade or business or held for the production of income which is subject to wear and tear, exhaustion, or obsolescence.
A) Property that is depreciated under the Modified Accelerated Cost Recovery System (MACRS), as provided by IRC section 168, is considered depreciable pursuant to IRC section 167 for purposes of the investment credit. Property assigned to a MACRS class of less than 4 years does not qualify for the investment credit.
B) Examples of tangible property that is not depreciable are land, inventories or stock in trade, natural resources, and coin or currency.
C) The provisions of Treasury Reg. section 1.167(a)-4 shall govern in determining whether leasehold improvements are depreciable.
D) IRC section 179 allows taxpayers, under certain circumstances, to expense up to $25,000 of equipment purchased in a single tax year. Based on this provision, if the total cost of the property was $25,000 or less, the taxpayer has the option of expensing the cost all in one year as a depreciation expense. While the property does have a useful life of four or more years, since the election was made to completely expense the cost of the property in one year, the property has no federal depreciable basis and does not have a basis upon which to compute the Illinois investment tax credit. Property not fully expensed under section 179 would qualify for the credit based on the cost of the depreciable property reduced by the section 179 deduction.
3) Placed in service. For purposes of the Illinois investment credit, "placed in service" has the same meaning as under IRC section 46. Property will be considered to have been placed in service in the same taxable year in which it is taken into account in determining the federal investment tax credit. See Treasury Reg. section 1.46-3(d).
A) Even though property is placed in service in the same taxable year in which it is taken into account in determining the Federal investment tax credit, only property placed in service in Illinois after June 30, 1984 and before January 1, 1997 can qualify for consideration in determining the credit against the replacement tax. Qualifying property shall be considered placed in service in Illinois on the date on which the property is placed in a condition or state of readiness and available for a specifically assigned function. See Treasury Reg. section 1.46-3(d)(2).
B) Property that is disposed of, moved out of Illinois or which ceases to qualify for any other reason during the same taxable year it was placed in service in Illinois will not be considered in computing the investment credit for the taxable year.
4) Adjusted basis. The basis of qualified property for purposes of the investment credit is the property's basis used to compute the depreciation deduction for federal income tax purposes. Accordingly, the basis for the credit is determined without regard to any bonus depreciation under IRC section 168(k), but after taking into account any amount treated as an expense not chargeable to capital under IRC section 179.
A) In computing the amount of investment credit available for a taxable year, the proper investment credit rate will be applied to the total basis of all qualified property placed in service in Illinois during the taxable year, provided the property continues to qualify on the last day of the taxable year.
B) If the basis of property placed in service during a taxable year is increased or decreased during the same taxable year, the increased or decreased basis will be used to compute the investment credit for the taxable year.
5) Acquired by purchase. In order to qualify for the investment credit, the property must have been acquired by purchase as defined in IRC section 179(d). For purposes of determining whether property is acquired by purchase as defined by IRC section 179(d), the family of an individual includes only his spouse, ancestors and lineal descendants. Also, for these purposes only, a controlled group has the same meaning as in IRC section 1563(a), except stock ownership of only 50% or more is required. See Treasury Reg. section 1.179-4 under the Internal Revenue Code. Property which the taxpayer constructs, reconstructs or erects itself is generally considered acquired by purchase. IRC section 179 defines purchase as any acquisition of property except:
A) an acquisition from a person whose relationship to the acquiring person is such that a resulting loss would be disallowed under IRC section 267 or 707(b);
B) an acquisition by one component member of a controlled group from another component member of the group; an acquisition of property, if the basis of the property in the hands of the person acquiring it is determined in whole or in part by its adjusted basis in the hands of the person from whom the property was acquired; or
C) an acquisition of property, the basis of which is determined under IRC section 1014(a). IRC section 1014(a) covers property acquired from a decedent. Property acquired by bequest or demise is not acquired by purchase.
6) Used in Illinois. Mobile property such as vehicles must be used predominantly in Illinois. Removal of such property from Illinois for a temporary and transitory purpose will not disqualify the property so long as it continues to be used predominantly in the Illinois operation of the taxpayer. For purposes of this Section, mobile property is considered to be predominantly used in Illinois if usage in Illinois exceeds usage outside of Illinois. Example: A retailer sometimes uses its trucks based in Illinois to deliver goods both in Illinois and to out-of-State buyers. Temporary absence of its trucks from Illinois does not disqualify them.
7) A lessor of otherwise qualifying property that is used by the lessee in manufacturing, retailing, or coal or fluorite mining operations, would not qualify for the credit because the property is not used "by the taxpayer".
8) "Manufacturing" is defined in IITA Section 201(e)(3) as the material staging and production of tangible personal property by procedures commonly regarded as manufacturing, processing, fabrication or assembling which changes some existing material into new shapes, new qualities, or new combinations. It is not necessary that these procedures result in a finished consumer product. Procedures commonly regarded as manufacturing, processing, fabrication or assembling are those so regarded by the general public. If a taxpayer primarily engages in the following operations, the taxpayer will not qualify for the investment credit on the basis of engaging primarily in manufacturing. The activities described are generally not considered manufacturing operations:
A) Agricultural activities such as cultivating the soil, raising or harvesting crops, the production of seed or seedlings, and the development of hybrid seeds, plants or shoots are not manufacturing operations. The raising or breeding of livestock, poultry, fish or any other animals, as well as commercial fishing or beekeeping, is not manufacturing.
B) Manufacturing operations do not include mining, quarrying, logging, drilling for oil, gas or water, or any other operations that result in the extraction or procurement of a natural resource. However, the refining or processing of natural resources into a product of a different form or a product that has different qualities is manufacturing.
C) Persons engaged in the construction, reconstruction, alteration, remodeling or improvement of real estate are not considered engaged in manufacturing operations.
D) Manufacturing operations do not include research and development of new products or production techniques.
E) Manufacturing operations do not include the use of machinery or equipment in managerial or other non-production, non-operational activities including disposal of waste, scrap or residue, inventory control, production scheduling, work routing, purchasing, receiving, accounting, fiscal management, general communications, plant security, or personnel recruitment, selection or training.
9) Retailing. Retailing is defined as the sale of tangible personal property for use or consumption and not for resale, or services rendered in conjunction with the sale of tangible personal property for use or consumption and not for resale. For purposes of this Section, the term "tangible personal property" has the same meaning as when used in the Retailers' Occupation Tax Act, and does not include the generation, transmission, or distribution of electricity (IITA Section 201(e)(3)). It is required that the tangible personal property be finished consumer goods, and the property be sold to its ultimate consumer. For example, sales of tangible personal property for resale are not included in the definition of retailing. The following activities are not considered retailing operations:
A) The construction, reconstruction, alteration, remodeling or improvement of real estate;
B) The operation of a hotel or motel or other institution providing only lodging facilities;
C) Other service professions that do not involve the transfer of tangible personal property other than as an incident to the service performed. For guidance in distinguishing service professions from retailing professions, the Department will rely on rules promulgated under the Service Occupation Tax Act at 86 Ill. Adm. Code 140;
D) Farming operations related to crop and livestock production do not constitute retailing. However, the marketing of these products would constitute a retailing operation.
10) Mining of coal or fluorite. Mining has the same meaning as in section 613(c) of the Internal Revenue Code, but shall be limited to the mining of coal and fluorite (IITA Section 201(e)(3)). Mining as defined in IRC Section 613(c) includes not only extraction, but also treatment processes such as cleaning, breaking, sorting, sizing, dust allaying, and loading for shipment.
11) New or used. Qualifying property can be new or used; however, used property does not qualify if it was previously used in Illinois in such a manner and by such a person as would qualify for the Illinois investment credit.
A) Example: Corporation A purchases a used pick-up truck, for use in its manufacturing business in Illinois, from an Illinois resident who used the truck for personal purposes in Illinois. If the truck meets all the other requirements for the investment credit, it will not be disqualified merely because it was previously used in Illinois for a purpose that did not qualify for the credit. However, had Corporation A purchased the used truck from an Illinois taxpayer in whose hands the truck qualified for the investment credit, the truck would not be qualified property to Corporation A, even though the party from whom the truck was acquired had never received an investment credit for it.
B) Property that would otherwise qualify for the credit will not be disqualified because it was previously used in such a manner and by such a person as would have qualified for the investment credit before the credit came into effect. Example: In August of 1983, Corporation A purchased a drill press for use in its manufacturing operation in an Illinois Enterprise Zone from Corporation B. Corporation B originally placed the drill press into service in its Illinois manufacturing operation in January of 1980, before IITA Section 201(e) came into effect. Even though Corporation B would have qualified for the Illinois investment credit had there been a credit in 1980, this will not disqualify Corporation A from claiming a credit for this property, provided the property is otherwise qualified. However, should Corporation A sell the property to Corporation C for use in its Illinois manufacturing operation, the property would not qualify for the credit, even though it would otherwise qualify, because the property was used in such a manner and by such a person as would have qualified for the investment credit under Section 201(e) or 201(f) at a time when at least one of the credits was in effect. The fact that the Section 201(e) credit was not yet effective when Corporation A placed the property in service will not cause the property to qualify for the Section 201(e) credit in the hands of Corporation C because IITA Section 201(e) specifically provides that the property is disqualified if it previously qualified under either IITA Section 201(e) or 201(f).
f) To qualify for the credit, property must be used in Illinois by a taxpayer who is primarily engaged in manufacturing, or in mining coal or fluorite, or in retailing. It is not required that the property be used exclusively in manufacturing, mining of coal or fluorite or in retailing. So long as the taxpayer is primarily, more than 50%, engaged in one of these operations, all qualified property is eligible for the credit, even if the property is not actually used in an exempt manufacturing, coal or fluorite mining or retailing process. The taxpayer must engage primarily in one or more of the operations. In other words, a taxpayer that is engaged 30% of the time in retailing and 40% of the time in manufacturing will qualify for the credit, because the taxpayer is engaged primarily in one or more of the operations. In determining whether a taxpayer is primarily engaged in an activity the Department will look to the gross receipts of the taxpayer received in the ordinary course of business by that taxpayer. For example, if more than 50% of the taxpayer's gross receipts are from manufacturing, the taxpayer is primarily engaged in manufacturing, or if more than 50% of the gross receipts are from retailing, the taxpayer is primarily engaged in retailing. The taxpayer (and the Department) will look to the gross receipts received by the taxpayer in the ordinary course of business. Therefore, if, for example, the taxpayer suffers a casualty loss and that is compensated for by an insurance payment, the amount of money so received will not be deemed gross receipts received in the ordinary course of business, and disqualify the taxpayer from eligibility and perhaps result in the recapture of credits granted in prior years.
EXAMPLE 1: Corporation A manufactures CD ROM Units for personal computers, which are sold to others for resale. Corporation A also engages in the retail sale of canned computer software. Finally, Corporation A develops and sells custom computer software to various clients. Corporation A receives 20% of its gross receipts from the manufacturing of CD ROM Units, 40% of its gross receipts from retail sales of canned software, and 40% of its gross receipts from its custom computer software development and sales operations. Corporation A is eligible for the credit. Corporation A is engaged primarily in manufacturing and retailing, because the total of its manufacturing and retailing operations is 80% of its gross receipts. Therefore, the Corporation is eligible for the credit.
EXAMPLE 2: Corporation B operates a hotel. 80% of the gross receipts of Corporation B are from the renting of rooms, 5% of the gross receipts are from the operation of a gift shop in the hotel and the remaining 15% of the gross receipts are from the operation of a restaurant and lounge in the hotel. The renting of rooms is not retailing. Therefore, Corporation B is ineligible for the credit because it is not engaged primarily in retailing, even though it does, through the operation of the gift shop, restaurant and lounge, engage in some retailing activities.
g) Recapture. If, within 48 months after being placed in service, any property ceases to be qualified property in the hands of the taxpayer or the situs of any qualified property is moved outside of Illinois, or outside of the enterprise zone, for other than a temporary or transitory purpose, then the personal property tax replacement income for the taxable year in which such event occurred will be increased (IITA Section 201(e)(7)). If, during the 48 month period, the taxpayer ceased to be primarily engaged in retailing, manufacturing, coal or fluorite mining, the property ceases to be qualified property. Therefore, previously granted credits must be recaptured.
1) Any property disposed of by the taxpayer within 48 months after being placed in service ceases to qualify.
2) A taxpayer disposes of property when he sells the property, exchanges or trades in worn-out property for new property, abandons the property or retires it from use. Property destroyed by casualty, stolen, or transferred as a gift is treated as having been disposed of. Property which is mortgaged or used as security for a loan does not cease to qualify provided the taxpayer continues to use the property within Illinois. Property transferred to a trustee in bankruptcy is considered disposed of in the year the property is transferred to the trustee. A transfer of property by foreclosure is treated as a disposition.
3) The reduction of the basis of qualified property resulting from the redetermination of the purchase price is a disposition of qualified property to the extent of such reduction in the taxable year the reduction takes place. This occurs, for example, when property is purchased and placed in service in one year, and in a later year the taxpayer receives a refund of part of the original purchase price. See 26 CFR 1.47-2(c) (2010).
4) In order to determine the amount by which the personal property tax replacement income tax must be increased in the taxable year in which the property ceased to qualify or was moved outside of Illinois or the enterprise zone, the taxpayer must recompute the investment credit for the taxable year in which the property was placed in service by eliminating from his calculations any such property. This recomputed investment credit is subtracted from the amount of credit actually used in the year in which the disqualified property was placed in service. The difference between the recomputed credit and the credit actually used is added to the personal property tax replacement income tax or the income tax for the year in which the property ceased to qualify or was moved outside of Illinois. If the recomputed credit is greater than the credit actually used in the year the property was placed in service, no addition to the current taxable year's personal property tax replacement income tax or income tax is required.
EXAMPLE: In 1985, Corporation A places qualifying property with a basis of $55,000 into service in an enterprise zone located in Illinois and computes a Section 201(e) investment credit for the year of $275 ($55,000 x .5%) and a Section 201(h) investment credit of $275 ($55,000 x .5%). Corporation A's 1985 personal property tax replacement income tax is $260 and its income tax liability for the year is $420. After application of the credit, Corporation A has no remaining replacement tax liability and its remaining income tax liability is $145. In the following year Corporation A moved a qualifying asset having a basis in 1985 of $5,000 from Illinois and is therefore required to recapture a portion of the investment credit applied against its replacement tax. In order to determine its additional income tax for 1986, Corporation A must recompute its 1985 investment credit by eliminating the disqualified property ($55,000 - $5,000 x .5% = $250). This recomputed credit is subtracted from the investment credit actually used in 1985 against the income tax ($260 - $250 = $10) and the difference is added to Corporation A's 1986 income tax after application of the 1986 investment credit.
h) Partnerships and Subchapter S Corporations.
1) For each taxable year ending before December 31, 2000, a partnership may elect to pass through to its partners the credits to which the partnership is entitled under IITA Section 201(e) for the taxable year. The election to pass through the credits shall be irrevocable. [IITA Section 201(e)(9)]
A) This subsection (h)(1) applies only to partnerships. Subchapter S corporations may not pass credits through to their stockholders under this provision.
B) Subject to the statute of limitations, the election under this subsection (h)(1) may be made retroactively. See Borden Chemicals and Plastics, L.P. v. Zehnder, 312 IllApp3d 35 (1st Dist. 2000). A retroactive election shall be made by filing an amended return by the partnership making the election for the tax year of the election and for any subsequent year affected by the election, and including a schedule of the credits to be passed through. An example of a subsequent year affected by an election would be a year in which a credit carried forward from a year prior to the election was used by the partnership or was passed through to the partners by an election for that subsequent year.
C) All credits to which the partnership is entitled under IITA Section 201(e) in the year an election is made are passed through to the partners, including credits passed through to the partnership from another partnership, credits carried forward from prior years and the share attributable to partners who are not subject to Personal Property Tax Replacement Income Tax and exempt organizations not subject to tax under IITA Section 205(a).
D) Any credit passed through to a partner must be used within the 5-year carryforward period allowed to the partnership. Thus, a credit earned by a partnership in the year the election is made may be used by the partner to whom it is passed in that partner's taxable year in which the taxable year of the partnership for which the election was made ends, and any unused amount may be carried forward to the 5 succeeding taxable years of the partner. If a partnership elects to pass through to its partners a credit earned in its immediately preceding taxable year, a partner may use that credit in its taxable year in which the taxable year of the partnership for which the election was made ends, and any unused amount may be carried forward to the 4 succeeding taxable years of the partner.
2) For taxable years ending on or after December 31, 2000, a partner that qualifies its partnership for a subtraction under Section 203(d)(2)(I) of IITA or a shareholder that qualifies a subchapter S corporation for a subtraction under Section 203(b)(2)(S) shall be allowed a credit under IITA Section 201(e) equal to its share of the credit earned under IITA Section 201(e) during the taxable year by the partnership or subchapter S corporation, determined in accordance with the determination of income and distributive share of income under sections 702 and 704 and subchapter S of the Internal Revenue Code. [35 ILCS 5/201(e)(9)] Under this subsection (h)(2):
A) The provisions of this subsection (h)(2) apply to both partnerships and subchapter S corporations.
B) Credits are passed through only in the year earned. Any amount carried forward from a prior year cannot flow through to the partners or shareholders of the entity.
C) The share of credits allocable to a partner or shareholder who is not subject to Personal Property Tax Replacement Income Tax and who is not exempt from taxation under IRC section 501(a) do not pass through to that partner or shareholder. Those amounts may be used by the partnership or subchapter S corporation against the Personal Property Tax Replacement Income Tax liability it incurs on the share of its income attributable to such partners or shareholders.
D) Any credit passed through to a partner or shareholder under this subsection (h)(2) may be used in the taxable year of the partner or shareholder in which the taxable year of the entity that passes the credit through ends, and may be carried forward to the 5 succeeding taxable years of the partner or shareholder until used.
E) Any credit passed through to a partnership or subchapter S corporation under this subsection (h)(2) shall pass through to its partners or shareholders in the same manner as a credit earned by the partnership or subchapter S corporation.
(Source: Amended at 35 Ill. Reg. 15092, effective August 24, 2011)
Section 100.2110 Economic Development for a Growing Economy Credit (IITA Section 211)
a) For tax years beginning on or after January 1, 1999, a taxpayer who has entered into an Agreement (including for tax years beginning on or after January 1, 2021, a New Construction EDGE Agreement) with the Department of Commerce and Economic Opportunity (DCEO) under the Economic Development for a Growing Economy Tax Credit Act [35 ILCS 10] (EDGETCA), shall be allowed a credit against the tax imposed by the Illinois Income Tax Act (IITA) Section 201(a) and (b) in an amount to be determined in the Agreement. (IITA Section 211)
b) The credit shall be computed as follows:
1) The credit allowed shall not exceed the Incremental Income Tax with respect to the project. Additionally, the New Construction EDGE Credit shall not exceed the New Construction EDGE Incremental Income Tax. (IITA Section 211(1)) EDGETCA Section 5-5 defines Incremental Income Tax as the total amount withheld during the taxable year from the compensation of new employees, and if applicable, retained employees under Article 7 of the IITA arising from employment at a project that is the subject of an Agreement. EDGETCA Section 5-5 also defines New Construction EDGE Incremental Income Tax as the total amount withheld during the taxable year from the compensation of New Construction EDGE Employees. [35 ILCS 10/5-5]
2) The amount of the credit allowed during the tax year plus the sum of all amounts allowed in prior years shall not exceed 100% of the aggregate amount expended by the taxpayer during all prior tax years on approved costs defined by Agreement. (IITA Section 211(2))
3) Pursuant to IITA Section 211(3), the amount of credit shall be determined on an annual basis; provided, however, that:
A) except in the case of a taxpayer described in subsection (b)(3)(B), the credit against any State income tax liability may not be applied in more than 10 taxable years;
B) in the case of a taxpayer certified by DCEO under the Corporate Headquarters Relocation Act, the credit may not extend beyond 15 taxable years; provided, that the taxpayer may not claim for any tax year during that period more than 60% of the credit otherwise allowed for that tax year under the EDGETCA (see EDGETCA Section 5-45); and
C) a credit earned within the applicable period specified in subsection (b)(3)(A) or (B) may be carried forward beyond that period pursuant to IITA Section 211(4).
4) The credit may not exceed the amount of taxes imposed pursuant to IITA Section 201(a) and (b). (IITA Section 211(4))
5) In the case of an election under Section 100.7380(a), no credit shall be allowed under IITA Section 211 or this Section for the taxable year of the election.
c) Any credit in excess of the tax liability for the taxable year may be carried forward to offset the income tax liability of the taxpayer for the next five years or until it has been fully utilized, whichever occurs first. The credit shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one tax year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 211(4)) In the case of an election under Section 100.7380(a), no credit to which the election applies may be carried forward under IITA Section 211(4) and this Section.
d) No credit shall be allowed with respect to any Agreement for any taxable year ending after the Noncompliance Date. Upon receiving notification by the Department of Commerce and Economic Opportunity of the noncompliance of a taxpayer with an Agreement, the Department shall notify the taxpayer that no credit is allowed with respect to that Agreement for any taxable year ending after the Noncompliance Date, as stated in such notification. If any credit has been allowed with respect to an Agreement for a taxable year ending after the Noncompliance Date for that Agreement, any refund paid to the taxpayer for that taxable year shall, to the extent of that credit allowed, be an erroneous refund within the meaning of IITA Section 912. (IITA Section 211(5)) If, during any taxable year, a taxpayer ceases operations at a project location that is the subject of that Agreement with the intent to terminate operations in the State, the tax imposed under subsections (a) and (b) of IITA Section 201 for such taxable year shall be increased by the amount of any credit allowed under the Agreement for that project location prior to the date the taxpayer ceases operations. (IITA Section 211(5))
e) In the case of a credit earned by a partnership or Subchapter S corporation, the credit passes through to the owners for use against their regular income tax liabilities in the same proportion as other items of the taxpayer are passed through to the taxpayer's owners for federal income tax purposes. (See IITA Section 211.)
1) The credit earned by a partnership or a Subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or Subchapter S corporation in which the tax credit certificate is issued by DCEO under Section 5-55 of the EDGETCA.
2) The credit shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or Subchapter S corporation ends and may be carried forward to the 5 succeeding taxable years of the owner until used.
f) To claim the credit, a taxpayer shall attach to its Illinois income tax return:
1) a copy of the tax credit certificate and annual certification (if any) issued by DCEO; and
2) in the case of a partner in a partnership or shareholder of a Subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or Subchapter S corporation stating:
A) the portion of the total credit shown on the tax credit certificate that is allowed to that partner or shareholder and
B) the taxable year of the partnership or Subchapter S corporation in which the tax credit certificate was issued.
g) For purposes of this credit, the terms "Agreement", "Incremental Income Tax", "new employees", "New Construction EDGE Incremental Income Tax", "New Construction EDGE Employee", "Noncompliance Date", and "retained employees" shall have the same meaning as when used in EDGETCA Section 5-5. (IITA Section 211(6))
h) This credit is exempt from the sunset provisions of IITA Section 250. (IITA Section 211)
(Source: Former Section 100.2110 renumbered to Section 100.2131; New Section 100.2110 renumbered from Section 100.2198 and amended at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2111 REV Tax Credit (IITA Section 236)
a) For tax years beginning on or after January 1, 2025, a taxpayer who has entered into an Agreement with the Department of Commerce and Economic Opportunity (DCEO) under the Reimagining Energy and Vehicles in Illinois Act [20 ILCS 686] (REV Illinois Act) is entitled to a credit against the taxes imposed under the Illinois Income Tax Act (IITA) Section 201 (a) and (b) in an amount to be determined in the Agreement. (IITA Section 236(a))
b) The credit may be in the form of a REV Illinois Credit, a REV Construction Jobs Credit, or both. (IITA Section 236(b)(1))
c) Instead of claiming the credit against the taxes imposed under IITA Section 201(a) and (b), with respect to the portion of a REV Illinois Credit that is calculated based on the incremental income tax attributable to new employees and retained employees, the taxpayer may elect, in accordance with the REV Illinois Act, to claim the credit, on or after January 1, 2025, against its obligation to pay over withholding under IITA Section 704A. (IITA Section 236(b)(6)) (See Section 100.7381.)
d) The credit shall be computed as established in this subsection.
1) The credit allowed shall not exceed the percentage of incremental income tax and percentage of training costs permitted in the REV Illinois Act and in the Agreement with respect to the project. (IITA Section 236(b)(1))
2) The amount of the credit allowed during a tax year plus the sum of all amounts allowed in prior tax years shall not exceed the maximum amount of credit established in the Agreement. (IITA Section 236(b)(2))
3) The amount of the credit shall be determined on an annual basis.
4) The credit may not be applied against any State income tax liability in more than 15 taxable years, except as applied in a carryover year as provided in subsection (f). (IITA Section 236(b)(3))
5) The credit may not exceed the amount of taxes imposed pursuant to IITA Section 201(a) and (b). (IITA Section 236(b)(4))
6) In the case of an election under Section 100.7381, no credit shall be allowed under IITA Section 236 or this Section for the taxable year of the election against the taxes imposed under IITA Section 201(a) and (b). (IITA Section 236(b)(6))
e) The credit allowed under this Section shall be taken in the taxable year that includes the date of the tax credit certificate issued by DCEO under Section 30 of the REV Illinois Act, except that credits awarded by DCEO prior to January 1, 2025, shall be taken in the first taxable year beginning on or after January 1, 2025.
f) Any credit that is unused in the year the credit is computed may be carried forward to and applied to the tax liability of the 5 taxable years following the excess credit year, or until it has been fully utilized, whichever occurs first. The credit shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one tax year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 236(b)(4)) In the case of an election under Section 100.7381, no credit to which the election applies may be carried forward under IITA Section 236(b)(4) and this Section.
g) No credit shall be allowed with respect to any Agreement for any taxable year ending after the noncompliance date.
1) Upon receiving notification by DCEO of the noncompliance of a taxpayer with an Agreement, the Department shall notify the taxpayer that no credit is allowed with respect to that Agreement for any taxable year ending after the Noncompliance Date, as stated in such notification.
2) If any credit has been allowed with respect to an Agreement for a taxable year ending after the noncompliance date for that Agreement, any refund paid to the taxpayer for that taxable year shall, to the extent of that credit allowed, be an erroneous refund within the meaning of IITA Section 912. (IITA Section 236(b)(5))
h) If, during any taxable year, a taxpayer ceases operations at a project location that is the subject of that Agreement with the intent to terminate operations in the State, the tax imposed under subsections (a) and (b) of IITA Section 201 for such taxable year shall be increased by the amount of any credit allowed under the Agreement for that project location prior to the date the taxpayer ceases operations. (IITA Section 236(b)(5))
i) Partnerships and Subchapter S Corporations
1) If the taxpayer is a partnership or a Subchapter S corporation, the credit is allowed to pass through to the partners or shareholders in accordance with the determination of income and distributive share of income under Sections 702 and 704 and subchapter S of the Internal Revenue Code, or as otherwise agreed by the partners or shareholders, provided that such agreement shall be executed in writing prior to the due date of the return for the taxable year and meet such other requirements as the Department may establish by rule. Partnership has the meaning prescribed in IITA Section 1501(a)(16). (IITA Section 251)
2) The credit earned by a partnership or a subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the tax credit certificate is issued by DCEO under Section 30 of the REV Illinois Act.
3) The credit shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends and may be carried forward to the 5 succeeding taxable years of the owner until used.
4) Any credit passed through to a partnership or subchapter S corporation under this subsection shall pass through to its partners or shareholders in the same manner as a credit earned by the partnership or subchapter S corporation.
j) To claim the credit, a taxpayer shall attach to its Illinois income tax return:
1) a copy of the tax credit certificate and annual certification (if any) issued by DCEO; and
2) in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating:
A) the portion of the total credit shown on the tax credit certificate that is allowed to that partner or shareholder; and
B) the taxable year of the partnership or subchapter S corporation in which the tax credit certificate was issued.
k) For purposes of this Section, the terms "Agreement," "incremental income tax," "new employee," "noncompliance date," "retained employee," "REV Construction Jobs Credit," "REV Illinois Credit," and "training costs" shall have the same meaning as when used in the REV Illinois Act.
l) This credit is exempt from the sunset provisions of IITA Section 250. (IITA Section 236(a))
(Source: Added at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2112 MICRO Tax Credit (IITA Section 238)
a) For tax years beginning on or after January 1, 2025, a taxpayer who has entered into an Agreement with the Department of Commerce and Economic Opportunity (DCEO) under the Manufacturing Illinois Chips for Real Opportunity (MICRO) Act [35 ILCS 45] (MICRO Act) is entitled to a credit against the taxes imposed under the Illinois Income Tax Act (IITA) Section 201 (a) and (b) in an amount to be determined in the Agreement. (IITA Section 238(a))
b) The credit may be in the form of a MICRO Illinois Credit, a MICRO Construction Jobs Credit, or both. (IITA Section 238(b)(1))
d) The credit shall be computed as established in this subsection.
1) The credit allowed shall not exceed the percentage of incremental income tax and percentage of training costs permitted in the MICRO Act and in the Agreement with respect to the project. (IITA Section 238(b)(1))
2) The amount of the credit allowed during a tax year plus the sum of all amounts allowed in prior tax years shall not exceed the maximum amount of credit established in the Agreement. (IITA Section 238(b)(2))
3) The amount of the credit shall be determined on an annual basis.
4) The credit may not be applied against any State income tax liability in more than 15 taxable years, except as applied in a carryover year as provided in subsection (f). (IITA Section 238(b)(3))
5) The credit may not exceed the amount of taxes imposed pursuant to IITA Section 201(a) and (b). (IITA Section 238(b)(4))
6) In the case of an election under Section 100.7382, no credit shall be allowed under IITA Section 238 or this Section for the taxable year of the election against the taxes imposed under IITA Section 201(a) and (b). (IITA Section 238(b)(6))
e) The credit allowed under this Section shall be taken in the taxable year that includes the date of the tax credit certificate issued by DCEO under Section 110-30 of the MICRO Act, except that credits awarded by DCEO prior to January 1, 2025, shall be taken in the first taxable year beginning on or after January 1, 2025.
f) Any credit that is unused in the year the credit is computed may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year, or until it has been fully utilized, whichever occurs first. The credit shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one tax year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 238(b)(4)) In the case of an election under Section 100.7382, no credit to which the election applies may be carried forward under IITA Section 238(b)(4) and this Section.
g) No credit shall be allowed with respect to any Agreement for any taxable year ending after the noncompliance date.
1) Upon receiving notification by DCEO of the noncompliance of a taxpayer with an Agreement, the Department shall notify the taxpayer that no credit is allowed with respect to that Agreement for any taxable year ending after the Noncompliance Date, as stated in such notification.
2) If any credit has been allowed with respect to an Agreement for a taxable year ending after the noncompliance date for that Agreement, any refund paid to the taxpayer for that taxable year shall, to the extent of that credit allowed, be an erroneous refund within the meaning of IITA Section 912. (IITA Section 238(b)(5))
h) If, during any taxable year, a taxpayer ceases operations at a project location that is the subject of that Agreement with the intent to terminate operations in the State, the tax imposed under subsections (a) and (b) of IITA Section 201 for such taxable year shall be increased by the amount of any credit allowed under the Agreement for that project location prior to the date the taxpayer ceases operations. (IITA Section 238(b)(5))
i) Partnerships and Subchapter S Corporations
1) If the taxpayer is a partnership or a Subchapter S corporation, the credit is allowed to pass through to the partners or shareholders in accordance with the determination of income and distributive share of income under Sections 702 and 704 and subchapter S of the Internal Revenue Code, or as otherwise agreed by the partners or shareholders, provided that such agreement shall be executed in writing prior to the due date of the return for the taxable year and meet such other requirements as the Department may establish by rule. Partnership has the meaning prescribed in IITA Section 1501(a)(16). (IITA Section 251)
2) The credit earned by a partnership or a subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the tax credit certificate is issued by DCEO under Section 110-30 of the MICRO Act.
3) The credit shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends and may be carried forward to the 5 succeeding taxable years of the owner until used.
4) Any credit passed through to a partnership or subchapter S corporation under this subsection shall pass through to its partners or shareholders in the same manner as a credit earned by the partnership or subchapter S corporation.
j) To claim the credit, a taxpayer shall attach to its Illinois income tax return:
1) a copy of the tax credit certificate and annual certification (if any) issued by DCEO; and
2) in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating:
A) the portion of the total credit shown on the tax credit certificate that is allowed to that partner or shareholder; and
B) the taxable year of the partnership or subchapter S corporation in which the tax credit certificate was issued.
k) For purposes of this Section, the terms "Agreement," "incremental income tax," "new employee," "noncompliance date," "MICRO Construction Jobs Credit," "MICRO Illinois Credit," "retained employee," and "training costs" shall have the same meaning as when used in the MICRO Act.
l) This credit is exempt from the sunset provisions of IITA Section 250. (IITA Section 238(a))
(Source: Added at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2120 Jobs Tax Credit; Enterprise Zone, Foreign Trade Zone or Sub-Zone and River Edge Redevelopment Zone (IITA Section 201(g))
a) A taxpayer conducting a trade or business in an enterprise zone, or a High Impact Business designated by the Department of Commerce and Economic Opportunity conducting a trade or business in a federally designated foreign trade zone or sub-zone, or in a river edge redevelopment zone established pursuant to the River Edge Redevelopment Zone Act [65 ILCS 115] shall be allowed a credit against the tax imposed by Section 201(a) and (b) of the Illinois Income Tax Act in the amount of $500 per eligible employee hired to work in the zone during the taxable year.
1) In general, the credit is available for eligible employees hired on or after January 1, 1986, or for taxable years ending prior to July 25, 2013, the effective date of PA 98-109, which repealed IITA Section 201(g).
2) The credit is not allowed for an eligible employee hired to work in an enterprise zone in a taxable year ending on or after August 7, 2012, the effective date of PA 97-905, which repealed the credit as it relates to enterprise zones.
b) To qualify for the credit:
1) The taxpayer must hire 5 or more eligible employees to work in an enterprise zone or federally designated foreign trade zone or sub-zone or a river edge redevelopment zone during the taxable year.
2) The taxpayer's total employment within the enterprise zone or federally designated foreign trade zone or sub-zone or a river edge redevelopment zone must increase by 5 or more full-time employees beyond the total employed in that zone at the end of the previous tax year for which a jobs tax credit under this Section was taken, or beyond the total employed by the taxpayer as of December 31, 1985, whichever is later.
A) If a taxpayer was in business in 1985 at a location, has never before taken the credit, and is located in an enterprise zone created before or during 1985, the taxpayer would use 1985 as the base year.
B) If a taxpayer was in business in 1985 at a location, has never before taken the credit, and is located in an enterprise zone created after 1985, the taxpayer's base year for calculating the increase in employment is the total employed at the end of the calendar year in which the enterprise zone was created. The law is clear that the credit is a reward for increasing employment in enterprise zones. To use 1985 as a base year, even if no enterprise zone was then in existence, is not consistent with this clear goal of the law. In such a situation, a taxpayer would not always be able to show that there was job creation in the enterprise zone. For example, while employment may have increased over 1985 levels, there may not have been an increase in employment from the end of the calendar year in which the zone was created. Therefore, to accept 1985 as the base year no matter whether there was an enterprise zone in existence at that time, could result in providing a credit for job creation that did not occur in an enterprise zone. Such a result would be contrary to law.
3) The eligible employees must be employed 180 consecutive days in order to be deemed hired for purposes of this subsection (b)(3).
EXAMPLE: An otherwise eligible employee is hired to work in an enterprise zone on August 1, 1987. The employer's tax year ends on December 31, 1987. The employee would have worked 153 days during the 1987 tax year and, therefore, would not be considered to be "deemed hired" in 1987. Even if all other requirements were met, the employer would not be eligible for the jobs tax credit for 1987. Once the employee has been employed for 180 consecutive days, the employee is deemed hired. Therefore, in this instance the employee would be "deemed hired" in 1988. If all other requirements were met, the employer could claim the Jobs Tax Credit for this employee for the 1989 tax year.
c) An "eligible employee" means an employee who is:
1) certified by the Department of Commerce and Economic Opportunity (DCEO) as "eligible for services" pursuant to regulations promulgated in accordance with Title II of the Job Training Partnership Act, Training Services for the Disadvantaged or Title III of the Job Training Partnership Act, Employment and Training Assistance for Dislocated Workers Program. Whenever an employee is certified, a voucher is completed by the applicant and approved by DCEO. The vouchers are entitled "Illinois Department of Commerce and Community Affairs, Enterprise Zone Program, Jobs Tax Credit Certification Voucher." Taxpayers should request a copy of the voucher to verify that the employee is DCEO certified. Taxpayers should maintain a copy of the voucher in their files to document eligibility status of employees in the event of an audit;
2) hired after the enterprise zone, federally designated foreign trade zone or sub-zone, or a river edge redevelopment zone was designated or the trade or business was located in that zone, whichever is later. The term "hired" means hired by the particular employer claiming the credit. Employees transferred from another facility of the employer to a facility located in an enterprise zone, federally designated foreign trade zone or sub-zone, or a river edge redevelopment zone are not deemed "hired" upon transfer to a facility located in the enterprise zone, federally designated foreign trade zone or sub-zone, or a river edge redevelopment zone;
3) employed in the enterprise zone, foreign trade zone or sub-zone, or a river edge redevelopment zone. An employee is employed in an enterprise zone, federally designated foreign trade zone or sub-zone, or a river edge redevelopment zone if his or her services are rendered there or the zone is the base of operations for the services performed; and
4) a full-time employee working 30 or more hours per week.
d) For tax years ending on or after December 31, 1985, and prior to December 31, 1988, the credit shall be allowed for the tax year in which the eligible employees are hired. For tax years ending on or after December 31, 1988, the credit shall be allowed for the tax year immediately following the tax year in which the eligible employees are hired. If the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a liability. If there is credit from more than one tax year that is available to offset a liability, earlier credit shall be applied first.
(Source: Amended at 38 Ill. Reg. 9550, effective April 21, 2014)
Section 100.2130 Investment Credit; High Impact Business (IITA 201(h))
a) Subject to the minimum investment requirements of Section 5.5 of the Illinois Enterprise Zone Act, a taxpayer shall be allowed a credit against the tax imposed by IITA Sections 201(a) and (b) for investment in qualified property which is placed in service in a federally designated Foreign Trade Zone or Sub-Zone located in Illinois by a Department of Commerce and Community Affairs designated High Impact Business. The credit is reported on Schedules 1299 A, C or D. Recapture (see subsection (i) below) is computed on Schedule 4255.
b) The credit shall be .5% of the basis for such property.
c) The credit shall not be available until the minimum investments in qualified and shall not be allowed to the extent that it would reduce a taxpayer's liability for the tax imposed by IITA Sections 201(a) and (b) to below zero. The credit applicable to such minimum investments shall be taken in the taxable year in which such minimum investments have been completed. The credit for additional investments beyond the minimum investment by a designated high impact business shall be available only in the taxable year in which the property is placed in service and shall not be allowed to the extent that it would reduce a taxpayer's liability for the tax imposed by IITA Sections 201(a) and (b) to below zero. The minimum investments required by Section 5.5 of the Illinois Enterprise Zone Act are:
1) $12,000,000 which will be placed in service in qualified property with an intention to create 500 full-time equivalent jobs at a designated location in Illinois, or
2) $30,000,000 which will be placed in service in qualified property with the intention to retain 1,500 full-time jobs at a designated location in Illinois.
The Illinois Department of Commerce and Community Affairs must certify that the minimum investment requirements have been met.
d) For tax years ending on or after December 31, 1987, the credit shall be allowed for the tax year in which the property is placed in service, or, if the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a liability. If there is a credit from more than one tax year that is available to offset a liability, the credit accruing first in time shall be applied first.
e) The term "qualified property" means property which is:
1) tangible, whether new or used;
A) Tangible property includes objects or things that are physically capable of being touched and seen and over which a person may assert rights of ownership.
B) Tangible property consists of personalty or realty and includes such items as buildings, structural components of buildings, machinery, equipment and vehicles.
C) Items such as stock certificates, bonds, notes and the like are not tangible personal property. While the certificate or paper may be tangible, the item itself, the share of ownership of a corporation or the promise to pay is an intangible that is memorialized by the paper.
D) The terms "new or used" shall have their commonly ascribed meanings.
2) depreciable pursuant to IRC Section 167, except that "3-year property" as defined in IRC Section 168 is not eligible for the credit provided by IITA Section 201(h);
A) Depreciable property is property used in the trade or business of a taxpayer, or held for production of income, which is subject to wear and tear, exhaustion, or obsolescence.
B) Property that is depreciated under the Modified Accelerated Cost Recovery System (MARCS), as provided by IRC Section 168, is considered depreciable pursuant to IRC Section 167 for purposes of the Enterprise Zone Investment Credit.
C) Examples of tangible property that is not depreciable include land, inventories or stock-in-trade, natural resources, and coin or currency.
D) The provisions of Internal Revenue Service regulation Section 1.167(a)-4 will be utilized in making determinations as to whether particular leasehold improvements are depreciable.
3) acquired by purchase as defined in IRC Section 179(d); and
A) A purchase is any acquisition of property except:
i) an acquisition from a person whose relationship to the acquiring person is such that a resulting loss would be disallowed under IRC Sections 267 or 707(b);
ii) an acquisition by one component member of a controlled group from another component member of the group;
iii) an acquisition of property if the basis of the property in the hands of the person acquiring it is determined in whole or in part by its adjusted basis in the hands of the person from whom the property was acquired; or
iv) an acquisition of property, the basis of which is determined under IRC Section 1014(a). IRC Section 1014(a) covers property received from a decedent. Property acquired by bequest or demise is not acquired by purchase.
B) For purposes of determining whether property is acquired by purchase as defined by IRC 179(d), the family of an individual includes only his spouse and ancestral and lineal descendants of the individual and his spouse.
C) For purposes of determining whether property is acquired by purchase only, a controlled group has the same meaning as in IRC Section 1563(a), except stock ownership of only 50% or more is required (also see IRS Regulation Section 1.179-4(f)).
D) Property that the taxpayer constructs, reconstructs or erects is generally considered acquired by purchase.
4) not eligible for the Enterprise Zone Investment Credit provided by IITA Section 201(f).
f) The basis of qualified property shall be the basis used to compute the depreciation deduction for federal income tax purposes.
1) In computing the amount of credit available for a taxable year, the credit rate will be applied to the total basis of all qualified property that is placed in service by a high impact business located in a foreign trade zone or sub-zone in Illinois during the taxable year, provided the property continues to qualify on the last day of the taxable year.
2) If the basis of the property for federal income tax depreciation purposes is increased after it has been placed in service in a federally designated foreign trade zone or sub-zone located in Illinois by the taxpayer, the amount of such increase shall be deemed property placed in service on the date of such increase in basis.
3) Property that has been fully expensed under IRC Section 179 has no federal depreciable basis with which to compute the credit. Property not fully expensed under IRC 179 can still qualify for the credit.
g) The term "placed in service" shall have the same meaning as under IRC Section 46. (IITA Section 201(h)(5)) Property is placed in service for purposes of the credit in the earlier of the following years:
1) That in which, under the taxpayer's depreciation practice, depreciation begins on the property; or
2) That in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.
h) If, during any taxable year ending on or before December 31, 1996, any property ceases to be qualified property in the hands of the taxpayer within 48 months after being placed in service in a foreign trade zone or sub-zone, or the situs of any qualified property is moved outside Illinois within 48 months after being placed in service, the tax imposed under IITA Section 201(a) and (b) of this Section for such taxable year shall be increased.
1) Any property disposed of by the taxpayer within 48 months after being placed in service ceases to qualify.
A) A taxpayer disposes of property when he sells the property, exchanges or trades-in worn-out property for new property, abandons the property or retires it from use.
B) Property destroyed by casualty, stolen, or transferred as a gift is disposed of property.
C) Property that is mortgaged or used as security for a loan is not disposed of property, provided that the taxpayer continues to use the property in its business within a foreign trade zone or subzone located in Illinois.
D) Property transferred to a trustee in bankruptcy is considered disposed of property.
E) A transfer of property by foreclosure is a disposition of property.
F) A reduction in the basis of qualified property resulting from a redetermination of the purchase price of the property is a disposition of property to the extent of such reduction in basis in the year in which the reduction takes place. For example, this would occur when property is purchased and placed in service in one year, and in a later year the taxpayer receives a refund of a portion of the original purchase price.
2) Any property converted to personal use ceases to qualify for the credit.
3) The increase in tax shall be determined by:
A) recomputing the investment credit which would have been allowed for the year in which credit for such property was originally allowed by eliminating such property from such computation, and
B) subtracting such computed credit from the amount of credit previously allowed. The difference between the recomputed credit and the credit actually claimed is added to the income tax for year in which the property ceased to qualify.
EXAMPLE: In 1990, High Impact Business A places qualifying property with a basis of $55,000 into service in Illinois and computes a credit for the year of $275 ($55,000 x .5%). High Impact Business A's 1990 income tax is $275. After application of the credit, High Impact Business A has no remaining income tax liability. In the following year, High Impact Business A moved a qualifying asset having a basis of $5,000 from Illinois to Missouri and is required to recapture a portion of the credit applied against its 1990 income tax liability. The credit applied against High Impact Business A's income tax must be recaptured because the property was moved outside of Illinois and no longer qualifies for the credit. In order to determine its additional income tax for 1991, High Impact Business A must recompute its 1990 credit by eliminating the disqualified property ($55,000 - $5,000 x .5% = $250). This recomputed credit is subtracted from the credit actually used in 1990 against the income tax ($275 - $250 = $25) and the difference is added to High Impact Business A's 1991 income tax.
i) If, during any taxable year ending after December 31, 1996, a taxpayer who has been allowed a credit under IITA Section 201(h) relocates its entire facility in violation of the explicit terms and length of the contract under Section 18-183 of the Property Tax Code, the tax imposed under subsections (a) and (b) of this Section shall be increased for the taxable year in which the taxpayer relocates that facility by an amount equal to the amount of credit received by the taxpayer under this IITA Section 201(h) with respect to qualified property placed in service at that facility.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.2131 Investment Credit; Enterprise Zone and River Edge Redevelopment Zone (IITA Section 201(f))
a) A taxpayer shall be allowed a credit against the tax imposed by IITA Section 201(a) and (b) for investment in qualified property placed in service in an enterprise zone created pursuant to the Illinois Enterprise Zone Act [20 ILCS 655] or for qualified property placed in service on or after July 1, 2006 in a river edge redevelopment zone established pursuant to the River Edge Redevelopment Zone Act [65 ILCS 115].
b) For partners in a partnership and shareholders of Subchapter S corporations, there shall be allowed an enterprise zone or river edge redevelopment zone investment credit to be determined in accordance with the determination of income and distributive share of income under sections 702 and 704 and Subchapter S of the Internal Revenue Code.
c) The credit shall be 0.5% of the basis for property in a zone.
d) The credit shall be available only in the taxable year in which the property is placed in service in the enterprise zone or river edge redevelopment zone and shall not be allowed to the extent that it would reduce a taxpayer's liability for the tax imposed by IITA Section 201(a) and (b) below zero.
1) Qualifying property shall be considered placed in service in an Illinois enterprise zone or river edge redevelopment zone on the date on which the property is placed in a condition or state of readiness and availability for a specifically assigned function.
2) Property that is disposed of, is moved out of the enterprise zone or river edge redevelopment zone, or ceases to qualify for any other reason during the same taxable year it was placed in service in an enterprise zone or river edge redevelopment zone will not be considered in computing the credit for the taxable year.
3) The credit shall be allowed for the tax year in which the property is placed in service, or, if the amount of the credit exceeds the original liability or the liability as later amended, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year.
4) The credit shall be applied to the earliest year for which there is a liability.
5) If there is credit for more than one tax year that is available to offset a liability, the credit accruing first in time shall be applied first.
e) The term "qualified property" means property that is:
1) tangible, whether new or used. The terms "new" and "used" shall have their commonly ascribed meanings. Buildings and structural components of buildings may be qualified property. The term tangible property generally includes:
A) objects or things that are physically capable of being touched and seen and over which a person may assert rights of ownership; and
B) personal or real property, which may consist of such items as buildings, component parts of buildings, machinery, equipment and vehicles.
C) Items such as stock certificates, bonds, notes and the like are not tangible personal property. While the certificate or paper may be tangible, the item itself, the share of ownership of a corporation or the promise to pay, is an intangible that is memorialized by the paper.
2) depreciable pursuant to IRC section 167, except that 3-year property as defined in IRC section 168(c)(2)(A) is not eligible for the credit.
A) Depreciable property is property used in the trade or business of a taxpayer, or held for production of income, that is subject to wear and tear, exhaustion, or obsolescence.
B) Property that is depreciated under the Modified Accelerated Cost Recovery System (MACRS), as provided by IRC section 168, is considered depreciable pursuant to IRC section 167 for purposes of the enterprise zone or river edge redevelopment zone Investment Credit.
C) Examples of tangible property that is not depreciable include land, inventories or stock-in-trade, natural resources, and coin or currency.
D) The provisions of 26 CFR 1.167(a)-4 will be utilized in making determinations as to whether particular leasehold improvements are depreciable.
E) IRC section 179 allows taxpayers, under certain circumstances, to expense a designated dollar amount of equipment purchased in a single tax year. Based on this provision, if the total cost of the property was equal to or less than the amount specified under IRC section 179, the taxpayer has the option of expensing the cost all in one year as a depreciation expense. While the property does have a useful life of four or more years, since the election was made to completely expense the cost of the property in one year, the property has no federal depreciable basis and does not have a basis upon which to compute the Illinois investment tax credit. Property not fully expensed under section 179 would qualify for the credit based on the cost of the depreciable property reduced by the section 179 deduction.
3) acquired by purchase as defined in IRC section 179(d).
A) A purchase is any acquisition of property except:
i) an acquisition from a person whose relationship to the acquiring person is such that a resulting loss would be disallowed under IRC section 267 or 707(b);
ii) an acquisition by one component member of a controlled group from another component member of the group;
iii) an acquisition of property if the basis of the property in the hands of the person acquiring it is determined in whole or in part by its adjusted basis in the hands of the person from whom the property was acquired; or
iv) an acquisition of property, the basis of which is determined under IRC section 1014(a). IRC section 1014(a) covers property received from a decedent. Property acquired by bequest or demise is not acquired by purchase.
B) For purposes of determining whether property is acquired by purchase as defined by IRC section 179(d), the family of an individual includes only the individual's spouse and the ancestral and lineal descendants of the individual and the individual's spouse.
C) For purposes of determining whether property is acquired by purchase only, a controlled group has the same meaning as in IRC section 1563(a), except stock ownership of only 50% or more is required (also see 26 CFR 1.179-4).
D) Property that the taxpayer constructs, reconstructs or erects is generally considered acquired by purchase.
4) used in the enterprise zone or river edge redevelopment zone by the taxpayer.
A) The term "used in an Illinois enterprise zone or river edge redevelopment zone" means that the property for which the credit is being claimed is physically located within the boundaries of an Illinois enterprise zone certified by the Illinois Department of Commerce and Economic Opportunity or river edge redevelopment zone established pursuant to the River Edge Redevelopment Zone Act from the time it is placed in service and while it is being utilized by the taxpayer claiming the credit in that taxpayer's business operation.
i) Storage of property in an enterprise zone or river edge redevelopment zone will not constitute use. The taxpayer must make use of, convert to its service, avail itself of, or employ the property in the enterprise zone or river edge redevelopment zone in order to demonstrate use of the property in the enterprise zone or river edge redevelopment zone.
ii) A lessor may claim the credit for otherwise qualified property if the property is physically located in an Illinois enterprise zone or river edge redevelopment zone from the time it is placed in service and all other conditions of eligibility for the credit are met.
iii) A lessee of tangible property may never claim the credit because a lessee has not acquired the property by purchase.
B) Mobile property, such as vehicles, must be used predominantly in an Illinois enterprise zone or river edge redevelopment zone in order to qualify for the credit.
i) Removal of such property from the enterprise zone or river edge redevelopment zone for a temporary or transitory purpose will not disqualify the property so long as it continues to be used predominantly in the enterprise zone or river edge redevelopment zone.
ii) Mobile property is considered to be predominantly used in an enterprise zone or river edge redevelopment zone if usage in the enterprise zone or river edge redevelopment zone exceeds usage outside of the enterprise zone or river edge redevelopment zone.
5) not property that has been previously used in Illinois in such a manner and by such a person as would qualify for the credit.
A) Generally, used property will not qualify for the credit if it was previously used in Illinois in such a manner that it could have qualified for the credit.
B) However, property that would otherwise qualify for the credit will not be disqualified because it was previously used in Illinois in such a manner that it could have qualified for the credit, if that use pre-dated the effective date of the law that established the credit.
EXAMPLE 1: Corporation A purchases a used pickup truck for use in its manufacturing business in Illinois from an Illinois resident who used the truck for personal purposes in Illinois. If the truck meets all other requirements for the credit, it will not be disqualified because it has been previously used in Illinois for a non-qualifying purpose.
EXAMPLE 2: Corporation A purchases a used pickup truck from Corporation B. Corporation B used the truck in its business in a qualifying manner and could have claimed the credit for the truck, but did not. Corporation A may not claim the credit for the truck because the truck has been previously used in Illinois in such a manner that it could have qualified for the credit.
f) The basis of qualified property shall be the basis used to compute the depreciation deduction for federal income tax purposes, including any bonus depreciation deduction allowed under IRC section 168(k). If the basis of the property for federal income tax depreciation purposes is increased after it has been placed in service in the enterprise zone or river edge redevelopment zone by the taxpayer, the amount of the increase shall be deemed property placed in service on the date of the increase in basis.
g) If, during any taxable year, any property ceases to be qualified property in the hands of the taxpayer within 48 months after being placed in service, or the situs of any qualified property is moved outside the enterprise zone or river edge redevelopment zone within 48 months after being placed in service, the tax imposed under IITA Section 201(a) and (b) for the taxable year shall be increased.
1) Any property disposed of by the taxpayer within 48 months after being placed in service ceases to qualify.
A) A taxpayer disposes of property when he or she sells the property, exchanges or trades-in worn-out property for new property, abandons the property or retires it from use.
B) Property destroyed by casualty, stolen, or transferred as a gift is disposed of property.
C) Property that is mortgaged or used as security for a loan is not disposed of property, provided that the taxpayer continues to use the property in its business within an Illinois enterprise zone or river edge redevelopment zone.
D) Property transferred to a trustee in bankruptcy is considered disposed of property.
E) A transfer of property by foreclosure is a disposition of property.
F) A reduction in the basis of qualified property resulting from a redetermination of the purchase price of the property is a disposition of property to the extent of the reduction in basis in the year in which the reduction takes place. For example, this would occur when property is purchased and placed in service in one year, and in a later year the taxpayer receives a refund of a portion of the original purchase price.
2) Any property converted to personal use ceases to qualify for the credit.
3) The increase in tax shall be determined by:
A) recomputing the investment credit that would have been allowed for the year in which credit for the property was originally allowed by eliminating the property from the computation, and
B) subtracting the computed credit from the amount of credit previously allowed. The difference between the recomputed credit and the credit actually claimed is added to the income tax for the year in which the property ceased to qualify or was moved outside of the enterprise zone or river edge redevelopment zone.
EXAMPLE: In 2007, Corporation A places qualifying property with a basis of $55,000 into service in an enterprise zone or river edge redevelopment zone located in Illinois and computes a Section 201(f) enterprise zone or river edge redevelopment zone Investment Tax Credit of $275 ($55,000 x 0.5%). Corporation A's 2007 income tax liability is $420. After the application of the credit, Corporation A has remaining income tax liability of $145. In the following year, Corporation A moved a qualifying asset having a basis in 2007 of $5,000 from the enterprise zone or river edge redevelopment zone to another location in Illinois. As a result, Corporation A is required to recapture a portion of the enterprise zone or river edge redevelopment zone Investment Credit that was applied against its 2007 income tax liability. In order to determine its additional income tax for 2008, Corporation A must recompute its 2007 enterprise zone Investment Tax Credit by eliminating the disqualified property ($55,000 - $5,000 x 0.5% = $250). This recomputed credit is subtracted from the enterprise zone Investment Tax Credit actually used in 2007 ($275 - $250 = $25), and the difference is added to Corporation A's 2008 income tax after application of the Investment Tax Credit.
h) Automatic Sunset of Credit for River Edge Redevelopment Zone Property. IITA Section 250(a) provides that, if a reasonable and appropriate sunset date is not specified in the Public Act that creates a credit, a taxpayer shall not be entitled to take the credit for tax years beginning on or after 5 years after the effective date of the Public Act creating the credit. IITA Section 250(b) provides that any credit scheduled to expire in 2011, 2012, or 2013 by operation of this Section shall be extended by 5 years. The credit for property placed in service in a river edge redevelopment zone was created by PA 94-1021, which had an effective date of July 12, 2006, and specified no sunset date for the credit. Accordingly, no credit is allowed under this Section for property placed in service in a river edge redevelopment zone for any taxable year beginning on or after July 12, 2016.
(Source: Section 100.2131 renumbered from Section 100.2110 and amended at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2135 REV Illinois Investment Tax Credit (IITA Section 237)
a) For tax years beginning on or after November 16, 2021, a taxpayer shall be allowed a credit against the tax imposed by IITA Section 201 (a) and (b) for investment in qualified property which is placed in service at the site of a REV Illinois Project subject to an agreement between the taxpayer and the Department of Commerce and Economic Opportunity (DCEO) pursuant to the Reimagining Energy and Vehicles in Illinois Act [20 ILCS 686] (REV Illinois Act). (IITA Section 237(a))
b) For the purposes of the REV Illinois investment tax credit, "Project" or "REV Illinois Project" shall have the same meaning as when used in Section 10 of the REV Illinois Act.
c) The credit shall be 0.5% of the basis for such property. (IITA Section 237(a))
d) The credit shall be available only in the taxable year in which the property is placed in service and shall not be allowed to the extent that it would reduce a taxpayer's liability for the tax imposed by IITA Section 201(a) and (b) to less than zero. The credit shall be allowed for the tax year in which the property is placed in service, or if the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a liability. If there is credit from more than one tax year that is available to offset a liability, the earlier credit shall be applied first. (IITA Section 237(a))
e) The credit allowed under this Section shall be taken in the taxable year that includes the date of the tax credit certificate issued by DCEO under Section 100 of the REV Illinois Act.
f) The term "qualified property" means property which:
1) is tangible, whether new or used;
A) Tangible property includes objects or things that are physically capable of being touched and seen and over which a person may assert rights of ownership.
B) Tangible property consists of personal or real property and includes such items as buildings, structural components of buildings, machinery, equipment, and vehicles.
C) Items such as stock certificates, bonds, notes and the like are not tangible personal property. While the certificate or paper may be tangible, the item itself, the share of ownership of a corporation or the promise to pay, is an intangible that is memorialized by the paper.
D) The terms "new or used" shall have their commonly ascribed meanings.
2) is depreciable pursuant to Internal Revenue Code (IRC) Section 167, except that "3-year property" as defined in IRC Section 168 is not eligible for the credit provided by IITA Section 237;
A) Depreciable property is property used in the trade or business of a taxpayer, or held for production of income, which is subject to wear and tear, exhaustion, or obsolescence.
B) Property that is depreciated under the Modified Accelerated Cost Recovery System (MACRS), as provided by IRC Section 168, is considered depreciable pursuant to IRC Section 167 for purposes of this credit.
C) Examples of tangible property that is not depreciable include land, inventories or stock-in-trade, natural resources, and coin or currency.
D) The provisions of Internal Revenue Service (IRS) Regulation Section 1.167(a)-4 will be utilized in making determinations as to whether particular leasehold improvements are depreciable.
E) IRC Section 179 allows taxpayers, under certain circumstances, to expense a designated dollar amount of equipment purchased in a single tax year. Based on this provision, if the total cost of the property was equal to or less than the amount specified under IRC Section 179, the taxpayer has the option of expensing the cost all in one year as a depreciation expense. While the property does have a useful life of four or more years, since the election was made to completely expense the cost of the property in one year, the property has no federal depreciable basis and does not have a basis upon which to compute the REV Illinois investment tax credit. Property not fully expensed under IRC Section 179 would qualify for the credit based on the cost of the depreciable property reduced by the IRC Section 179 deduction.
3) is acquired by purchase as defined in IRC Section 179(d);
A) A purchase is any acquisition of property except:
i) an acquisition from a person whose relationship to the acquiring person is such that a resulting loss would be disallowed under IRC Sections 267 or 707(b),
ii) an acquisition by one component member of a controlled group from another component member of the same controlled group,
iii) an acquisition of property if the basis of the property in the hands of the person acquiring it is determined in whole or in part by its adjusted basis in the hands of the person from whom the property was acquired, or
iv) an acquisition of property, the basis of which is determined under IRC Section 1014(a). IRC Section 1014(a) covers property received from a decedent. Property acquired by bequest or demise is not acquired by purchase.
B) For purposes of determining whether property is acquired by purchase as defined by IRC Section 179(d), the family of an individual includes only the individual's spouse and the ancestral and lineal descendants of the individual and the individual's spouse.
C) For purposes of determining whether property is acquired by purchase only, a controlled group has the same meaning as in IRC Section 1563(a), except stock ownership of only 50% or more is required (also see 26 C.F.R. 1.179-4).
D) Property that the taxpayer constructs, reconstructs or erects is generally considered acquired by purchase.
E) A lessee of tangible property may never claim the credit because a lessee has not acquired the property by purchase.
4) is used at the site of the REV Illinois Project by the taxpayer; and
A) The term "used at the site of the REV Illinois Project" means that the property for which the credit is being claimed is physically located within the boundaries of a REV Illinois Project site certified by DCEO. Storage of property in a REV Illinois Project site will not constitute use. The taxpayer must make use of, convert to its service, avail itself of, or employ the property in the REV Illinois Project site in order to demonstrate use of the property.
B) Mobile property, such as vehicles, must be used predominantly at the REV Illinois Project site in order to qualify for the credit.
i) Removal of such property from the REV Illinois Project site for a temporary or transitory purpose will not disqualify the property so long as it continues to be used predominantly in the Illinois operation of the taxpayer at the REV Illinois Project site.
ii) Mobile property is considered to be predominantly used at the REV Illinois Project site if usage at the site exceeds usage outside the site. For example, if a taxpayer sometimes uses its trucks based at a REV Illinois Project site to deliver goods both in Illinois and out-of-state, then the temporary absence of its trucks from the REV Illinois Project site does not disqualify them as qualified property used at the site by the taxpayer.
C) A lessor may claim the credit for otherwise qualified property if the property is physically located in a REV Illinois Project site from the time it is placed in service and all other conditions of eligibility for the credit are met.
5) has not been previously used in Illinois in such a manner and by such a person as would qualify for the credit provided by this Section. (IITA Section 237(b))
A) Generally, used property will not qualify for the credit if it was previously used in Illinois in such a manner and by such a person that it could have qualified for the credit.
B) However, property that would otherwise qualify for the credit will not be disqualified because it was previously used in Illinois in such a manner and by such a person that it could have qualified for the credit, if that use pre-dated the effective date of the law (11/16/21) that established the credit.
EXAMPLE 1: Corporation A purchases a used pickup truck for use at its REV Illinois Project site from an Illinois resident who used the truck for personal purposes in Illinois. If the truck meets all other requirements for the credit, it will not be disqualified because it has been previously used in Illinois for a non-qualifying purpose.
EXAMPLE 2: Corporation A purchases a used pickup truck from Corporation B. Corporation B used the truck in its business in a qualifying manner and could have claimed the credit for the truck, but did not. Corporation A may not claim the credit for the truck because the truck has been previously used in Illinois in such a manner that it could have qualified for the credit.
g) The basis of qualified property shall be the basis used to compute the depreciation deduction for federal income tax purposes. (IITA Section 237(c))
1) In computing the amount of credit available for a taxable year, the credit rate will be applied to the total basis of all qualified property that is placed in service at the site of the REV Illinois Project during the taxable year, provided the property continues to qualify on the last day of the taxable year.
2) If the basis of the property for federal income tax depreciation purposes is increased after it has been placed in service at the site of the REV Illinois Project by the taxpayer, the amount of such increase shall be deemed property placed in service on the date of such increase in basis. (IITA Section 237(d))
3) Property that has been fully expensed under IRC Section 179 has no federal depreciable basis with which to compute the credit. Property not fully expensed under IRC Section 179 can still qualify for the credit.
h) The term "placed in service" shall have the same meaning as under IRC Section 46 (also see IRS Regulation Section 1.46-3). (IITA Section 237(e)) Property is placed in service for purposes of the credit in the earlier of the following taxable years:
1) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins, or
2) The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.
i) If during any taxable year, any property ceases to be qualified property in the hands of the taxpayer within 48 months after being placed in service, or the situs of any qualified property is moved from the REV Illinois Project site within 48 months after being placed in service, the tax imposed under IITA Section 201(a) and (b) for such taxable year shall be increased. (IITA Section 237(f))
1) Any property disposed of by the taxpayer within 48 months after being placed in service ceases to qualify for the credit.
A) A taxpayer disposes of property when the taxpayer sells the property, exchanges or trades-in worn-out property for new property, abandons the property or retires it from use.
B) Property destroyed by casualty, stolen, or transferred as a gift is disposed of property.
C) Property that is mortgaged or used as security for a loan is not disposed of property, provided that the taxpayer continues to use the property in its business at the REV Illinois Project site.
D) Property transferred to a trustee in bankruptcy is considered disposed of property in the year the property is transferred to the trustee.
E) A transfer of property by foreclosure is a disposition of property.
F) A reduction of the basis of qualified property resulting from a redetermination of the purchase price of the property is a disposition of qualified property to the extent of such reduction in basis in the year in which the reduction takes place. (IITA Section 237(F)) For example, this would occur when property is purchased and placed in service in one year, and in a later year the taxpayer receives a refund of a portion of the original purchase price.
2) Any property converted to personal use ceases to qualify for the credit.
3) The increase in tax shall be determined by:
A) recomputing the investment credit which would have been allowed for the year in which credit for such property was originally allowed by eliminating such property from such computation, and
B) subtracting such recomputed credit from the amount of credit previously allowed. (IITA Section 237(f)) The difference between the recomputed credit and the credit actually claimed is added to the income tax for the year in which the property ceased to qualify.
EXAMPLE: In 2021, taxpayer places qualifying property with a basis of $55,000 into service at the site of a REV Illinois Project and computes a credit for the year of $275 ($55,000 x 0.5%). Taxpayer's 2021 income tax is $275. After application of the credit, taxpayer has no remaining income tax liability. In the following year, taxpayer moved a qualifying asset having a basis of $5,000 from Illinois to Missouri and is required to recapture a portion of the credit applied against its 2021 income tax liability. The credit applied against taxpayer's income tax must be recaptured because the property was moved outside of Illinois and no longer qualifies for the credit. In order to determine its additional income tax for 2022, taxpayer must recompute its 2021 credit by eliminating the disqualified property (($55,000 - $5,000) x 0.5% = $250). This recomputed credit is subtracted from the credit actually used in 2021 against the income tax ($275 - $250 = $25) and the difference is added to taxpayer's 2022 income tax.
j) Partnerships and Subchapter S Corporations
1) For taxable years ending before December 31, 2023, for partners, shareholders of Subchapter S corporations, and owners of limited liability companies, if the liability company is treated as a partnership for purposes of federal and State income taxation, there shall be allowed a credit under this Section to be determined in accordance with the determination of income and distributive share of income under Sections 702 and 704 and Subchapter S of the IRC. (IITA Section 237(a)) Partnership has the meaning prescribed in IITA Section 1501(a)(16). In the case of a credit earned by a partnership or subchapter S corporation, the credit passes through to the owner as provided in the partnership agreement under IRC Section 704(a) or in proportion to their ownership of the stock of the subchapter S corporation under IRC Section 1366(a).
2) For taxable years ending on or after December 31, 2023, if the taxpayer is a partnership or a Subchapter S corporation, then the credit is allowed to pass through to the partners and shareholders in accordance with the determination of income and distributive share of income under Sections 702 and 704 and Subchapter S of the Internal Revenue Code, or as otherwise agreed by the partners or shareholders, provided that such agreement shall be executed in writing prior to the due date of the return for the taxable year and meet such other requirements as the Department may establish by rule. Partnership has the meaning prescribed in Section 1501(a)(16). (IITA Section 251)
3) The credit earned by a partnership or a subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the tax credit certificate is issued by DCEO under Section 100 of the REV Illinois Act.
4) The credit shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends and may be carried forward to the 5 succeeding taxable years of the owner until used.
5) Any credit passed through to a partnership or subchapter S corporation under this subsection shall pass through to its partners or shareholders in the same manner as a credit earned by the partnership or subchapter S corporation.
k) To claim the credit, a taxpayer shall attach to its Illinois income tax return:
1) a copy of the tax credit certificate and annual certification (if any) issued by DCEO; and
2) in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating:
A) the portion of the total credit shown on the tax credit certificate that is allowed to that partner or shareholder; and
B) the taxable year of the partnership or subchapter S corporation in which the tax credit certificate was issued.
l) Any taxpayer qualifying for the REV Illinois Investment Tax Credit shall not be eligible for the investment tax credits in Section 201(e), (f), or (h) of the IITA. (20 ILCS 686/100)
(Source: Amended at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2136 MICRO Investment Tax Credit (IITA Section 239)
a) For tax years beginning on or after January 1, 2025, a taxpayer shall be allowed a credit against the tax imposed by IITA Section 201(a) and (b) for investment in qualified property which is placed in service at the site of a project that is subject to an agreement between the taxpayer and the Department of Commerce and Economic Opportunity (DCEO) pursuant to the Manufacturing Illinois Chips for Real Opportunity (MICRO) Act [35 ILCS 45] (MICRO Act). (IITA Section 239(a))
b) For the purposes of the MICRO Investment Tax Credit, "Project" or "MICRO Illinois Project" shall have the same meaning as when used in Section 110-10 of the MICRO Act.
c) The credit shall be 0.5% of the basis for such property. (IITA Section 239(a))
d) The credit shall be available only in the taxable year in which the property is placed in service and shall not be allowed to the extent that it would reduce a taxpayer's liability for the tax imposed by IITA Section 201(a) and (b) to less than zero. The credit shall be allowed for the tax year in which the property is placed in service, or if the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a liability. If there is credit from more than one tax year that is available to offset a liability, the earlier credit shall be applied first. (IITA Section 239(a))
e) The credit allowed under this Section shall be taken in the taxable year that includes the date of the tax credit certificate issued by DCEO under Section 110-100 of the MICRO Act.
f) The term "qualified property" means property which:
1) is tangible, whether new or used;
A) Tangible property includes objects or things that are physically capable of being touched and seen and over which a person may assert rights of ownership.
B) Tangible property consists of personal or real property and includes such items as buildings, structural components of buildings, machinery, equipment, and vehicles.
C) Items such as stock certificates, bonds, notes and the like are not tangible personal property. While the certificate or paper may be tangible, the item itself, the share of ownership of a corporation or the promise to pay, is an intangible that is memorialized by the paper.
D) The terms "new or used" shall have their commonly ascribed meanings.
2) is depreciable pursuant to Internal Revenue Code (IRC) Section 167, except that "3-year property" as defined in IRC Section 168 is not eligible for the credit provided by IITA Section 239;
A) Depreciable property is property used in the trade or business of a taxpayer, or held for production of income, which is subject to wear and tear, exhaustion, or obsolescence.
B) Property that is depreciated under the Modified Accelerated Cost Recovery System (MACRS), as provided by IRC Section 168, is considered depreciable pursuant to IRC Section 167 for purposes of this credit.
C) Examples of tangible property that is not depreciable include land, inventories or stock-in-trade, natural resources, and coin or currency.
D) The provisions of Internal Revenue Service (IRS) Regulation Section 1.167(a)-4 will be utilized in making determinations as to whether particular leasehold improvements are depreciable.
E) IRC Section 179 allows taxpayers, under certain circumstances, to expense a designated dollar amount of equipment purchased in a single tax year. Based on this provision, if the total cost of the property was equal to or less than the amount specified under IRC Section 179, the taxpayer has the option of expensing the cost all in one year as a depreciation expense. While the property does have a useful life of four or more years, since the election was made to completely expense the cost of the property in one year, the property has no federal depreciable basis and does not have a basis upon which to compute the MICRO Investment Tax Credit. Property not fully expensed under IRC Section 179 would qualify for the credit based on the cost of the depreciable property reduced by the IRC Section 179 deduction.
3) is acquired by purchase as defined in IRC Section 179(d);
A) A purchase is any acquisition of property except:
i) an acquisition from a person whose relationship to the acquiring person is such that a resulting loss would be disallowed under IRC Sections 267 or 707(b);
ii) an acquisition by one component member of a controlled group from another component member of the same controlled group;
iii) an acquisition of property if the basis of the property in the hands of the person acquiring it is determined in whole or in part by its adjusted basis in the hands of the person from whom the property was acquired; or
iv) an acquisition of property, the basis of which is determined under IRC Section 1014(a). IRC Section 1014(a) covers property received from a decedent. Property acquired by bequest or demise is not acquired by purchase.
B) For purposes of determining whether property is acquired by purchase as defined by IRC Section 179(d), the family of an individual includes only the individual's spouse and the ancestral and lineal descendants of the individual and the individual's spouse.
C) For purposes of determining whether property is acquired by purchase only, a controlled group has the same meaning as in IRC Section 1563(a), except stock ownership of only 50% or more is required (also see 26 C.F.R. 1.179-4).
D) Property that the taxpayer constructs, reconstructs or erects is generally considered acquired by purchase.
E) A lessee of tangible property may never claim the credit because a lessee has not acquired the property by purchase.
4) is used at the site of the MICRO Illinois Project by the taxpayer; and
A) The term "used at the site of the MICRO Illinois Project" means that the property for which the credit is being claimed is physically located within the boundaries of a MICRO Illinois Project site certified by DCEO. Storage of property in a MICRO Illinois Project site will not constitute use. The taxpayer must make use of, convert to its service, avail itself of, or employ the property in the MICRO Illinois Project site in order to demonstrate use of the property.
B) Mobile property, such as vehicles, must be used predominantly at the MICRO Illinois Project site in order to qualify for the credit.
i) Removal of such property from the MICRO Illinois Project site for a temporary or transitory purpose will not disqualify the property so long as it continues to be used predominantly in the Illinois operation of the taxpayer at the MICRO Illinois Project site.
ii) Mobile property is considered to be predominantly used at the MICRO Illinois Project site if usage at the site exceeds usage outside the site. For example, if a taxpayer sometimes uses its trucks based at a MICRO Illinois Project site to deliver goods both in Illinois and out-of-state, then the temporary absence of its trucks from the MICRO Illinois Project site does not disqualify them as qualified property used at the site by the taxpayer.
C) A lessor may claim the credit for otherwise qualified property if the property is physically located in a MICRO Illinois Project site from the time it is placed in service and all other conditions of eligibility for the credit are met.
5) has not been previously used in Illinois in such a manner and by such a person as would qualify for the credit provided by this Section. (IITA Section 239(b))
A) Generally, used property will not qualify for the credit if it was previously used in Illinois in such a manner and by such a person that it could have qualified for the credit.
B) However, property that would otherwise qualify for the credit will not be disqualified because it was previously used in Illinois in such a manner and by such a person that it could have qualified for the credit, if that use pre-dated the effective date of the law that established the credit.
EXAMPLE 1: Corporation A purchases a used pickup truck for use at its MICRO Illinois Project site from an Illinois resident who used the truck for personal purposes in Illinois. If the truck meets all other requirements for the credit, it will not be disqualified because it has been previously used in Illinois for a non-qualifying purpose.
EXAMPLE 2: Corporation A purchases a used pickup truck from Corporation B. Corporation B used the truck in its business in a qualifying manner and could have claimed the credit for the truck, but did not. Corporation A may not claim the credit for the truck because the truck has been previously used in Illinois in such a manner that it could have qualified for the credit.
g) The basis of qualified property shall be the basis used to compute the depreciation deduction for federal income tax purposes. (IITA Section 239(c))
1) In computing the amount of credit available for a taxable year, the credit rate will be applied to the total basis of all qualified property that is placed in service at the site of the MICRO Illinois Project during the taxable year, provided the property continues to qualify on the last day of the taxable year.
2) If the basis of the property for federal income tax depreciation purposes is increased after it has been placed in service at the site of the project by the taxpayer, the amount of such increase shall be deemed property placed in service on the date of such increase in basis. (IITA Section 239(d))
3) Property that has been fully expensed under IRC Section 179 has no federal depreciable basis with which to compute the credit. Property not fully expensed under IRC Section 179 can still qualify for the credit.
h) The term "placed in service" shall have the same meaning as under IRC Section 46 (also see IRS Regulation Section 1.46-3). (IITA Section 239(e)) Property is placed in service for purposes of the credit in the earlier of the following taxable years:
1) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins, or
2) The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.
i) If during any taxable year, any property ceases to be qualified property in the hands of the taxpayer within 48 months after being placed in service, or the situs of any qualified property is moved from the project site within 48 months after being placed in service, the tax imposed under IITA Section 201(a) and (b) for such taxable year shall be increased.
1) Any property disposed of by the taxpayer within 48 months after being placed in service ceases to qualify for the credit.
A) A taxpayer disposes of property when the taxpayer sells the property, exchanges or trades-in worn-out property for new property, abandons the property or retires it from use.
B) Property destroyed by casualty, stolen, or transferred as a gift is disposed of property.
C) Property that is mortgaged or used as security for a loan is not disposed of property, provided that the taxpayer continues to use the property in its business at the MICRO Illinois Project site.
D) Property transferred to a trustee in bankruptcy is considered disposed of property in the year the property is transferred to the trustee.
E) A transfer of property by foreclosure is a disposition of property.
F) A reduction of the basis of qualified property resulting from a redetermination of the purchase price of the property is a disposition of qualified property to the extent of such reduction in basis in the year in which the reduction takes place. (IITA Section 239(f)) For example, this would occur when property is purchased and placed in service in one year, and in a later year the taxpayer receives a refund of a portion of the original purchase price.
2) Any property converted to personal use ceases to qualify for the credit.
3) The increase in tax shall be determined by:
A) recomputing the investment credit which would have been allowed for the year in which credit for such property was originally allowed by eliminating such property from such computation; and
B) subtracting such recomputed credit from the amount of credit previously allowed. (IITA Section 239(f)) The difference between the recomputed credit and the credit actually claimed is added to the income tax for the year in which the property ceased to qualify.
EXAMPLE: In 2025, taxpayer places qualifying property with a basis of $65,000 into service at the site of a MICRO Illinois Project and computes a credit for the year of $325 ($65,000 x 0.5%). Taxpayer's 2025 income tax is $325. After application of the credit, taxpayer has no remaining income tax liability. In the following year, taxpayer moved a qualifying asset having a basis of $5,000 from Illinois to Missouri and is required to recapture a portion of the credit applied against its 2025 income tax liability. The credit applied against taxpayer's income tax must be recaptured because the property was moved outside of Illinois and no longer qualifies for the credit. In order to determine its additional income tax for 2026, taxpayer must recompute its 2025 credit by eliminating the disqualified property (($65,000 - $5,000) x 0.5% =$300). This recomputed credit is subtracted from the credit actually used in 2025 against the income tax ($325 - $300 = $25) and the difference is added to taxpayer's 2026 income tax.
j) Partnerships and Subchapter S Corporations
1) If the taxpayer is a partnership or a Subchapter S corporation, the credit shall be allowed to the partners or shareholders in accordance with the determination of income and distributive share of income under Sections 702 and 704 and subchapter S of the IRC, or as otherwise agreed by the partners or shareholders, provided that such agreement shall be executed in writing prior to the due date of the return for the taxable year and meet such other requirements as the Department may establish by rule. Partnership has the meaning prescribed in IITA Section 1501(a)(16). (IITA Section 251)
2) The credit earned by a partnership or a subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the tax credit certificate is issued by DCEO under Section 110-100 of the MICRO Act.
3) The credit shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends and may be carried forward to the 5 succeeding taxable years of the owner until used.
4) Any credit passed through to a partnership or subchapter S corporation under this subsection shall pass through to its partners or shareholders in the same manner as a credit earned by the partnership or subchapter S corporation.
k) To claim the credit, a taxpayer shall attach to its Illinois income tax return:
1) a copy of the tax credit certificate and annual certification (if any) issued by DCEO; and
2) in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating:
A) the portion of the total credit shown on the tax credit certificate that is allowed to that partner or shareholder; and
B) the taxable year of the partnership or subchapter S corporation in which the tax credit certificate was issued.
l) Any taxpayer qualifying for the MICRO Investment Tax Credit shall not be eligible for the investment tax credits in Section 201(e), (f), or (h) of the IITA. (35 ILCS 45/110-100)
(Source: Added at 48 Ill. Reg. 10281, effective June 25, 2024)
Section 100.2140 Credit Against Income Tax for Replacement Tax (IITA 201(i))
a) Section 201(c) imposes the Personal Property Tax Replacement Income Tax. This tax is measured by net income of every corporation (including Sub-chapter S corporations), partnership and trust, for each taxable year. The tax is imposed on the privilege of earning or receiving income in this State. The tax is in addition to the income tax imposed under IITA Sections 201(a) and (b). IITA Section 201(d) lists the tax rates for the Personal Property Tax Replacement Income Tax.
b) For tax years ending prior to December 31, 2003, a credit is allowed against the Income Tax for Personal Property Tax Replacement Income Tax.
1) For tax years ending before January 1, 1989, the credit is computed by multiplying the tax imposed by IITA Sections 201(c) and (d) by the apportionment percentage (or by 1 if the entity is non-apportioning). The result is further multiplied by the tax rate imposed by IITA Sections 201(a) and (b).
2) For tax years ending on or after January 1, 1989, the credit is computed by multiplying the tax imposed by IITA Sections 201(c) and (d) by a fraction, the numerator of which is base income allocable to Illinois and the denominator of which is Illinois base income. The result is further multiplied by the tax rate imposed by IITA Sections 201(a) and (b).
c) Any credit earned on or after December 31, 1986, under this subsection which is unused in the year the credit is computed because it exceeds the tax liability imposed under IITA Sections 201(a) and (b) for that year (whether it exceeds the original liability or the liability as later amended) may be carried forward and applied to the tax liability imposed by IITA Sections 201(a) and (b) for the 5 taxable years following the excess credit year, provided that no credit may be carried forward to any year ending on or after December 31, 2003. The credit shall be applied first to the earliest year for which there is a liability. If there is a credit for more than one tax year that is available to offset a liability, the earliest credit shall be applied first.
d) If, during any taxable year, the tax imposed by IITA Sections 201(c) and (d) for which a taxpayer has claimed the credit is reduced, the amount of credit for such tax shall also be reduced. Such reduction shall be determined by recomputing the credit to take into account the reduced tax imposed by IITA Sections 201(c) and (d). If any portion of the reduced amount of credit has been carried forward to a different taxable year, an amended return shall be filed for such taxable year to reduce the amount of credit claimed.
(Source: Amended at 29 Ill. Reg. 20516, effective December 2, 2005)
Section 100.2150 Training Expense Credit (IITA 201(j))
a) Beginning with tax years ending on or after December 31, 1986 and prior to December 31, 2003, a taxpayer shall be allowed a credit against the tax imposed by IITA Sections 201(a) and (b) for all amounts paid or accrued, on behalf of all persons employed by the taxpayer in Illinois, or Illinois residents employed outside of Illinois by a taxpayer, for educational or vocational training in semi-technical or technical fields or semi-skilled or skilled fields, which were deducted from gross income in the computation of taxable income (IITA Section 201(j)).
b) The credit against the tax imposed by IITA Sections 201(a) and (b) shall be 1.6% of eligible training expenses (IITA Section 201(j)).
c) All amounts paid for educational or vocational training in semi-technical or technical fields or semi-skilled or skilled fields are eligible for the credit. No particular fields of employment are presumptively eligible or ineligible for the credit.
1) The Training Expense Credit was originally enacted into law as a training expense deduction by P.A. 83-650, the Prairie State 2000 Authority Act, and was later converted into the current Training Expense Credit by P.A. 84-1405. The Illinois General Assembly found that there existed a large surplus of workers throughout the State who are ready, willing and able to work but who lack the appropriate skills to perform the specialized tasks for modern business and industry....The General Assembly found that a substantial impediment to attracting new businesses and encouraging the modernization of existing businesses has been the shortage of workers who can perform the specialized tasks required by the new technologies of modern business. [20 ILCS 4020/2]
2) The credit is for the amounts paid or accrued for educational or vocational training in semi-technical or technical or semi-skilled or skilled fields.
A) The terms "semi-technical or technical fields or semi-skilled or skilled fields" do not refer to any particular occupation. This statutory language authorizes the credit for the costs of training of an employee to improve that employee's job skills within the scope of his or her employment.
B) The credit will be authorized for the costs of job-linked training that offers special skills for career advancement or that is preparatory for, and leads to, a job with definite career potential.
C) The credit will be authorized for amounts expended for training necessary to implement Total Quality Management or improvement systems within the workplace.
D) The credit will be authorized for training related to machinery or equipment.
E) The credit will be authorized for job-linked basic skills, which may include English as a second language and remedial training, necessary for employees to function effectively and safely in the workplace, or as a prerequisite for other training.
EXAMPLES: Training of a machine operator in skills necessary to operate a computer-assisted manufacturing machine would qualify for the credit. Training of the employees of a retailer in the operation of a cash register system that is designed to aid the retailer by resulting in faster sales and greater inventory control because of centralized linkage of the system to the retailer's headquarters would, assuming all other requirements are met, qualify for the credit. A course in how to supervise employees required of supervisors because of the installation of a computer system at the business with terminals in the homes of that supervisor's subordinates that allows those subordinates to work from their homes would qualify for the credit.
F) Training does not have to occur in a classroom. Training may be given by an employer to his or her employees, an employer may contract with a third party to provide the training, or an employer may reimburse an employee for the costs of training purchased by an employee. Eligible training may include self-study courses. Self-study courses will qualify if the employer demonstrates that the self-study coursework is training in semi-technical or technical or semi-skilled or skilled fields. Self-study training must be contrasted with the type "down time" reading which, as stated in subsection (d)(2)(B), below, does not qualify for the credit.
G) Training does not have to occur on the premises of the employer. Training does not have to occur in the State of Illinois. However, in order to claim costs of employee travel and lodging, an employer must document that the costs of travel were related to the training and were deducted in determining the employer's federal taxable income.
H) A training expense that would otherwise not qualify for the credit will not be deemed to qualify for the credit because of a designation of an employee as a probationary employee, a trainee, or a similar designation of that nature.
d) Only amounts expended for eligible training will qualify as eligible training expenses. Such costs may or may not constitute "direct expenses" as that term is used in normal accounting parlance. Capitalized costs will not qualify for the credit. However, as noted below, depreciation expenses associated with capital expenditures may qualify for the credit. The term "compensation" used in this Section is defined in IITA Section 1501(a)(3).
1) The following costs qualify as eligible training expenses:
A) Compensation of employees for time spent in training others in in-house training will qualify as eligible training expenses, but the compensation must be prorated based on the amount of time actually spent in conducting the training.
B) Compensation of an employee for time spent in preparing for in-house training as or for an instructor will qualify because such compensation is an expense of the training.
C) Compensation of an employee for time spent in training will qualify for the credit.
D) The cost of materials (i.e., slides, hand-outs, etc.) for in-house training will qualify for the credit because such costs are expenses of the training.
E) Pro-rata rent of a training facility is an expense eligible for the credit. Similarly, depreciation expenses for a training facility owned by a taxpayer or for equipment used for training are eligible expenses.
F) Costs of registration (including allocable wages of employees performing the registration) with state, federal or industry authorities may be eligible expenses, if such costs are related to eligible training.
G) Tuition reimbursement is an eligible expense provided that the tuition amounts were deducted in determining the employer's federal taxable income.
H) Costs of travel and lodging for eligible training provided that the costs were deducted in determining the employer's federal taxable income.
2) The following costs do not qualify as eligible training expenses:
A) The cost of the training facility and equipment is not an eligible expense. Capital costs are not eligible for the credit. However, as noted above, depreciation expense is eligible.
B) Compensation of an employee for "down time" spent informally training (i.e., a mechanic with no machinery on which to work reading about new equipment, or a mechanic reading about specifications of equipment never before encountered) is not an eligible expense.
C) Compensation of an employee for time spent supervising another employee is not an eligible expense. For instance, a supervisor spending an hour a day reviewing and discussing a new employee's progress and planning the new employee's future work schedule would not be an eligible expense.
D) Cost of a meal (breakfast or lunch) provided in the course of a brief training session is not an eligible expense. Similarly, the cost of meals provided to an employee during an all-day training session is not an eligible expense.
3) Employers must maintain records sufficient to document that the training is eligible training. Employers must maintain records that document the amounts expended for eligible training expenses. An employer may maintain documentation as required for the Industrial Training Program of the Illinois Department of Commerce and Community Affairs (see 56 Ill. Adm. Code 2650.120), or as maintained by employers in compliance with the requirements of the Illinois Secretary of State's Workplace Literacy Program (see 23 Ill. Adm. Code 3040.220 and 3040.240) for purposes of documentation for the Training Expense Credit. Employers may claim the credit based upon average or standard costs of training each employee. The documentation of amounts expended for eligible training expenses, or documentation maintained to claim the credit based upon average or standard costs, must be sufficient to demonstrate that the training for which the credit is claimed is on behalf of persons employed by the taxpayer in Illinois, or Illinois residents employed outside of Illinois by the taxpayer, the training qualifies for the credit under the standards of subsection (b) of this Section above, and the expenditures are eligible training expenses under the standards of subsection (d)(1) above. In the event an employer claims the credit based upon average or standard costs, this documentation must include detailed information concerning the methodology utilized in determining the average or standard costs.
e) For purposes of the training expense credit and this rule, the term "persons employed by the taxpayer in Illinois" shall include both employees whose compensation is subject to withholding under IITA Section 701 (including employees who are exempt from withholding pursuant to IITA Section 701(d)). A person is employed in Illinois by the taxpayer if that person has "compensation paid in this State" as that term is defined in IITA Section 304(a)(2)(B). Sole proprietors, partners of partnerships, shareholders of corporations, beneficiaries of trusts or estates, or other individuals who own an interest in the employer are not employees for purposes of this credit, unless in the case of shareholders or beneficiaries, they are able to demonstrate that, separate and apart from their ownership status, they are also employees of the concern.
f) For partners and shareholders of subchapter S corporations, there shall be allowed a credit under IITA Section 201(j) to be determined in accordance with the determination of income and distributive share of income under Sections 702 and 704 and subchapter S of the Internal Revenue Code (IITA Section 201(j)).
g) Any credit allowed under this subsection which is unused in the year the credit is earned may be carried forward to each of the 5 taxable years following the year for which the credit is computed until it is used. This credit shall be applied first to the earliest year for which there is a liability. If there is a credit under this subsection from more than one tax year that is available to offset a liability, the earliest credit arising under this subsection shall be applied first. No carryforward credit may be claimed in any tax year ending on or after December 31, 2003. (IITA Section 201(j))
(Source: Amended at 29 Ill. Reg. 20516, effective December 2, 2005)
Section 100.2160 Research and Development Credit (IITA Section 201(k))
a) For tax years ending after July 1, 1990 and prior to December 31, 2003, and tax years ending on or after December 31, 2004 and prior to January 1, 2027, each taxpayer shall be allowed a credit against the tax imposed by IITA Section 201(a) and (b) for increasing research activities in this State. It is the intent of the General Assembly that the research and development credit under IITA Section 201(k) applies continuously for all tax years ending on or after December 31, 2004 and ending prior to January 1, 2032, including, but not limited to, the period beginning on January 1, 2016, the date on which the credit expired prior to enactment of PA 100-22, and ending on July 6, 2017, the effective date of PA 100-22. All actions taken in reliance on the continuation of the credit under IITA Section 201(k) by any taxpayer are hereby validated. (IITA 201(k))
b) The credit allowed shall be equal to 6½% of the qualifying expenditures for increasing research activities in this State. (IITA Section 201(k))
c) Not all "research" will qualify for the credit. Nor will every expenditure associated with research qualify for the credit. Qualified research is defined in IRC section 41(d). Qualifying expenditures means the qualifying expenditures as defined for the federal credit for increasing research activities which would be allowable under IRC section 41 and which are conducted in this State.
1) IRC section 41(b) defines "qualifying research expenses" as the sum of the in-house research expenses and the contract research expenses paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer.
2) Qualifying expenditures also include basic research payments. Basic research payments are defined in IRC section 41(e).
d) Qualifying expenditures for increasing research activities in this State means the excess of qualifying expenditures for the taxable year in which incurred over qualifying expenditures for the base period. Qualifying expenditures for the base period means the average of the qualifying expenditures for each year in the base period.
e) Base period means the 3 taxable years immediately preceding the taxable year for which the determination is being made. For purposes of computing the average qualifying expenditures for the base period:
1) For taxable years after a taxpayer has succeeded to the tax items of a corporation under IITA Section 405(a), qualifying expenditures incurred by the corporation during the base period shall be deemed to be qualifying expenditures of the taxpayer.
2) If the taxpayer incurred no qualifying expenditures during a base period year, the qualifying expenditures for that year are zero, even if the taxpayer was not in existence or conducting any business in this State during that year.
3) If the taxpayer was doing business in this State for only part of a base period year, the qualifying expenditures for that year shall be equal to the qualifying expenditures actually incurred, multiplied by 365 and divided by the number of days in the portion of the taxable year during which the taxpayer was doing business in this State.
4) Qualifying expenditures incurred in taxable years in which the taxpayer did not qualify for the credit, including taxable years ending on or after December 31, 2003 and prior to December 31, 2004 must be included in the computation of qualifying expenditures for the base period.
f) Any credit in excess of the tax liability for the taxable year may be carried forward to offset the income tax liability of the taxpayer for the next 5 years or until it has been fully utilized, whichever occurs first (IITA Section 201(k)), provided that no credit earned in a tax year ending prior to December 31, 2003 may be carried forward to any year ending on or after December 31, 2003. If an unused credit is carried forward to a given year from 2 or more earlier years, that credit arising in the earliest year is applied first. If a tax liability for the given year remains, the credit from the next earliest year is applied. Any remaining unused credit or credits can be carried forward to the next following year in which a tax liability exists. However, the credit can only be carried forward 5 years from the year in which the taxpayer incurred the expense for which the credit was given. Any unused credit is then forfeited.
g) Combined Returns. In the case of taxpayers filing combined returns, Section 100.5270(d) details the manner in which the credit is determined.
h) Pass-through of Credits to Partners and Subchapter S Corporation Shareholders
1) For tax years beginning on and after January 1, 1999, partners and shareholders of subchapter S corporations shall be allowed a credit under this Section to be determined in accordance with the determination of income and distributive share of income under IRC sections 702 and 704 and subchapter S of the Internal Revenue Code. (IITA Section 201(k)) No inference shall be drawn from the enactment of PA 91-644, which expressly allows this pass-through of credits, in construing IITA Section 201(k) for tax years beginning prior to January 1, 1999.
2) Repeal and re-enactment of the credit. Due to the repeal of the credit for taxable years ending on or after December 31, 2003, and the re-enactment of the credit for taxable years ending on or after December 31, 2004:
A) A partner or shareholder may not claim a credit passed through from a partnership or subchapter S corporation for any taxable year of the partner or shareholder ending on or after December 31, 2003 and prior to December 31, 2004, even if the credit was earned in a taxable year of the partnership or subchapter S corporation ending prior to December 31, 2003.
B) No credit may be earned by a partnership or subchapter S corporation for a taxable year ending on or after December 31, 2003 and prior to December 31, 2004, and passed through to a partner or shareholder, even if the partner or shareholder would have reported the credit for a taxable year ending on or after December 31, 2004.
(Source: Amended at 49 Ill. Reg. 1295, effective January 15, 2025)
Section 100.2161 Quantum Computing Campuses Tax Credit (IITA Section 241)
a) For tax years ending on or after June 26, 2024 (the effective date of Public Act 103-0595), each taxpayer who has been awarded a credit by the Department of Commerce and Economic Opportunity (DCEO) is allowed a credit against the taxes imposed under IITA Section 201(a) and (b) in an amount equal to 20% of the wages paid by the taxpayer during the taxable year to a full-time or part-time employee of a construction contractor employed in the construction of an eligible facility located on a quantum computing campus. (IITA Section 241(a))
b) For purposes of this Section, the term "quantum computing campus" shall have the same meaning as when used in Section 605-1115(a) of the Civil Administrative Code of Illinois ((Department of Commerce and Economic Opportunity Law) (DCEO Law)) [20 ILCS 605].
c) An "eligible facility" means a building used primarily to house one or more of the following:
1) A quantum computer operator;
2) A research facility;
3) A data center (as defined in Section 605-1115(a) of the DCEO Law);
4) A manufacturer and assembler of quantum computers and component parts;
5) A cryogenic or refrigeration facility; or
6) Any other facility determined, by industry and academic leaders, to be fundamental to the research and development of quantum computing for practical solutions. (IITA Section 241(e))
d) The amount of the credit shall be determined by DCEO and shall be the amount shown on the tax credit certificate issued by DCEO to the taxpayer.
e) In no event shall a credit under IITA Section 241 reduce the taxpayer's liability to less than zero. If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The tax credit shall be applied to the earliest year for which there is a tax liability. If there are credits for more than one year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 241(b))
f) Partnerships and Subchapter S Corporations
1) If the taxpayer is a partnership or a Subchapter S corporation, the credit shall be allowed to the partners or shareholders in accordance with the determination of income and distributive share of income under Sections 702 and 704 and subchapter S of the Internal Revenue Code, or as otherwise agreed by the partners or shareholders, provided that such agreement shall be executed in writing prior to the due date of the return for the taxable year and meet such other requirements as the Department may establish by rule. Partnership has the meaning prescribed in IITA Section 1501(a)(16). (IITA Section 251)
2) The credit earned by a partnership or a subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the tax credit certificate is issued by DCEO under Section 605-1115(c) of the DCEO Law.
3) The credit shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends and may be carried forward to the 5 succeeding taxable years of the owner until used.
4) Any credit passed through to a partnership or subchapter S corporation under this subsection shall pass through to its partners or shareholders in the same manner as a credit earned by the partnership or subchapter S corporation.
g) To claim the credit, a taxpayer shall attach to its Illinois income tax return for the taxable year:
1) a copy of the tax credit certificate and annual certification (if any) issued by DCEO; and
2) in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating:
A) the portion of the total credit shown on the tax credit certificate that is allowed to that partner or shareholder; and
B) the taxable year of the partnership or subchapter S corporation in which the tax credit certificate was issued. (IITA Section 241(c))
h) The credit may not be transferred or sold.
i) This credit is exempt from the sunset provisions of IITA Section 250. (IITA Section 241(f))
(Source: Added at 49 Ill. Reg. 1861, effective January 31, 2025)
Section 100.2163 Environmental Remediation Credit (IITA 201(l))
a) For tax years ending after December 31, 1997, and on or before December 31, 2001, a taxpayer shall be allowed a credit against the tax imposed by IITA Section 201(a) and (b) for unreimbursed environmental remediation costs incurred. [IITA Section 201(l)]
b) The credit allowed shall be equal to 25% of the unreimbursed remediation costs incurred and approved by the Illinois Environmental Protection Agency in excess of $100,000 per cleanup site. The $100,000 deductible does not apply if the remediation site is within an enterprise zone. [IITA Section 201(l)]
c) The credit is earned in the year the Illinois Environmental Protection Agency issues a No Further Remediation Letter with respect to the site and may not exceed $150,000 per site. The credit shall not exceed $40,000 per year and the credit may not reduce the taxpayer's liability for the tax imposed by IITA Section 201(a) and (b) below zero. [IITA Section 201(l)]
d) The credit is not allowed to a person who is responsible for the pollution of the remediation site or who is related to the responsible person. A person is related to a responsible person if deductions for losses incurred on transactions between them would be disallowed under IRC Section 267(b), (c), or (f)(1). [IITA Section 201(l)]
e) Any credit in excess of either the tax liability for the taxable year or the $40,000 per year limitation may be carried forward to offset the income tax liability of the taxpayer for the next 5 years or until it has been fully utilized, whichever occurs first. Credit in excess of the $150,000 per site limitation may not be carried over to another year. If a credit from more than one year is carried forward to a particular tax year, the credit arising in the earliest tax year is applied first.
f) If the site is sold, any unused credit passes to the purchaser, unless the purchaser is disqualified under subsection (d) of this Section.
g) In the case of a credit earned by a partnership or Subchapter S corporation, the credit passes through to the owners for use against their regular income tax liabilities in the same proportion as other items of the taxpayer are passed through to its owners for federal income tax purposes.
h) A taxpayer claiming the credit who has deducted any of the expenses on which the credit is based for federal income tax purposes must add those expenses back in computing base income.
(Source: Added at 26 Ill. Reg. 192, effective December 20, 2001)
Section 100.2164 Data Center Construction Employment Tax Credit (IITA Section 229)
a) For taxable years beginning on or after January 1, 2019, a taxpayer who has been awarded a credit by the Department of Commerce and Economic Opportunity (DCEO) under Section 605-1025(b) of the Department of Commerce and Economic Opportunity Law of the Civil Administrative Code of Illinois [20 ILCS 605] (DCEO Law) is entitled to a credit against the taxes imposed under IITA Section 201 (a) and (b). (IITA Section 229(a))
b) Data Center. For the purposes of the data center construction employment tax credit, "data center" shall have the same meaning as when used in Section 605-1025(c) of the DCEO Law.
c) The credit shall be computed as established in this subsection. The amount of the credit shall be 20% of the wages paid during the taxable year to a full-time or part-time employee of a construction contractor employed by a certified data center if those wages are paid for the construction of a new data center in a geographic area that meets any one of the following criteria:
1) the area has a poverty rate of at least 20%, according to the U.S. Census Bureau American Community Survey 5-year Estimates;
2) 75% or more of the children in the area participate in the federal free lunch program, according to reported statistics from the State Board of Education;
3) 20% or more of the households in the area receive assistance under the Supplemental Nutrition Assistance Program (SNAP), according to data from the U.S. Census Bureau American Community Survey 5-year Estimates; or
4) the area has an average unemployment rate, as determined by the Department of Employment Security, that is more than 120% of the national unemployment average, as determined by the U.S. Department of Labor, for a period of at least 2 consecutive calendar years preceding the date of the application. (IITA Section 229(a))
d) Year in Which Credit is Taken. The credit allowed under this Section shall be taken in the taxable year that includes the date of the tax credit certificate issued by DCEO under Section 605-1025(b) of the DCEO Law.
e) Partnerships and Subchapter S Corporations
1) For taxable years ending before December 31, 2023, if the taxpayer is a partnership, a Subchapter S corporation, or a limited liability company that has elected partnership tax treatment, the credit shall be allowed to the partners, shareholders, or members in accordance with the determination of income and distributive share of income under Sections 702 and 704 and subchapter S of the Internal Revenue Code, as applicable. (IITA Section 229(a)) Partnership has the meaning prescribed in IITA Section 1501(a)(16). In the case of a credit earned by a partnership or subchapter S corporation, the credit passes through to the owners as provided in the partnership agreement under IRC section 704(a) or in proportion to their ownership of the stock of the subchapter S corporation under IRC section 1366(a).
2) For taxable years ending on or after December 31, 2023, if the taxpayer is a partnership or a Subchapter S corporation, then the credit is allowed to pass through to the partners and shareholders in accordance with the determination of income and distributive share of income under Sections 702 and 704 and Subchapter S of the Internal Revenue Code, or as otherwise agreed by the partners or shareholders, provided that such agreement shall be executed in writing prior to the due date of the return for the taxable year and meet such other requirements as the Department may establish by rule. Partnership has the meaning prescribed in IITA Section 1501(a)(16). (IITA Section 251)
3) The credit earned by a partnership or subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the tax credit certificate was issued by DCEO under Section 605-1025(b) of the DCEO Law.
4) The credit shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends and may be carried forward to the 5 succeeding taxable years of the owner until used.
5) Any credit passed through to a partnership or subchapter S corporation under this subsection shall pass through to its partners or shareholders in the same manner as a credit earned by the partnership or subchapter S corporation.
f) In no event shall a credit under this Section reduce the taxpayer's liability to less than zero. If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The tax credit shall be applied to the earliest year for which there is a tax liability. If there are credits for more than one year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 229(b))
g) Revocation. No credit shall be allowed with respect to any certification for any taxable year ending after the revocation of the certification by DCEO. Upon receiving notification by DCEO of the revocation of certification, the Department shall notify the taxpayer that no credit is allowed for any taxable year ending after the revocation date, as stated in the notification. (IITA Section 229(c))
h) If any credit has been allowed with respect to a certification for a taxable year ending after the revocation date, any refund paid to the taxpayer for that taxable year shall be, to the extent of that credit allowed, an erroneous refund within the meaning of IITA Section 912. (IITA Section 229(c))
i) Documentation of the Credit. A claimant shall attach to its Illinois income tax return:
1) a copy of the Tax Credit Certificate and annual certification (if any) issued by DCEO; and
2) in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating:
A) the portion of the total credit shown on the Tax Credit Certificate that is allowed to that partner or shareholder; and
B) the taxable year of the partnership or subchapter S corporation in which the Tax Credit Certificate was issued.
j) This Section is exempt from the automatic sunset provisions of IITA Section 250. (IITA Section 229(a))
(Source: Amended at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2165 Education Expense Credit (IITA 201(m))
a) Beginning with tax years ending after December 31, 1999, a taxpayer who is the custodian of one or more qualifying pupils shall be allowed a credit against the tax imposed by IITA Section 201(a) and (b) for qualified education expenses incurred on behalf of the qualifying pupils (the "education expense credit"). The education expense credit shall be equal to 25% of qualified education expenses, but the maximum education expense credit allowed to a family that is the custodian of qualifying pupils shall not exceed $500 in any tax year ending prior to December 31, 2017, or $750 for any tax year ending on or after December 31, 2017, regardless of the number of qualifying pupils. The education expense credit taken shall not reduce a taxpayer's liability under the Act to less than zero. Notwithstanding any other provision of law, for taxable years beginning on or after January 1, 2017, if the taxpayer's adjusted gross income for the taxable year exceeds $500,000, in the case of spouses filing a joint federal tax return or $250,000, in the case of all other taxpayers, the credit allowed under this Section shall be zero. (IITA Section 201(m)) For purposes of this provision, each spouse is a separate taxpayer. No part of the education expense credit is refundable to the custodian in the event the custodian's tax liability is reduced to zero.
b) For a taxpayer to claim the education expense credit, the taxpayer must be the custodian of one or more qualifying pupils and have incurred qualified education expenses on behalf of the qualifying pupils.
1) Qualifying Pupils
A) "Qualifying pupils" shall mean individuals who are:
i) residents of the State of Illinois;
ii) under the age of 21 at the close of the school year for which a credit is sought; and
iii) full time pupils enrolled in a kindergarten through twelfth grade education program at any school during the school year for which a credit is sought. (IITA Section 201(m))
B) An individual under the age of 21 and graduating from the twelfth grade during a school year shall be considered a qualifying pupil for the year but only to the extent of qualified education expenses incurred by the custodian due to the qualifying pupil's enrollment in the twelfth grade.
2) "Custodian" of qualifying pupils shall mean an Illinois resident(s) who is a parent, the parents, a legal guardian, or the legal guardians of the qualifying pupils. (IITA Section 201(m))
A) A foster parent, or the foster parents, or an adoptive parent, or the adoptive parents shall be included within the meaning of parent or legal guardian for purposes of determining the custodian of qualifying pupils.
B) Custodian shall not include a parent or the parents of qualifying pupils whose parental rights over the qualifying pupils have been legally terminated.
C) A custodian incurring qualified education expenses on behalf of qualifying pupils may claim the education expense credit only to the extent of qualified education expenses actually paid for by that custodian.
D) The education expense credit claimed shall not exceed the applicable $500 or $750 credit limit allowable to a family that is the custodian of qualifying pupils. Therefore, the divorced or unmarried parents of qualifying pupils, each of whom is the custodian of the qualifying pupils and each of whom incurs education expenses on behalf of such pupils, shall be considered the family of such qualifying pupils for purposes of the applicable $500 or $750 credit limit.
3) "School", for purposes of the education expense credit, means any public or nonpublic elementary or secondary school in Illinois that is in compliance with Title VI of the Civil Rights Act of 1964 and attendance at which satisfies the requirements of Section 26-1 of the School Code [105 ILCS 5/26-1], except that nothing shall be construed to require a child to attend any particular public or nonpublic school in order to qualify for the education expense credit (IITA Section 201(m)). Schools that are not required to be in compliance with the Title VI of the Civil Rights Act of 1964 but attendance at which meets the compulsory education requirements of Section 26-1 of the School Code are included within the meaning of "school" for purposes of the education expense credit. Private schools providing educational instruction in the home, attendance at which meets the compulsory education requirements of Section 26-1 of the School Code, are included within the meaning of "school" for purposes of the education expense credit. For school years prior to the 2014-2015 school year, Section 26-1 of the School Code required attendance beginning with 7-year-olds, who were required to attend first grade or higher. A school that provided kindergarten, but not first grade or higher, did not qualify as a school for which the credit is allowed under this Section. PA 98-544 amended Section 26-1 of the School Code to require attendance in kindergarten or higher for 6-year-olds, starting with the 2014-2015 school year. Accordingly, beginning with the 2014-2015 school year, a school providing kindergarten may qualify, even if it does not provide first grade or higher.
4) Qualified Education Expenses
A) "Qualified education expenses" shall mean amounts incurred on behalf of a qualifying pupil in excess of $250 for tuition, book fees, and lab fees at the school in which the qualifying pupil is enrolled during the regular school year. (IITA Section 201(m)) Amounts incurred for tuition, book fees and lab fees by a family that is the custodian of more than one qualifying pupil may aggregate all tuition, book fees and lab fees incurred by the family in arriving at qualified education expenses eligible for the credit.
i) Tuition is the amount paid to a school as a condition of enrollment for a quarter, semester or year term in a kindergarten through twelfth grade education program of the school. Enrollment in an education program shall mean admission to the full and regular schedule of classroom instruction of the school during the designated period. Tuition also includes amounts paid as a condition of enrollment on behalf of a school to cover costs of implementing and administering an education program.
ii) Book fees are amounts paid for the use of books that are essential to a qualifying pupil's participation in the education program of the school. A book is essential when the school or an instructor of the school requires its use by the qualifying pupil in order to participate in and complete a course of the education program.
iii) Lab fees are amounts paid for the use of supplies, equipment, materials or instruments that are essential to a qualifying pupil's participation in a lab course of the school's education program. Supplies, equipment, materials or instruments are essential when the school or an instructor of the school requires their use by the qualifying pupil in order to participate in and complete a lab course of the education program. Lab courses include those courses that, in addition to classroom instruction by a teacher, provide an environment of organized activity involving observation, experimentation or practice in a course of study. Lab courses of study include those courses with a scientific, musical, artistic, technical or language skill content. Lab fees may be in the nature of a rental fee for supplies, equipment, materials or instruments that are used in the lab course. Fees incurred for the purchase of supplies, equipment, materials or instruments used in a lab course and which are substantially consumed by the assignments and activities of the lab are also considered qualifying lab fees.
B) Any amount paid for the purchase of items that would be considered qualified education expenses but for the fact that the items are not substantially consumed during the school year and will remain the tangible personal property of a qualifying pupil or a custodian at the conclusion of the school year shall not be considered qualified education expenses. For purposes of this Section, an item is substantially consumed when, during the school year, the item is used to the extent that its fair market value has been reduced to a de minimis amount.
c) Examples. Calculation of the education expense credit may be illustrated by the following examples. For each example, it is assumed that the taxpayer's adjusted gross income for the taxable year is not greater than $500,000 (in the case of each spouse filing a joint federal income tax return) or $250,000 (in the case of all other taxpayers).
EXAMPLE 1. Family A is the custodian of 2 qualifying pupils. Family A incurs a total of $6,000 in tuition, book fees and lab fees for the education of both pupils during the calendar year. The first $250 incurred for tuition, book fees and lab fees is not included as a qualified education expense. The balance of $5,750 ($6,000 - $250) multiplied by 25% equals $1,437.50. Family A may only claim the maximum tax credit allowable of $500 (for taxable years ending prior to December 31, 2017) or $750 (for taxable years ending on or after December 31, 2017).
EXAMPLE 2. Family B is the custodian of one qualifying pupil. Family B incurs a total of $2,250 in tuition, book fees and lab fees for the education of the qualifying pupil during the calendar year. Family B also incurs $200 for the purchase of a musical instrument used by the qualifying pupil while participating in the school band. The $200 incurred for the purchase of a musical instrument is an expense that does not qualify for the credit. The first $250 incurred for tuition, book fees and lab fees is not included as a qualified education expense. The balance of $2,000 ($2,250-$250) multiplied by 25% equals $500. Family B may claim a credit for the entire $500.
EXAMPLE 3. Family C is the custodian of 4 qualifying pupils. Family C incurs a total of $1,000 in book fees and lab fees for the education of all 4 qualifying pupils during the calendar year. Family C also incurs a total of $50 for the purchase of books used in completing book reports required by the school. The $50 incurred for the purchase of books is an expense that does not qualify for the credit. The first $250 incurred for book fees and lab fees is not included as a qualified education expense. The balance of $750 ($1,000 - $250) multiplied by 25% equals $187.50. Family C may claim a tax credit of $187.50.
d) To aid a custodian in claiming the education expense credit, a school should provide to the custodian a written receipt documenting education expenses paid to the school by the custodian on behalf of qualifying pupils during the calendar year. The written receipt should be provided to the custodian on or before January 31 of the succeeding calendar year. When a school provides a written receipt to a custodian, it should use the form prescribed by the Department and include the following information:
1) the designated calendar year during which the education expenses were paid;
2) the name and address of the school;
3) the name and address of the custodian;
4) the name and social security number of the qualifying pupil or pupils;
5) a list of education expense amounts paid for tuition, book fees and lab fees during the calendar year; and
6) the total of all such education expenses paid during the calendar year. All information contained on the written receipt provided by a school is deemed confidential information for use as supporting documentation of the education expense credit claimed and shall not be used for any other purpose.
e) A custodian filing a return claiming the education expense credit shall maintain records of proof as to the education expenses paid for by the custodian. The custodian shall maintain the records for a period of not less than 3 years after the date the return on which the custodian claimed the education expense credit was filed. Records maintained by the custodian shall be subject to inspection by the Department and its duly authorized agents and employees.
f) The education expense credit for qualified education expenses incurred must be claimed for the tax year in which the qualified education expenses are actually paid. Any part of the education expense credit not claimed or allowed in a given tax year shall not be carried forward or back to any other tax year. Likewise, where qualified education expenses are incurred in excess of the allowable education expense credit for any given tax year, the excess of qualified education expenses shall not be used in claiming the education expense credit for any other tax year.
g) This Section is exempt from automatic sunset under IITA Section 250.
(Source: Amended at 44 Ill. Reg. 2845, effective January 30, 2020)
Section 100.2170 Tax Credits for Coal Research and Coal Utilization Equipment (IITA 206)
a) Until January 1, 2005, each corporation subject to the Illinois Income Tax Act shall be entitled to a credit against the tax imposed under IITA Sections 201(a) and (b) in an amount equal to 20% of the amount donated to the Illinois Center for Research on Sulfur in Coal (IITA Section 206).
b) Until January 1, 2005, each corporation subject to the Illinois Income Tax Act shall be entitled to a credit against the tax imposed under IITA Sections 201(a) and (b) in an amount equal to 5% of the amount spent during the taxable year by the corporation on equipment purchased for the purpose of maintaining or increasing the use of Illinois coal at any Illinois facility owned, leased or operated by the corporation.
1) Such equipment shall be limited to direct coal combustion equipment and pollution control equipment necessary thereto.
2) For purposes of this credit, the amount spent on qualifying equipment shall be defined as the basis of the equipment used to compute the depreciation deduction for federal income tax purposes. This amount spent is the adjusted basis of each item of equipment as determined pursuant to IRC 167(g). Generally, the adjusted basis will be the purchase price of the property plus any capital expenditures less any rebates (IITA Section 206).
3) In order to show that the equipment was purchased with the intent to maintain or increase the use of Illinois coal at any Illinois facility owned, leased or operated by the taxpayer, the taxpayer must demonstrate that the equipment was used for the combustion of Illinois coal during the taxable year or could reasonably have been so used but was not due to circumstances beyond the taxpayer's control.
c) The credit shall be allowed for the tax year in which the amount is donated or the equipment purchased is placed in service, or, if the amount of the credit exceeds the tax liability for that year, whether it exceeds the original liability or the liability as later amended, such excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit years. The credit may not reduce a taxpayer's liability below zero, nor may excess credit be carried to another year for years ending prior to December 31, 1987. The credit shall be applied to the earliest year for which there is a liability. If there is credit from more than one tax year that is available to offset a liability, the earlier credit shall be applied first.
(Source: Amended at 26 Ill. Reg. 1274, effective January 15, 2002)
Section 100.2171 Angel Investment Credit (IITA 220)
a) For taxable years beginning on and after January 1, 2011, and ending on or before December 31, 2026, a claimant (as defined under 14 Ill. Adm. Code 531.20) may claim a credit against the tax imposed under IITA Sections 201(a) and (b) in an amount equal to 25% of the Angel Investment (as defined under 14 Ill. Adm. Code 531.20) made by the claimant and that is shown on the Tax Credit Certificate issued by the Department of Commerce and Economic Opportunity (DCEO) under 14 Ill. Adm. Code 531.70. A claimant may not sell or otherwise transfer a credit awarded under this Section to another person. (IITA Section 220(g))
b) Year in Which Credit is Taken. The credit allowed under this Section shall be taken in the taxable year that includes the date of the Tax Credit Certificate issued by DCEO under 14 Ill. Adm. Code 531.70.
c) In the case of a credit earned by a partnership or subchapter S corporation, the credit passes through to the owners as provided in the partnership agreement under IRC section 704(a) or in proportion to their ownership of the stock of the subchapter S corporation under IRC section 1366(a). The credit earned by a partnership or subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the Tax Credit Certificate is issued by DCEO under 14 Ill. Adm. Code 531.70, and shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends.
d) The credit under this Section may not exceed the taxpayer's Illinois income tax liability under IITA Section 201(a) and (b) for the taxable year. If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one tax year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 220(b))
e) Recapture. If, as determined by DCEO, an investment for which a claimant is allowed a credit under this Section is held by the claimant for less than 3 years, or, if within that period of time the qualified new business venture is moved from the State, the claimant shall pay to the Department of Revenue, on forms prescribed by the Department of Revenue, the amount of the credit that the claimant received related to the investment. DCEO shall annually certify that the claimant's investment has been made and remains in the qualified new business venture for no less than 3 years. (IITA Section 220(d))
f) Documentation of the Credit. A claimant shall attach to its Illinois income tax return a copy of the Tax Credit Certificate and/or annual certification (if any) issued by DCEO and, in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating the portion of the total credit shown on the Tax Credit Certificate that is allowed to that partner or shareholder and the taxable year of the partnership or subchapter S corporation in which the Tax Credit Certificate was issued.
(Source: Amended at 46 Ill. Reg. 14550, effective August 2, 2022)
Section 100.2175 Invest in Kids Credit (IITA 224)
a) For taxable years beginning on and after January 1, 2018, and ending before January 1, 2023, a taxpayer may claim a credit against the income tax imposed under IITA Section 201(a) and (b) in an amount equal to 75% of the qualified contribution amount awarded under the Invest in Kids Act that is shown on the Certificate of Receipt issued by an approved scholarship granting organization under 86 Ill. Adm. Code 1000.500. The credit may not be applied against the personal property replacement tax imposed under IITA Section 201(c) and (d).
b) The credit allowed under this Section may be taken in the taxable year that includes the date of the Certificate of Receipt issued by an approved scholarship granting organization under 86 Ill. Adm. Code 1000.500. The credit may not be transferred. The credit may not be carried back and may not reduce the taxpayer's liability to less than zero. If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one tax year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 224(c))
c) In the case of a credit earned by a partnership or subchapter S corporation, the credit passes through to the owners as provided in the partnership agreement under IRC section 704(a) or in proportion to their ownership of the stock of the subchapter S corporation under IRC section 1366(a). The credit earned by a partnership or subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the Certificate of Receipt is issued by an approved scholarship granting organization under 86 Ill. Adm. Code 1000.500, and shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends.
d) A credit awarded under the Invest in Kids Act may not be claimed for any qualified contribution for which the taxpayer claims a federal income tax deduction. (IITA Section 224(d))
e) A taxpayer shall retain and provide at the request of the Department the Certificate of Receipt issued by an approved scholarship granting organization and, in the case of a partner in a partnership or shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating the portion of the total credit shown on the Certificate of Receipt that is allowed to that partner or shareholder and the taxable year of the partnership or subchapter S corporation in which the Certificate of Receipt was issued.
f) EXAMPLE 1: Individual A contributes $5,000 to an approved scholarship granting organization on January 25, 2018. Individual A receives a Certificate of Receipt in the amount of $5,000. On April 1, 2019, Individual A files a 2018 U.S. Form 1040 with Schedule A Itemized Deductions. Individual A does not include any part of the $5,000 contribution under Gifts to Charity on Schedule A. Individual A is entitled to claim an Invest in Kids tax credit in the amount of $3,750 on Individual A's 2018 Form IL-1040, Schedule 1299-C.
EXAMPLE 2: Individual B contributes $5,000 to an approved scholarship granting organization on January 25, 2018. Individual B receives a Certificate of Receipt in the amount of $5,000. On April 1, 2019, Individual B files a 2018 U.S. Form 1040 with Schedule A Itemized Deductions. Individual B includes $1,250 (25% of the qualified contribution) under Gifts to Charity on Schedule A. Individual B is not entitled to claim any Invest in Kids tax credit on Individual B's 2018 Form IL-1040, Schedule 1299-C.
EXAMPLE 3: Corporation C contributes $1 million to an approved scholarship granting organization on January 5, 2018. Corporation C receives a Certificate of Receipt in the amount of $1 million. On October 15, 2019, Corporation C files a 2018 U.S. Form 1120 and excludes the $1 million from the charitable contributions line of the return. Corporation C is entitled to claim an Invest in Kids tax credit in the amount of $750,000 on Corporation C's 2018 Form IL-1120, Schedule 1299-D.
EXAMPLE 4: Corporation D contributes $5 million to an approved scholarship granting organization on January 5, 2018. Corporation D receives a Certificate of Receipt in the amount of $1,333,333 (the maximum qualified contribution). On October 15, 2019, Corporation D files a 2018 U.S. Form 1120 and includes $3,666,667 ($5 million less the maximum qualified contribution) on the charitable contributions line of the return. Corporation D is entitled to claim an Invest in Kids tax credit in the amount of $1 million on Corporation D's 2018 Form IL-1120, Schedule 1299-D.
(Source: Added at 42 Ill. Reg. 4953, effective February 28, 2018)
Section 100.2179 Volunteer Emergency Worker Credit (IITA Section 234)
a) For taxable years beginning on or after January 1, 2023, and beginning before January 1, 2028, a taxpayer shall be allowed a credit against the tax imposed by subsections (a) and (b) of Section 201 of the Illinois Income Tax Act in the amount of $500 if the taxpayer:
1) Served as a volunteer emergency worker for at least nine months during the taxable year,
2) Did not receive more than $5,000 in compensation for serving as a volunteer emergency worker during the taxable year, and
3) Is registered with the Office of the State Fire Marshal (OSFM) as having met criteria (1) and (2) by January 12 of the following calendar year.
b) Beginning on February 1 of each year, taxpayers meeting the criteria in subsection (a) shall submit an application for volunteer emergency worker income tax credit through the Department's website. After verifying the application against the information provided pursuant to subsection (c), the Department shall issue to the taxpayer a volunteer emergency worker credit certificate. If the application does not match the information provided pursuant to subsection (c), the Department will contact the taxpayer by telephone or email to request additional support, and the Department will work with the taxpayer and OSFM during the next ten business to resolve any verification issues. If eligibility has not been verified after 10 business days, the Department will send the taxpayer an email indicating that the application has been denied.
c) The chief of the fire department, fire protection district, or fire protection association shall be responsible for notifying the OSFM by January 12 of each year of the volunteer emergency workers who met the criteria in subsection (a)(1) and (2) during the preceding calendar year. By January 24 of each year, the OSFM shall provide the Department with an electronic file containing the name, address, State Fire Marshal identification number and fire department identification number for the individuals who have been reported to the OSFM by the chief of the fire department, fire protection district, or fire protection association as meeting the criteria in subsection (a)(1) and (2) and who meet the criteria of subsection (a)(3).
d) Volunteer emergency worker credit certificates shall be awarded on a first-come, first-served basis in accordance with the receipt of applications, and they shall not exceed $5,000,000 in the aggregate. Taxpayers may not claim the volunteer emergency worker credit on any income tax return unless they receive a valid certificate number from the Department.
e) A credit awarded under this Section shall not reduce a taxpayer's liability to less than zero.
f) As used in this Section, "volunteer emergency worker" means a person who serves as a member, other than on a full-time career basis, of a fire department, fire protection district, or fire protection association that has a Fire Department Identification Number issued by the Office of the State Fire Marshal and who does not serve as a member on a full-time fire service career basis for another fire department, fire protection district, fire protection association, or governmental entity.
(Source: Added at 48 Ill. Reg. 4433, effective March 11, 2024)
Section 100.2180 Credit for Residential Real Property Taxes (IITA 208)
a) Beginning with tax years ending on or after December 31, 1991, every individual taxpayer shall be entitled to a tax credit equal to 5% of real property taxes paid by the taxpayer during the taxable year on the principal residence of the taxpayer. In the case of multi-unit or multi-use structures and farm dwellings, the taxes on the taxpayer's principal residence shall be that portion of the total taxes that is attributable to the principal residence.
1) Notwithstanding any other provision of law, for taxable years beginning on or after January 1, 2017, no taxpayer is allowed a credit under this Section if the taxpayer's adjusted gross income for the taxable year exceeds:
A) $500,000, in the case of spouses filing a joint federal tax return; or
B) $250,000, in the case of all other taxpayers. (IITA Section 208)
2) For purposes of this provision, each spouse is a separate taxpayer.
b) A taxpayer will qualify for the property tax credit if:
1) the taxpayer's principal residence during the year preceding the tax year at issue was in Illinois; and
2) the taxpayer owned the residence; and
3) the property tax billed in the tax year at issue has been paid. This is the amount paid after factoring in any applicable exemptions.
c) Basis of the Credit
1) The credit may be based on the entire property tax bill if:
A) the taxpayer lived in the same residence during all of the year preceding the tax year at issue; and
B) the tax bill included property used only for the taxpayer's personal residence, yard, garage, or other structure used for personal purposes. If the property tax bill included not only taxpayer's personal residence, but also business, rental, or farm property, that credit may be calculated only on that portion of the property tax bill that is for the personal residence.
2) The credit may not be taken for a vacation home.
3) Credit may not be taken for mobile home privilege tax.
d) If taxpayer sold a principal residence in the year preceding the tax year at issue, he or she may not take a credit for the tax year at issue. In this situation, taxpayer will not have paid property taxes during the taxable year on that principal residence. Property taxes in Illinois are assessed on a property in one year and paid in the next year. In other words, in 1994 taxpayers pay 1993 taxes. In order to qualify for the credit granted by IITA Section 208 during 1994, a taxpayer must have ownership of an Illinois principal residence during 1993. An amount representing property taxes for the period of ownership of the taxpayer in the year preceding the tax year at issue will have been paid to the buyer of the taxpayer's former residence. Therefore, taxpayer will be authorized to take an additional amount of credit for property taxes paid to buyer upon sale of the residence in the year preceding the tax year at issue, but will have no credit in the subsequent year.
EXAMPLE: Taxpayer A sells his or her principal residence to B on July 1, 1991. Taxpayer A owned and resided in the principal residence for all of 1990, and for the first 6 months of 1991. Taxpayer A is entitled to a credit for residential real property taxes on his or her 1991 return in an amount equal to the amount of 1990 taxes paid in 1991. In addition, Taxpayer A is entitled to a credit for 6 months of the 1991 taxes that were paid over to B upon sale of the principal residence on July 1, 1991. Taxpayer A is not entitled to a credit for property taxes paid on this property on his or her 1992 return because no taxes were paid on this residence in 1992. However, if Taxpayer A bought another residence in 1991, Taxpayer A may calculate a credit for that portion of 1991 during which he or she owned and lived at the new property.
(Source: Amended at 44 Ill. Reg. 2845, effective January 30, 2020)
Section 100.2181 Credit for Instructional Materials and Supplies. (IITA Section 225)
a) For taxable years beginning on and after January 1, 2017, a taxpayer shall be allowed a credit in the amount paid by the taxpayer during the taxable year for instructional materials and supplies with respect to classroom based instruction in a qualified school, or $250, whichever is less, provided that the taxpayer is a teacher, instructor, counselor, principal or aide in a qualified school for at least 900 hours during a school year. The credit may not be carried back and may not reduce the taxpayer's liability to less than zero. If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The tax credit carried forward is applied to the earliest year for which there is a tax liability. If credits for more than one year are available to offset a liability, the earlier credit shall be applied first. (IITA Section 225)
b) For purposes of this Section:
1) The term "qualified school" means a public school or non-public school located in Illinois. (IITA Section 225) IITA Section 102 provides that, except as otherwise expressly provided or clearly appearing from the context, any term used in the Act has the same meaning as when used in a comparable context in the IRC or any successor law or laws relating to federal income taxes and other provisions of federal statutes relating to federal income taxes, as that Code, laws and statutes are in effect for the taxable year. Accordingly, "school" means a school that provides elementary education or secondary education (kindergarten through grade 12), as provided in the federal income tax deduction allowed to teachers for classroom supplies under IRC section 62(a)(2)(D) and (d)(1).
2) The term "materials and supplies" means amounts paid for instructional materials or supplies that are designated for classroom use in any qualified school. (IITA Section 225) Expenses qualifying for the federal income tax deduction for classroom books, supplies, equipment and other materials under IRC section 62(a)(2)(D) also qualify for this credit, except that the express provision in IRC section 62(a)(2)(D)(ii) that nonathletic supplies for courses of instruction in health or physical education do not qualify, does not apply for purposes of this credit.
3) A "school year" includes any summer school conducted in the summer immediately following the end of the spring term of the school year.
c) This Section is exempt from automatic sunset under IITA Section 250. (IITA Section 225)
(Source: Added at 44 Ill. Reg. 2845, effective January 30, 2020)
Section 100.2185 Film Production Services Credit (IITA Section 213)
a) For taxable years beginning on or after January 1, 2004, and prior to January 1, 2027, a person awarded a credit under the Film Production Services Tax Credit Act of 2008 [35 ILCS 16] is entitled to a credit against the taxes imposed under IITA Section 201(a) and (b) in an amount determined by the Department of Commerce and Economic Opportunity. (IITA Section 213) The amount of the credit shall be the amount shown on the Tax Credit Certificate issued by the Department of Commerce and Economic Opportunity under 14 Ill. Adm. Code 528.70 or the Certificate of Transfer issued by the Department of Commerce and Economic Opportunity under 14 Ill. Adm. Code 528.85.
b) Year in which Credit is Taken. The credit allowed under this Section shall be taken in the taxable year that includes the date of the Tax Credit Certificate issued by the Department of Commerce and Economic Opportunity under 14 Ill. Adm. Code 528.70.
c) In the case of a credit earned by a partnership or subchapter S corporation, the credit passes through to the owners as provided in the partnership agreement under IRC section 704(a) or in proportion to their ownership of the stock of the subchapter S corporation under IRC section 1366(a). The credit earned by a partnership or subchapter S corporation will be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the Tax Credit Certificate is issued by the Department of Commerce and Economic Opportunity under 14 Ill. Adm. Code 528.70 and shall be allowed to each owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends.
d) For tax years ending prior to July 11, 2005 (the effective date of PA 94-171), the credit may not be carried forward or back. For tax years ending on or after July 11, 2005, if the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The credit shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one tax year that are available to offset a liability, the earlier credit shall be applied first. In no event shall a credit under this Section reduce the taxpayer's liability to less than zero. (IITA Section 213)
e) Transfer of Credit. A transfer of this credit may be made by the person earning the credit within one year after the credit is awarded in accordance with rules adopted by the Department of Commerce and Economic Opportunity. (IITA Section 213)
1) Transfers shall be made pursuant to 14 Ill. Adm. Code 528.85.
2) A credit may be transferred to a partnership or subchapter S corporation, in which case the partners or shareholders of the transferee shall be entitled to the transferred credit in the amounts determined under subsection (c).
3) A credit may be transferred after the end of the taxable year of the transferee in which the credit is to be taken under subsection (b). If the transferee has already filed its return for that taxable year, it will need to file a corrected or amended return, for that taxable year, claiming the credit.
f) Documentation of the Credit. A person claiming the credit allowed under this Section shall attach to its Illinois income tax return a copy of the Tax Credit Certificate or the Certificate of Transfer issued by the Department of Commerce and Economic Opportunity and, in the case of a partner in a partnership or a shareholder of a subchapter S corporation that earned the credit, a Schedule K-1-P or other written statement from the partnership or subchapter S corporation stating the portion of the total credit shown on the Tax Credit Certificate or Certificate of Transfer that is allowed to that partner or shareholder and the taxable year of the partnership or subchapter S corporation in which the Tax Credit Certificate was issued.
(Source: Amended at 44 Ill. Reg. 2845, effective January 30, 2020)
Section 100.2190 Tax Credit for Affordable Housing Donations (IITA Section 214)
a) For tax years ending on or after December 31, 2001 and on or before December 31, 2026, a taxpayer who makes a donation under Section 7.28 of the Illinois Housing Development Act [20 ILCS 3805/7.28] is entitled to a credit under IITA Section 214.
b) The credit shall be equal to 50% of the value of the donation, but in no event shall exceed the amount reserved by the administrative housing agency for that project pursuant to Section 7.28 of the Illinois Housing Development Act and 47 Ill. Adm. Code 355.209.
c) Year in which credit is taken. At the election of the taxpayer, the credit shall be taken:
1) in the tax year in which the donation is made; provided that such election may not be made for any tax year ending after December 31, 2016;
2) in the tax year in which the reservation letter is issued by the administrative housing agency under 47 Ill. Adm. Code 355.209, provided that the credit may not be claimed until the donation is made and, if the donation is not made before the taxpayer files its Illinois income tax return for the tax year in which the effective date occurs, the credit may not be claimed on the original return, but rather must be claimed on an amended return or claim for refund after the donation is made; or
3) in the tax year in which the credit is transferred to the taxpayer; provided that, if the taxpayer elects under this subsection (c)(3) to take the credit in any tax year after the tax year in which the donation was made, the 5-year carryforward period allowed to the taxpayer in subsection (d) shall be reduced by the number of tax years of the taxpayer that ended on or after the date of the donation and on or before the date of the transfer to the taxpayer. The election shall be made in the manner directed by the Department and, once made, shall be irrevocable.
EXAMPLE: The administrative housing agency issues a reservation letter for a qualifying project in December 2003. A calendar-year donor makes a qualifying donation in January 2004. Under this subsection (c), the donor may elect to take the credit in 2003 or 2004. If, in 2008, the donor transfers any unused credit to a calendar-year taxpayer, the taxpayer may also elect to claim the transferred amount as a credit in 2003 or 2004. However, because the statute of limitations might prevent the taxpayer from deriving any benefit from claiming the credit in 2003 or 2004, subsection (c)(3) allows the taxpayer to claim the credit in 2008, the year of the transfer. If the taxpayer elects to claim the credit in 2008, it may carry forward any credit in excess of its liability only until 2009, 5 years after the year of the donation.
d) If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The tax credit shall be applied to the earliest year for which there is a tax liability. If there are credits for more than one year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 214(b))
e) Transfer of Credit
1) Under IITA Section 214(c), the credit allowed under this Section may be transferred:
A) to the purchaser of land that has been designated solely for affordable housing projects in accordance with the Illinois Housing Development Act; or
B) to another donor who has also made a donation in accordance with Section 7.28 of the Illinois Housing Development Act.
2) Persons or entities not subject to the tax imposed by IITA Section 201(a) and (b) and who make a donation under Section 7.28 of the Illinois Housing Development Act are entitled to a credit as described in this Section and may transfer that credit as provided in this subsection (e). (IITA Section 214(a))
3) Transfer of the credit shall be made pursuant to 47 Ill. Adm. Code 355.309.
4) Transfer may be made of all or of any portion of the credit allowable to the transferor. However, any portion of a credit that has already been used to reduce the tax of a transferor may not be transferred.
f) In the case of a credit earned by or transferred to a partnership or Subchapter S corporation, the credit passes through to the owners for use against their regular income tax liabilities in the same proportion as other items of the taxpayer are passed through to its owners for federal income tax purposes. (See IITA Section 214(a).) The partners and shareholders shall be treated for all purposes as if their shares of the credit had been earned by or transferred to them directly, except that the election under subsection (c) of the tax year in which to take the credit shall be made by the partnership or Subchapter S corporation. Any credit passed through to a partner or shareholder under this subsection (f) may be used in the taxable year of the partner or shareholder in which ends the taxable year of the pass-through entity in which the entity would be allowed to claim the credit under subsection (c). In the case where the pass-through entity is the donor, the credit may be carried forward to the five succeeding taxable years of the partner or shareholder in the manner provided in subsection (d) until used. In the case where the pass-through entity is a transferee, the partner or shareholder shall be entitled to use the credit in the same number of taxable years as the pass-through entity would have been allowed to use the credit under subsection (c)(3).
g) Documentation of the credit. A taxpayer claiming the credit provided by this Section must maintain and record any information that the Department may require by regulation regarding the affordable housing project for which the credit is claimed. (IITA Section 214(d)) When claiming the credit provided by this Section, the taxpayer must provide the following information regarding the taxpayer's donation to the development of affordable housing under the Illinois Housing Development Act.
1) For the taxable year for which the credit is allowed under subsection (c), a donor (or a partner or Subchapter S corporation shareholder of the donor) claiming the credit shall attach to its Illinois income tax return a copy of the reservation letter issued by the administrative housing agency stating the amount of credit allocated to the affordable housing project under 47 Ill. Adm. Code 355.209.
2) For the taxable year in which a credit is transferred, the transferee (or a partner or Subchapter S corporation shareholder of the transferee) shall attach to its Illinois income tax return a copy of the certificate showing the names of the original donor and of the transferee, as provided in 47 Ill. Adm. Code 355.309.
h) For purposes of this credit, the terms "administrative housing agency", "affordable housing project" and "certificate" shall have the meanings given to those terms in Section 7.28 of the Illinois Housing Development Act and 47 Ill. Adm. Code 355.
(Source: Amended at 46 Ill. Reg. 14550, effective August 2, 2022)
Section 100.2193 Student-Assistance Contributions Credit (IITA 218)
a) For taxable years ending on or after December 31, 2009 and on or before December 31, 2029, each taxpayer is allowed a credit against the taxes imposed under IITA Section 201(a) and (b) in an amount equal to 25% of each matching contribution made by the taxpayer during the taxable year. (See IITA Section 218(a).)
b) Matching Contribution. For purposes of this Section, the term "matching contribution" means the total amount paid by the taxpayer during the taxable year to an individual Illinois College Savings Pool account or Illinois Prepaid Tuition Trust Fund account for the benefit of a designated beneficiary, to the extent the amount paid does not exceed the total contributions made by an employee of the taxpayer during the taxpayer's taxable year to the same account for the benefit of the same designated beneficiary.
c) Limitation. The maximum credit allowed under IITA Section 218 and this Section with respect to any contributing employee shall not exceed $500 per taxable year.
EXAMPLE: Taxpayer is a calendar year taxpayer. Employee A is an employee of Taxpayer for the entire 2009 calendar year. During 2009, Employee A makes contributions totaling $6,000 each to three separate College Savings Pool accounts established for the benefit of each of Employee A's three children. During 2009, Taxpayer makes payments totaling $2,000 each to the same three accounts. Under subsection (a) of this Section, Taxpayer would be allowed a $500 credit for each of the three $2,000 matching contributions made during the taxable year, for a total credit of $1,500. However, under this subsection (c), Taxpayer may claim a maximum credit of only $500 in respect of the total of its contributions that match contributions made by Employee A. Therefore, the allowable credit is reduced from $1,500 to $500.
d) In the case of a partnership or subchapter S corporation, the credit passes through to the owners as provided in the partnership agreement under IRC Section 704(a) or in proportion to their ownership of the stock of the subchapter S corporation under IRC Section 1366(a). (See IITA Section 218(b).) The credit earned by a partnership or subchapter S corporation shall be treated as earned by its owners as of the last day of the taxable year of the partnership or subchapter S corporation in which the matching contribution is made, and shall be allowed to the owner in the taxable year of the owner in which the taxable year of the partnership or subchapter S corporation ends.
e) In no event shall a credit under this Section reduce the taxpayer's liability to less than zero. If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year. The tax credit shall be applied to the earliest year for which there is a tax liability. If there are credits for more than one year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 218(c))
f) Documentation of the Credit. A taxpayer claiming the credit allowed under IITA Section 218 and this Section must maintain records sufficient to document the date and amount of each payment made to an individual College Savings Pool account or Illinois Prepaid Tuition Trust Fund account, as well as documentation regarding the contribution the payment matches. (See IITA Section 218(d).) Documentation regarding the contribution the payment matches must include the employee's name, the account, and the amount and date of the employee's contribution.
(Source: Amended at 49 Ill. Reg. 1295, effective January 15, 2025)
Section 100.2195 Dependent Care Assistance Program Tax Credit (IITA 210)
a) Beginning with tax years ending on or after June 30, 1995, each taxpayer who is primarily engaged in manufacturing is entitled to a credit against the tax imposed by subsections (a) and (b) of Section 201 of the Act in an amount equal to 5% of the amount of expenditures by the taxpayer in the tax year for which the credit is claimed, reported pursuant to Section 129(d)(7) of the Internal Revenue Code, to provide in the Illinois premises of the taxpayer's workplace an on-site facility dependent care assistance program under Section 129 of the Internal Revenue Code (see IITA Section 210(a)).
b) The term manufacturing is defined, for purposes of this credit, in the same manner as that term is defined for purposes of the Replacement Tax Investment Credit (see IITA Section 201(e)(3)). Manufacturing is the material staging and production of tangible personal property by procedures commonly regarded as manufacturing, processing, fabrication or assembling which changes some existing material into new shapes, new qualities, or new combinations. It is not necessary that such procedures result in a finished consumer product. Procedures commonly regarded as manufacturing, processing, fabrication or assembling are those so regarded by the general public.
c) A taxpayer is primarily engaged in manufacturing if more than 50% of the gross receipts of the taxpayer are received from the sale of items manufactured by the taxpayer.
d) Any credit allowed under this Section which is unused in the year the credit is earned may be carried forward to each of the 2 taxable years following the year for which the credit is computed until it is used.
1) This credit shall be applied first to the earliest year for which there is a liability. If there is a credit under this Section from more than one tax year that is available to offset a liability, the earliest credit arising under this Section shall be applied first [35 ILCS 5/210(b)].
2) If a taxpayer has a Dependent Care Assistance Program Credit and credit(s) under any other provision of the Illinois Income Tax Act with a 5 year carryforward, the taxpayer may apply the Dependent Care Assistance Program Credit to tax otherwise due for a particular tax year, prior to applying the credit with the 5 year carryforward.
e) In determining the amount of the credit claimed by the employer, the employer shall claim the same fair market value of dependent care assistance in the form of on-site day care facility services, as is determined by the employer for federal purposes under the terms of Cumulative Bulletin Notice 89-11, 1989-2 CB 449. For this purpose fair market value of on-site dependent care assistance shall mean the employer's estimate of the fair market value of in-kind dependent care assistance provided to employees which shall be 125 percent of reasonably estimated direct costs. For this purpose, direct costs are food, expendable materials and supplies, transportation, staff training, special or additional insurance directly attributable to the day care facility, periodic consulting or management fees directly related to the operation of the day care facility, and the cost of labor for personnel whose services relating to the facility are performed primarily on the premises of the day care facility.
f) A taxpayer claiming the credit provided by Section 210 of the IITA needs to maintain records sufficient to document the costs associated with the provision of an on-site facility dependent care assistance program under Section 129 of the Internal Revenue Code. To the extent that the taxpayer determines the cost of the on-site facility for federal purposes in a manner different from that set forth in subsection (e) above, the taxpayer shall maintain books and records in a form sufficient to document all costs claimed under subsection (e).
(Source: Added at 22 Ill. Reg. 2234, effective January 9, 1998)
Section 100.2196 Employee Child Care Assistance Program Tax Credit (IITA Section 210.5)
a) Eligibility for Credit
1) Beginning with tax years ending on or after December 31, 2000, each corporate taxpayer is entitled to a credit against the tax imposed by subsections (a) and (b) of Section 201 of the Act in:
A) an amount equal to 30% of the start-up costs expended by the corporate taxpayer to provide a child care facility for the children of its employees; plus
B) 5% of the annual amount paid by the corporate taxpayer in providing the child care facility for the children of its employees. (IITA Section 210.5(a))
2) The 30% credit for start-up costs is allowed only for tax years ending on or before December 31, 2004, and on or after December 31, 2007. The 5% credit for annual expenses is allowed for all years ending on or after December 31, 2000. Both parts of the credit are exempt from the sunset provisions of IITA Section 250.
b) To receive the tax credit under IITA Section 210.5, a corporate taxpayer must either independently provide and operate a child care facility for the children of its employees or join in a partnership with one or more other corporations to jointly provide and operate a child care facility for the children of employees of the corporations in the partnership. (IITA Section 210.5(a)) Amounts paid to a child care facility that is not operated by the taxpayer or by such a partnership do not qualify for the credit. For purposes of this credit, a "child care facility" is limited to a child care facility located in Illinois. (IITA Section 210.5(c))
c) For purposes of this credit, the term "start-up costs" qualifying for the 30% credit means the cost of planning, site-preparation, construction, renovation, or acquisition of a child care facility. (IITA Section 210.5(c)) Such costs are the capital expenditures incurred in creating a new facility or expanding an existing facility, both tangible and intangible. In the case of a capitalized asset, the 30% credit is allowed in the year the asset is placed in service in the child care facility.
1) Uncapitalized expenses incurred in connection with the child care facility prior to commencing operations are start-up costs. For example, salaries paid prior to the opening of the facility to the employees hired to operate the facility are start-up costs. Such expenses qualify for the 30% credit in the tax year expensed, even if the facility is not in operation by the end of the tax year.
2) Capital expenditures that are expensed rather than depreciated under IRC section 179 qualify as start-up costs in the same manner as expenditures that are actually capitalized and amortized.
3) In the case of property previously acquired by the taxpayer and later converted to use in the child care facility, the start-up cost shall be the adjusted basis of such property at the time of conversion, plus any capital costs of renovation or modification to make the property ready for use in the child care facility.
4) Any expenditure that qualifies for the federal employer-provided child care credit as an amount paid or incurred to acquire, construct, rehabilitate or expand property to be used in a new or expanded child care facility under the provisions of IRC section 45F(c)(1)(A)(i) shall qualify for the 30% credit, even if the requirements of IRC section 45F(c)(1)(A)(i)(II) or (III) are not met and provided that the facility is operated by the employer corporation or a partnership described in subsection (b).
EXAMPLE: An employer acquires a building to be used as a child care facility and the land on which the building is located. The cost of the building qualifies for the federal credit, but the cost of the land does not qualify because IRC section 45F(c)(1)(A)(i)(II) provides that only depreciable property may qualify for the federal credit. The cost of both the building and the land will qualify for the credit allowed under this IITA Section 210.5.
d) The annual amount paid by the employer qualifying for the 5% credit shall include all expenses (including depreciation and amortization) incurred in connection with the operation of the child care facility that are deducted during the taxable year. Depreciation and amortization of capitalized items and IRC section 179 deductions qualify for the credit whenever the original expenditure qualified as a start-up cost for the 30% credit, provided that the asset continues to be used in the operation of the child care facility. In the year the facility commences operations, only expenses deductible in the period after the commencement of operations qualify for the 5% credit. Expenses of the facility deducted prior to the commencement of operations qualify only for the 30% credit as start-up costs. Any expense qualifying for the federal employer-provided child care credit under IRC section 45F(c)(1)(A)(ii) for a tax year shall also qualify for the 5% credit in the same tax year. Any expense for which the employer claims the 5% credit authorized under this Section cannot qualify for the 5% Dependent Care Assistance Program Credit under IITA Section 210. (See IITA Section 210.5(a))
e) Any credit allowed under this Section that is unused in the year the credit is earned may be carried forward and applied to the tax liability of the 5 taxable years following the excess credit year until it is used. (IITA Section 210.5(b)) Any 30% credit earned in tax years ending on or before the December 31, 2004 sunset date may be carried forward to tax years ending after that date. The credit must be applied to the earliest year for which there is a tax liability. If there are credits from more than one tax year that are available to offset a liability, then the earlier credit must be applied first. (IITA Section 210(b))
f) A corporate taxpayer claiming the credit provided by IITA Section 210.5 needs to maintain records sufficient to document the costs associated with the provision of a child care facility and the "start-up costs" expended to provide a child care facility. Documentation must take the form of vouchers paid, cancelled checks or other proof of payment. Should the expenditure not be solely for child care, the documentation should explain how the amount allocated for child care was determined. If the child care provided includes care for non-employee children, the costs must be allocated between employee children and non-employee children. The method of allocation used must be reasonable and documented.
g) The credit is allowed only to corporations subject to tax under IITA Section 201(a) and (b). Neither subchapter S corporations nor shareholders of subchapter S corporations are allowed to claim the credit.
(Source: Amended at 32 Ill. Reg. 13223, effective July 24, 2008)
Section 100.2197 Foreign Tax Credit (IITA Section 601(b)(3))
a) IITA Section 601(b)(3) provides that the aggregate amount of tax which is imposed upon or measured by income and which is paid by a resident for a taxable year to another state or states on income which is also subject to the tax imposed by IITA Section 201(a) and (b) shall be credited against the tax imposed by IITA Section 201(a) and (b) otherwise due under the IITA for that taxable year. (IITA Section 601(b)(3))
b) Definitions applicable to this Section.
1) Tax qualifying for the credit. A tax qualifies for the credit only if it is imposed upon or measured by income and is paid by an Illinois resident to another state on income which is also subject to Illinois income tax.
A) A tax "imposed upon or measured by income" shall mean an income tax or tax on profits imposed by a state and deductible under IRC section 164(a)(3). The term shall not include penalties or interest imposed with respect to the tax.
B) A tax is "paid by an Illinois resident" to another state "on income which is also subject to Illinois income tax" only to the extent the income included in the tax base of the other state is also included in base income computed under IITA Section 203 during a period in which the taxpayer is an Illinois resident. Thus, for example, income tax paid to another state on retirement income excluded from base income under IITA Section 203(a)(2)(F) does not qualify for the credit, nor would income derived from a partnership or Subchapter S corporation whose tax year ends during a period in which the taxpayer is not an Illinois resident. See IRC section 706(a) and IRC section 1366(a)(1). If tax is paid to another state on income that is not included in base income or on income attributable to a period when the taxpayer was not a resident of Illinois, as well as on income that is included in base income and attributable to a period in which the taxpayer was a resident of Illinois, the amount of tax qualifying for the credit shall be determined by multiplying the tax paid by a fraction equal to the income taxed by the other state that is included in base income and attributable to a period in which the taxpayer was a resident of Illinois divided by the total tax base on which the other state's tax was computed.
2) For purposes of IITA Section 601(b)(3), "state" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States, or any political subdivision of any of the foregoing. (IITA Section 1501(a)(22)) This definition is effective for tax years ending on or after December 31, 1989. The term "state" does not include foreign countries or any political subdivision of a foreign country.
3) "Resident" is defined at IITA Section 1501(a)(20) and in Section 100.3020.
4) Base income subject to tax both by another state and by this State or "double-taxed income" means items of income minus items deducted or excluded in computing the tax for which credit is claimed, to the extent those items of income, deduction or exclusion are taken into account in the computation of base income under IITA Section 203 for the person claiming the credit. However, under IITA Section 601(b)(3), as in effect prior to January 1, 2006 (the effective date of Public Act 94-247), no compensation received by a resident which qualifies as compensation paid in this State as determined under IITA Section 304(a)(2)(B) shall be considered income subject to tax by another state or states.
A) Under IITA Section 203(a), base income of an individual is computed without allowing the standard deduction allowed in computing federal taxable income, and without allowing the exemptions provided in IITA Section 204. Double-taxed income is therefore computed without reduction for any standard deductions or exemptions allowed by the other state.
B) An item of income is not included in double-taxed income to the extent it is excluded or deducted in computing the tax for which the credit is claimed. For example, State X allows a deduction or exclusion equal to 60% of long-term capital gains and for 100% of winnings from the State X lottery. Only 40% of long-term capital gains is subject to tax in that state. Similarly, an individual subject to the Washington, D.C. unincorporated business tax is allowed to deduct from taxable income a reasonable allowance for compensation for personal services rendered. This deduction is in fact an exclusion for the "personal income" of the individual, which Congress has forbidden Washington, D.C. to tax except in the case of residents. Accordingly, double-taxed income is net of this deduction.
C) An item of income that is excluded, subtracted or deducted in the computation of base income under IITA Section 203 cannot be included in double-taxed income. For example, IITA Section 203(a)(2)(L) allows a subtraction for federally-taxed Social Security and Railroad Retirement benefits, while dividends received from a Subchapter S corporation are excluded from federal gross income and therefore from base income. Accordingly, even if another state taxes those benefits or dividends, these amounts are not included in double-taxed income.
D) An item of expense is deducted or subtracted in computing double-taxed income only to the extent that item is deducted or subtracted in computing the tax base in the other state and in computing base income under IITA Section 203. For example, State Y allows deductions for federal itemized deductions and for individual federal income taxes paid. No deduction for federal income taxes is allowed in computing base income under IITA Section 203, and so that deduction is not taken into account in computing base income subject to tax in State Y. Also, IITA Section 203(a) generally does not allow a deduction for federal itemized deductions, and so federal itemized deductions are generally not taken into account in computing base income subject to tax in State Y. However, IITA Section 203(a)(2)(V) allows self-employed individuals a subtraction modification for health insurance premiums, which can be taken as an itemized deduction in computing federal taxable income in some taxable years. Accordingly, in the case of a self-employed individual eligible for the Illinois subtraction, any itemized deduction for health insurance premiums taken into account in computing the State Y tax base is also taken into account in computing double-taxed income.
E) For taxable years beginning prior to January 1, 2006, compensation paid in Illinois under IITA Section 304(a)(2)(B), as further explained in Section 100.3120 as in effect for the taxable year, is not included in double-taxed income, even if another state taxes that compensation. For example, an Illinois resident whose base of operations is in Illinois during 2005, but whose employment requires him or her to work in Illinois and for a substantial period of time in State Z, must treat all compensation from his or her employment as paid in Illinois under IITA Section 304(a)(2)(B)(iii) as in effect for 2006. None of that compensation may be included in double-taxed income, even if State Z actually taxes the compensation earned for periods during which the resident was working in State Z. Public Act 94-247 (effective January 1, 2006) repealed the provision in IITA Section 601(b)(3) that stated compensation paid in Illinois may not be included in double-taxed income, and so compensation paid in Illinois may be included in double-taxed income in taxable years beginning on or after January 1, 2006.
F) Some states impose an alternative minimum tax similar to the tax imposed by IRC section 55, under which a taxpayer computes a regular taxable income and also computes an alternative minimum taxable income by reducing some exclusions or deductions, and eliminating other exclusions and deductions entirely. The taxpayer applies different rate structures to regular taxable income and to alternative minimum taxable income, and is liable for the higher of the two taxes so computed. An item of income included in a state's alternative minimum taxable income but not in the regular taxable income of that state is not included in base income subject to tax in that state unless the taxpayer is actually liable for alternative minimum tax in that state. For example, a state allows a 60% capital gains exclusion for regular tax purposes, but includes 100% of the capital gains in its alternative minimum taxable income. If a taxpayer incurs alternative minimum tax liability in that state, 100% of the capital gains is included in double-taxed income. If only regular tax liability is incurred, only 40% of capital gains is included in double-taxed income.
G) Some states compute the tax liability of a nonresident by first computing the tax on all income of the nonresident from whatever source derived, and then multiplying the resulting amount by a percentage equal to in-state sources of income divided by total sources of income or by allowing a credit based on the percentage of total income from sources outside the state. Other states determine the tax base of a nonresident by computing the tax base as if the person were a resident and multiplying the result by the percentage equal to in-state sources of income divided by total sources of income. The use of either of these methods of computing tax does not mean that income from all sources is included in double-taxed income. (See Comptroller of the Treasury v. Hickey, 114 Md. App. 388, 689 A.2d 1316 (1997); Chin v. Director, Division of Taxation, 14 N.J. Tax 304 (T.C. N.J. 1994)). When a state uses either of these methods of computation, double-taxed income shall be the base income of the taxpayer from all sources subject to tax in that state, as computed in accordance with the rest of this subsection (b)(4), multiplied by the percentage of income from sources in that state, as computed under that state's law; provided, however, that no compensation paid in Illinois under IITA Section 304(a)(2)(B) shall be treated as income from sources in that state in computing that percentage in any taxable year beginning prior to January 1, 2006.
EXAMPLE 1: Individual, an Illinois resident, has federal adjusted gross income of $80,000 in Year 1, comprised of $75,000 in wages, $1,000 in taxable interest and $4,000 in net rental income. Taxable interest includes $200 in interest on federal government obligations and excludes $500 in municipal bond interest. The rental income is from property in State X. Individual is subject to $6,000 in federal income tax in Year 1.
Individual's Illinois base income is $80,300: his $80,000 in adjusted gross income, plus $500 in municipal bond interest, minus $200 in federal government obligation interest.
State X computes Individual's income subject to its tax by starting with the $4,000 in net rental income included in his federal adjusted gross income, and requiring him to add back $3,000 in depreciation allowed on his rental property under IRC Section 168 in excess of straight-line depreciation, and subtracting the portion of his federal income tax liability allocable to his State X income. State X also allows Individual an exemption of $1,000.
Double-taxed income in this case is $7,000: the $4,000 in net rental income plus the $3,000 addition modification for excess depreciation. The $3,000 addition modification for excess depreciation is a deduction allowed by Illinois but not by State X, and only the amount of depreciation deductible in both states is taken into account. The subtraction for federal income tax and the exemption are not taken into account in computing base income under IITA Section 203(a), and therefore are not taken into account in computing double-taxed income.
EXAMPLE 2: Assume the same facts as in Example 1, except that State X requires Individual to compute income tax as if he were a resident of State X, and then multiply the result by a fraction equal to his federal adjusted gross income from State X sources divided by total federal adjusted gross income. Under this method, Individual has State X taxable income of $76,300 ($80,000 in federal adjusted gross income, plus $500 in municipal bond interest and $3,000 in excess depreciation, minus $200 in federal government obligation interest, $6,000 in federal income taxes, and the $1,000 exemption). The fraction actually taxed by State X is 5% (the $4,000 in rental income divided by $80,000 in federal adjusted gross income).
Under subsection (b)(4)(G), double-taxed income is $4,165, computed as follows. First, State X taxable income is computed using only those items of income and deduction taken into account by both State X and Illinois. Accordingly, the $6,000 in federal income taxes and the $1,000 exemption are not taken into account. The State X taxable income so computed is $83,300 ($80,000 federal adjusted gross income plus $3,000 in excess depreciation and $500 in municipal bond interest minus $200 in federal government obligation interest). Multiplying that amount by the 5% fraction used by State X yields double-taxed income of $4,165.
EXAMPLE 3: Assume the same facts as in Example 2, except that State X deems $10,000 of Individual's wages to be earned in State X. Under IITA Section 304(a)(2)(B)(iii), all of Individual's wages are considered "compensation paid in this State", even though Individual performs services in State X, because Individual's base of operations is in Illinois. Accordingly, Individual's State X taxable income is $76,300, just as in Example 2, but his fraction allocated to State X is 17.5% ($10,000 in wages plus $4,000 in net rental income, the total divided by $80,000 in federal adjusted gross income).
For taxable years beginning prior to January 1, 2006, Individual's double-taxed income is $4,165, the same as in Example 2. Because compensation deemed "paid in this State" cannot be treated as double-taxed income, the State X fraction must be computed under subsection (b)(4)(G) without treating the $10,000 in wages as allocable to State X. Accordingly, double-taxed income is the $83,300 total of all items taxed by both states minus deductions allowed by both states, times 5% (the $4,000 in net rental income divided by the $80,000 in federal adjusted gross income).
For taxable years beginning on or after January 1, 2006, Individual's double-taxed income is $14,578, which is the $83,300 total of all items taxed by both states minus deductions allowed by both states, times 17.5% (the $10,000 in wages taxed by both states plus the $4,000 in net rental income, divided by the $80,000 in federal adjusted gross income).
c) Amount of the credit. Subject to limitations described in subsections (d) and (e), the amount of the credit for a taxable year is the aggregate amount of tax paid by a resident for the taxable year. (IITA Section 601(b)(3)) Because the credit is allowed for taxes paid for the taxable year, rather than for taxes paid in or during the taxable year:
1) The amount of tax withheld for another state, estimated payments made to that state and overpayments from prior years applied against the current liability to that state are not relevant to the computation of the credit.
2) Any credit (including a credit for taxes paid to Illinois or another state, but not including a credit that is allowed for an actual payment of tax, such as a credit for income taxes withheld, for estimated taxes paid or for an overpayment of income tax in another taxable year) that is taken into account in determining the amount of tax actually paid or payable to another state shall reduce the amount of credit to which the taxpayer is entitled under this Section. In a case in which the taxpayer claims a transferable credit purchased by the taxpayer on the other state's return, the amount of the credit allowed is treated as an actual payment of tax, and does not reduce the amount of credit to which the taxpayer is entitled under this Section.
3) Any increase or decrease in the amount of tax paid to another state for a taxable year, as the result of an audit, claim for refund, or other change, shall increase or decrease the amount of credit for that taxable year, not for the taxable year in which the increase or decrease is paid or credited.
d) Limitations on the amount of credit allowed for taxable years ending prior to December 31, 2009. The aggregate credit allowed under IITA Section 601(b)(3) shall not exceed that amount which bears the same ratio to the tax imposed by IITA Section 201(a) and (b) otherwise due as the amount the taxpayer's base income subject to tax both by that other state or states and by this State bears to his total base income subject to tax by this State for the taxable year. (IITA Section 601(b)(3)) The credit allowed under this Section for taxable years ending prior to December 31, 2009 is therefore the smaller of either the total amount of taxes paid to other states for the year or the product of Illinois income tax otherwise due (before taking into account any Article 2 credit or the foreign tax credit allowed under IITA Section 601(b)(3)) multiplied by a fraction equal to the aggregate amount of the taxpayer's double-taxed income, divided by the taxpayer's Illinois base income.
1) In computing the aggregate amount of the taxpayer's double-taxed income, any item of income or deduction taken into account in more than one state shall be taken into account only once. For example, an individual subject to tax on his or her compensation by both State X and by a city in State X shall include the amount of that compensation only once in computing the aggregate amount of double-taxed income.
2) Because base income subject to tax both in another state and in Illinois cannot exceed 100% of base income, the credit cannot exceed 100% of the tax otherwise due under IITA Section 201(a) and (b).
3) No carryover of any amount in excess of this limitation is allowed by the IITA.
e) Limitations on the amount of credit allowed for taxable years ending on or after December 31, 2009.
1) The credit allowed under IITA Section 601(b)(3) for tax paid to other states shall not exceed that amount which bears the same ratio to the tax imposed by IITA Section 201(a) and (b) otherwise due under the IITA as the amount of the taxpayer's base income that would be allocated or apportioned to other states if all other states had adopted the provisions in Article 3 of the IITA bears to the taxpayer's total base income subject to tax by this State for the taxable year. (IITA Section 601(b)(3)) The credit allowed under this Section for taxable years ending on or after December 31, 2009 is therefore the smaller of either the total amount of taxes paid to other states for the year or the product of Illinois income tax otherwise due (before taking into account any Article 2 credit or the foreign tax credit allowed under IITA Section 601(b)(3)) multiplied by a fraction equal to the amount of the taxpayer's base income that is sourced outside Illinois using the allocation and apportionment provisions of Article 3 of the IITA, divided by the taxpayer's Illinois base income.
2) For purposes of this subsection (e), the 30-day threshold in IITA Section 304(a)(2)(B)(iii) (as in effect for taxable years ending on or after December 31, 2020) and Section 100.3120(a)(1)(E) does not apply in determining the number of working days in which services are performed in another state during the year. (See IITA Section 601(b)(3).) However, the provisions for employees providing services in this State during a disaster period in IITA Section 304(a)(2)(B)(iii)(c) and Section 100.3120(a)(1)(E)(ii) of this Part do apply.
EXAMPLE 4: Individual is an Illinois resident whose only income is employee compensation. Individual's employment requires him or her to spend a substantial amount of time each year working in other states, but Individual's base of operations under IITA Section 304(a)(2)(B)(iii) is in Illinois. For taxable years ending prior to December 31, 2020, because all of Individual's base income is employee compensation that is sourced to Illinois under IITA Section 304(a)(2)(B)(iii) as in effect for that period, the limitation under this subsection (e) on Individual's credit for taxes paid to other states will be zero, even if some or all of the employee compensation is actually taxed by another state. For taxable years ending on or after December 31, 2020, the amount of Individual's compensation allocated to other states is determined by using the working days formula under IITA Section 304(a)(2)(B)(iii), as in effect for the taxable year, and the number of working days Individual performed services in other states, without regard to whether Individual actually owed tax to any of those states or to the provision in IITA Section 304(a)(2)(B)(iii) that the working days formula applies only if the employee performs services in this State for more than 30 working days during the taxable year. However, working days during which Individual performed services in other states do not include any working day to which the disaster period provisions in IITA Section 304(a)(2)(B)(iii)(c) and Section 100.3120(a)(1)(E)(ii) of this Part would apply if the other states had adopted those provisions.
EXAMPLE 5: Individual is an Illinois resident whose only income is employee compensation. Individual's employment requires him or her to spend a substantial amount of time each year working in several states, but Individual's base of operations under IITA Section 304(a)(2)(B) is in a state that imposes no personal income tax. For taxable years ending prior to December 31, 2020, because all of Individual's base income is employee compensation that is sourced outside Illinois under IITA Section 304(a)(2)(B), his or her credit for taxes paid to other states may offset 100% of his or her Illinois income tax liability, even if some of his or her employee compensation is not actually taxed by another state. For taxable years ending on or after December 31, 2020, the amount of Individual's compensation allocated to other states is determined by using the working days formula under IITA Section 304(a)(2)(B)(iii), as in effect for the taxable year, and the number of working days Individual performed services in other states, without regard to whether Individual actually owed tax to any of those states or to the provision in IITA Section 304(a)(2)(B)(iii) that the working days formula applies only if the employee performs services in this State for more than 30 working days during the taxable year. However, working days during which Individual performed services in other states do not include any working day to which the disaster period provisions in IITA Section 304(a)(2)(B)(iii)(c) and Section 100.3120(a)(1)(E)(ii) of this Part would apply if the other states had adopted those provisions.
EXAMPLE 6: Individual is an Illinois resident partner in a partnership engaged in multistate business activities, and his or her only income is business income derived from the partnership. The partnership apportions 25% of its business income to Illinois under IITA Section 304(a). Individual's credit may offset 75% of his or her Illinois income tax liability, regardless of how much of his or her income from the partnership is actually taxed by other states.
f) Disallowance of credit for taxes deducted in computing base income. The credit provided by IITA Section 601(b)(3) shall not be allowed if any creditable tax was deducted in determining base income for the taxable year. (IITA Section 601(b)(3)) A trust that has deducted the amount of a state tax imposed upon or measured by net income may include that tax in the computation of the credit allowed under this Section, but IITA Section 203(c)(2)(F) requires that trust to add back to its federal taxable income an amount equal to the tax deducted pursuant to IRC section 164 if the trust or estate is claiming the same tax for purposes of the Illinois foreign tax credit. The amount that must be added back for a taxable year shall be the amount of tax deducted for that taxable year on the trust's federal income tax return. Because no similar provision is made for individuals, an individual who has deducted taxes paid to another state in computing his or her federal adjusted gross income may not claim a credit for those taxes on his or her Illinois tax return.
g) Credit for taxes paid on behalf of the taxpayer. An Illinois resident individual who is a shareholder or partner claiming a foreign tax credit for the shareholder's or partner's share of personal income taxes paid to a foreign state on his or her behalf by a Subchapter S corporation or a partnership, respectively, must attach to his or her Illinois return a written statement from the Subchapter S corporation or partnership containing the name and federal employee identification number of the Subchapter S corporation or partnership and clearly showing the paid amount of foreign tax attributable to the shareholder or partner, respectively. Additionally, for taxable years ending prior to December 31, 2009, the statement must include the shareholder's or partner's share of the Subchapter S corporation's or partnership's items of income, deduction and exclusion in sufficient detail to allow computation of the amount of base income subject to tax under subsection (b)(4) of this Section. Taxes imposed directly on the Subchapter S corporation or the partnership are not eligible for the credit.
h) Documentation required to support claims for credit. Any person claiming the credit under IITA Section 601(b)(3) shall attach a statement in support thereof and shall notify the Director of any refund or reductions in the amount of tax claimed as a credit under IITA Section 601(b)(3) all in the manner and at the time as the Department shall by regulations prescribe. For taxable years ending on or after December 31, 2009, the documentation required to be provided with the taxpayer's return in order to support the credit shall be as stated in the forms or instructions. For taxable years ending prior to December 31, 2009, no credit shall be allowed under this Section for any tax paid to another state nor shall any item of income be included in base income subject to tax in that state except to the extent the amount of the tax and income is evidenced by the following documentation attached to the taxpayer's return (or, in the case of an electronically-filed return, to the taxpayer's Form IL-8453, Illinois Individual Income Tax Electronic Filing Declaration), amended return or claim for refund:
1) Unless otherwise provided in this subsection (h), a taxpayer claiming the credit must attach a copy of the tax return filed for taxes paid to the other state or states to the taxpayer's Illinois income tax return, Form IL-8453, amended return or claim for refund.
2) If the tax owed to the other state is satisfied by withholding of the tax from payments due to the taxpayer without the necessity of a return filing by the taxpayer, the taxpayer must attach a copy of the statement provided by the payor evidencing the amount of tax withheld and the amount of income subject to withholding.
3) A taxpayer claiming a credit for taxes paid by a Subchapter S corporation or partnership on the taxpayer's behalf must attach a copy of the statement provided to the taxpayer by the Subchapter S corporation or partnership pursuant to subsection (g), showing the taxpayer's share of the taxes paid and the income of the taxpayer on which the taxes were paid.
(Source: Amended at 44 Ill. Reg. 10907, effective June 10, 2020)
Section 100.2198 Economic Development for a Growing Economy Credit (IITA 211) (Renumbered)
(Source: Section 100.2198 renumbered to Section 100.2110 at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2199 Illinois Earned Income Tax Credit (IITA Section 212)
a) With respect to the federal earned income tax credit allowed for the taxable year under Section 32 of the federal Internal Revenue Code, each individual taxpayer shall be allowed a credit against the tax imposed by IITA Section 201(a) and (b). (IITA Section 212(a)) The amount of the credit allowed shall be equal to:
1) 5% of the federal tax credit for each taxable year beginning on or after January 1, 2000 and ending prior to December 31, 2012;
2) 7.5% of the federal tax credit for each taxable year beginning on or after January 1, 2012 and ending prior to December 31, 2013;
3) 10% of the federal tax credit for each taxable year beginning on or after January 1, 2013 and beginning prior to January 1, 2017;
4) 14% of the federal tax credit for each taxable year beginning on or after January 1, 2017 and beginning prior to January 1, 2018;
5) 18% of the federal tax credit for each taxable year beginning on or after January 1, 2018 and beginning prior to January 1, 2023; and
6) 20% of the federal tax credit for each taxable year beginning on or after January 1, 2023. (IITA Section 212(a))
b) Credit in Excess of Liability
1) For tax years beginning before January 1, 2003, the credit allowed for the taxable year may not reduce the taxpayer's liability under the IITA to less than zero. Therefore, no part of the credit is refundable in the event the tax liability of the taxpayer is reduced to zero. (IITA Section 212(b))
2) For tax years beginning on or after January 1, 2003 and ending prior to August 21, 2007 (the effective date of PA 95-333), if the amount of the credit exceeds the income tax liability for the applicable tax year, then the excess credit shall be refunded to the taxpayer. (IITA Section 212(b))
3) For tax years ending on or after August 21, 2007, if the amount of the credit exceeds the income tax liability for the applicable tax year, then the excess credit shall be refunded to the taxpayer. (IITA Section 212(b))
4) Excess credit may not be carried over to other tax years.
c) In the case of a nonresident or part-year resident, the Illinois earned income tax credit shall be equal to the applicable fraction under subsection (a) of that portion of the federal earned income tax credit allowed pursuant to Section 32 of the federal Internal Revenue Code that bears the same ratio as the taxpayer's base income allocable to Illinois bears to the taxpayer's base income everywhere. (See IITA Section 212(a))
d) For taxable years beginning on or after January 1, 2023, each individual taxpayer who has attained the age of 18 during the taxable year but has not yet attained the age of 25 is entitled to the credit under subsection (a) based on the federal tax credit for which the taxpayer would have been eligible without regard to any age requirements that would otherwise apply to individuals without a qualifying child in Section 32(c)(1)(A)(ii) of the federal Internal Revenue Code. (IITA Section 212(b-5)) Taxpayers will need to complete a pro forma U.S. Form 1040, Line 27 as if they had a qualifying child in order to compute the allowable amount of federal tax credit.
e) For taxable years beginning on or after January 1, 2023, each individual taxpayer who has attained the age of 65 during the taxable year is entitled to the credit under subsection (a) based on the federal tax credit for which the taxpayer would have been eligible without regard to any age requirements that would otherwise apply to individuals without a qualifying child in Section 32(c)(1)(A)(ii) of the federal Internal Revenue Code. (IITA Section 212(b-10)) Taxpayers will need to complete a pro forma U.S. Form 1040, Line 27 as if they had a qualifying child in order to compute the allowable amount of federal tax credit.
f) For taxable years beginning on or after January 1, 2023, each individual taxpayer filing a return using an individual taxpayer identification number (ITIN) as prescribed under Section 6109 of the Internal Revenue Code, other than a Social Security number issued pursuant to Section 205(c)(2)(A) of the Social Security Act, is entitled to the credit under subsection (a) based on the federal tax credit for which the taxpayer would have been eligible without applying the restrictions regarding Social Security numbers in Section 32(m) of the federal Internal Revenue Code. (IITA Section 212(b-15)) Taxpayers will need to complete a pro forma U.S. Form 1040, Line 27 as if they had a Social Security number in order to compute the allowable amount of federal tax credit.
(Source: Amended at 48 Ill. Reg. 1677, effective January 10, 2024)
SUBPART C: NET OPERATING LOSSES OF UNITARY BUSINESS GROUPS OCCURRING PRIOR TO DECEMBER 31, 1986
Section 100.2200 Net Operating Losses Occurring Prior to December 31, 1986, of Unitary Business Groups: Treatment by Members of the Unitary Business Group.(IITA Section 202) - Scope
a) This section states rules for the allocation of net operating losses that were incurred in taxable years ending prior to December 31, 1986. These rules apply to various situations in which the combined method of apportionment has been employed by the corporation incurring the loss either in the year of the loss, or in the year to which the loss is carried back or forward. For rules applicable to net operating losses occurring on or after December 31, 1986, see Sections 100.2300 through 100.2350.
b) The rules are equally applicable to situations involving the combined apportionment method:
1) as it existed prior to Public Act 82-1029 (which applies to taxable years ending on or after December 31,1982, and which provides the Illinois statutory definition for unitary business group), and
2) as it exists after Public Act 82-1029, but before Public Act 84-1042 (which applies to taxable years ending on or after December 31, 1986, and which provides for Illinois net losses and Illinois net loss deductions).
(Source: Amended at 11 Ill. Reg. 11782, effective October 16, 1987)
Section 100.2210 Net Operating Losses Occurring Prior to December 31, 1986, of Unitary Business Groups: Treatment by Members of the Unitary Business Group (IITA Section 202) -- Definitions
Federal taxable income for Illinois income tax purposes and Federal NOL for Illinois income tax purposes mean:
a) in the case of a corporation that files its own (unconsolidated) federal income tax return for the year, the amount of taxable income or NOL reflected on such return or if altered by IRS audit or amended return, as finally determined for federal income tax purposes within the meaning of IITA Section 506(b) increased in any case by the amount of any net operating loss deduction (for carryback or carryforward of net operating losses from other years) actually reflected by the corporation on that federal return.
b) in the case of a corporation that is a member of an affiliated group filing a consolidated federal income tax return for the year, the amount of taxable income or NOL which such corporation would have had it filed a separate return for federal income tax purposes for the taxable year and each preceding taxable year for which it was a member of an affiliated group, such calculation being made as if the elections of 26 USC 243(b)(2) and 172(b)(3)(C) had been in effect for all such years, the amount calculated hereunder being increased in any case by the amount of any net operating loss deduction (for carryback or carryforward of any net operating losses from other years) to which the corporation would otherwise be entitled under this subsection.
c) in the case of the corporation that is not required to file a federal income tax return for the year, the equivalent federal taxable income which it computes under IITA Section 203(e); increased in any case by the amount of any net operating loss deduction (for carryback or carryforward of net operating losses from other years) to which the corporation would otherwise be entitled under that section.
(Source: Amended at 26 Ill. Reg. 13237, effective August 23, 2002)
Section 100.2220 Net Operating Losses Occurring Prior to December 31, 1986, of Unitary Business Groups: Treatment by Members of the Unitary Business Group. (IITA Section 202) – Current Net Operating Losses: Offsets Between Members
The computation of combined federal taxable income of a unitary business group may include federal NOLs for Illinois income tax purposes of various members of the group. These federal NOLs for Illinois income tax purposes of group members will be used in the year they occur to offset federal taxable incomes for Illinois income tax purposes of other members of the group in arriving at combined federal taxable income.
EXAMPLE: Corporations A, B, C and D are members of a unitary business group. Corporations A, B and C had 1982 federal taxable incomes for Illinois income tax purposes of $100,000, $200,000, and $300,000, respectively. Corporation D had a 1982 federal net operating loss for Illinois income tax purposes of $150,000. The group's 1982 combined federal taxable income is $450,000.
(Source: Amended at 11 Ill. Reg. 17782, effective October 16, 1987)
Section 100.2230 Net Operating Losses Occurring Prior to December 31, 1986, of Unitary Business Groups: Treatment by Members of the Unitary Business Group. (IITA Section 202) – Carrybacks and Carryforwards
a) The Illinois income tax treatment of net operating loss carrybacks and carryforwards will generally follow that of the Internal Revenue Code. However, to the extent that a federal net operating loss for Illinois income tax purposes of a member is absorbed in the computation of combined federal taxable income in the year that it arose, no carryback or carryforward of that loss will be allowed. This prohibition is mandated by IITA Section 203(g) which precludes deducting the same item more than once.
EXAMPLE: Corporations A, B, C and D are members of a unitary business group for calendar year 1982.In that year, Corporations A, B and C had federal taxable incomes for Illinois income tax purposes of $200,000, $300,000 and $500,000, respectively, while Corporation D had a federal net operating loss for Illinois income tax purposes of $250,000. Since Corporation D's 1982 federal net operating loss for Illinois income tax purposes is used to offset the 1982 federal taxable incomes for Illinois income tax purposes of the other group members in the computation of 1982 combined federal taxable income, Corporation D will not be able to carry back to 1979 or carry forward to 1983 or later years any portion of its 1982 federal net operating loss for Illinois income tax purposes. In these circumstances,Corporation D would not be entitled to a refund of 1979 Illinois income tax based on a net operating loss carryback from 1982 even if it received a refund of its 1979 federal income tax on that basis. In addition, if Corporation D carried forward the 1982 net operating loss to 1983 or later years in computing federal taxable income for federal income tax purposes, it is obligated to adjust that figure upward by those carryforward amounts in calculating its federal taxable income for Illinois income tax purposes for those carryforward years.
b) In the event that the group members' federal taxable incomes for Illinois income tax purposes and federal net operating losses for Illinois income tax purposes result in a combined federal net operating loss, this loss will be divided among those group members which incur federal net operating losses for Illinois income tax purposes. This division will be made pro rata based on the relative size of the federal net operating losses for Illinois income tax purposes of the members having such losses. The members will then individually carryback or carryforward their respective shares of the combined federal net operating loss in conformity with the applicable provisions of 26 U.S.C. Section 172, i.e. generally 3 year carryback and 15 year carryforward; for financial institutions, 10 year carryback and a 5 year carryforward; for real estate investment trusts, no carryback and a 15 year carryforward, etc. However, the amount of the loss that the individual member (hereinafter sometimes referred to as the "loss member") can carryback or forward to any year shall be limited to the lesser of the following amounts computed with respect to the carryback or carryforward year.
1) (hereinafter sometimes referred to as Limitation No. 1) The sum of the federal taxable incomes and federal net operating losses for Illinois income tax purposes in that year for the loss member and any other person that was a member of the same unitary business group as the loss member in that year and in the year that the loss was incurred by the loss member.
2) (hereinafter sometimes referred to as Limitation No. 2) The combined federal taxable income for that year of any unitary business group to which the loss member belonged.
c) This means that a member of a unitary business group will not be permitted to carry a loss to a year in which it belonged to a unitary business group that had a combined federal net operating loss for Illinois income tax purposes or zero combined federal taxable income for Illinois income tax purposes. In addition, a member of a unitary business group will not be permitted to carry a loss to a year in which it and other common members – persons that were members of its unitary business group in both the loss year and the carryback or carryforward year – had an aggregate federal net operating loss or zero taxable income among themselves for Illinois income tax purposes. In the case of losses arising in non-unitary years (years in which a unitary return was not filed), members will be permitted to carry such non-unitary losses to their unitary years (other conditions being met), but the maximum amount of non-unitary loss that any member may carry to a unitary year shall be limited to that member's federal taxable income for Illinois income tax purposes in that year (Limitation No. 1), and by the combined federal taxable income for that year of the unitary group to which the member belongs (Limitation No. 2) whichever is less.
d) When two or more persons carry losses back or forward to the same taxable year and both (all) were members of the same unitary business group in the carryback or carryforward year, the limitations described in the previous paragraph subsection will be applied as follows. First, if the persons were both subject to Limitation No. 1 relative to the same common members in the carryback or carryforward year and if their losses, when added together, exceed Limitation No. 1, then each of the persons is deemed to have used a proportionate share of its loss in the carryback or carryforward year, based on the size of its loss as compared to the total of the losses of the persons subject to the same Limitation No. 1. Second, if the total combined loss of the persons, otherwise eligible to be used in the carryback or carryforward year, exceeds Limitation No. 2, each of the persons is deemed to have used a proportionate share of its loss, based on the size of its loss, otherwise eligible for use, as compared to the total combined loss of the persons, otherwise eligible for use. (See Examples 4 and 5 below.)
e) When losses are carried back or forward from two or more loss years against the combined federal taxable income of a unitary business group for a particular taxable year, losses originating in the earliest year shall be used first. Appropriate adjustments shall be made to Limitation No. 1 and Limitation No. 2 in determining the amounts of losses that may be used in that particular year from later loss years.
1) EXAMPLE 1:
A) FACTS:
i) In 1983, Corporations X, Y, Z, and Q are members of a unitary business group with federal taxable incomes (NOL) for Illinois tax purposes as follows:
Corporation X $10 million
Corporation Y $10 million
Corporation Z $10 million
Corporation Q ($40 million)
ii) As a consequence, there is a $10 million unabsorbed net operating loss originating in 1983.
iii) In 1980, Corporations X, Y, Z, Q, and R were members of a unitary business group with federal taxable incomes (NOL) for Illinois income tax purposes as follows:
Corporation R $10 million
Corporation Z($5 million)
Corporation Y($5 million)
Corporation Q $10 million
Corporation X($5 million)
iv) As a consequence, the unitary business group X, Y, Z, Q and R had a combined federal taxable income in 1980 of $5 million.
B) ANALYSIS AND CONCLUSION: As a result of Limitation No. 1, the $10 million unabsorbed loss of Corporation Q, originating in 1983, cannot be used to any extent in computing the liabilities of Corporations Q, X, Y, Z, or R for 1980. The entire $10 million unabsorbed loss of Corporation Q originating in 1983 may be tested against 1981 income and loss figures of Corporation Q and other members of its unitary business group in that year.
2) EXAMPLE 2:
A) FACTS:
i) Corporations A, B, C, D and E are members of a unitary business group in 1981, 1982, and 1983. In 1983, they have federal taxable incomes (NOL) for Illinois income tax purposes as follows:
Corporation A $30,000
Corporation B $60,000
Corporation C $70,000
Corporation D ($150,000)
Corporation E ($50,000)
ii) The group's combined federal net operating loss is ($40,000) which will be divided between Corporations D and E for purposes of carryback and carryforward:
Corp. D: $150,000/$200,000 x ($40,000) = ($10,000)
Corp. E: $50,000/$200,000 x ($40,000) = ($10,000)
iii) In 1980 Corporations A, D, E and F were members of a unitary business group with federal taxable incomes (NOL) for Illinois income tax purposes as follows:
Corporation A $6,000
Corporation D $7,000
Corporation E $7,000
Corporation F 30,000
iv) As a consequence, the unitary business group A, D, E, and F had combined federal taxable income for 1980 of $50,000.
B) ANALYSIS AND CONCLUSION: Under Limitation No. 1, no more than $20,000 of the net operating loss of Corporations D and E originating in 1983 may be used in computing 1980 liabilities. Of the $20,000 in 1983 net operating losses that may be used in 1980, Corporation D is deemed to have provided $15,000 and Corporation E is deemed to have provided $5,000, this being the ratio indicated by the relative amounts of their respective net operating losses originating in 1983. As a consequence, Corporation D will have an unabsorbed loss of $15,000, which it may test against its income figures and those of other members of its unitary business group for 1981; Corporation E will have the same opportunity with respect to its $5,000 of unabsorbed loss.
3) EXAMPLE 3:
A) Same facts as Example 2, except Corporation F had a $25,000 net operating loss in 1982 and Corporation E had a $3,000 net operating loss in 1982. Neither Corporations F nor E were members of unitary business groups in 1982; both had zero taxable income in 1979, and neither was a member of a unitary business group in 1979.
B) ANALYSIS AND CONCLUSION: The entire $25,000 net operating loss of Corporation F originating in 1982 may be used in computing the liabilities of all four members of the unitary business groups for 1980. Also, the entire $3,000 net operating loss of Corporation E originating in 1982 may be used in computing the 1980 liabilities of all four members of the unitary business group. As a result of the application of Corporation E's 1982 net operating loss to the group's income in 1980, Limitation No. 1, as it applies to the net operating losses of Corporations D and E originating in 1983 is $17,000, i.e., the 1980 federal taxable income for Illinois income tax purposes less absorption of the 1982 loss for Corporation A is $6,000, for Corporation D is $7,000, for Corporation E is $4,000. The $17,000 of 1983 net operating loss will be divided between Corporations D and E in accordance with the 3 to 1 ratio in which they incurred losses in 1983, with the result that $12,750 of Corporation D's 1983 net operating loss will be used in 1980 and $4,250 of Corporation E's net operating loss will be used in 1980 with the remaining unabsorbed amounts potentially available for application to 1981 and later years.
4) EXAMPLE 4:
A) FACTS:
i) Corporations A, B, C and D are members of a unitary business group in 1983. In that year, they have federal taxable income (NOL) for Illinois income tax purposes as follows:
A – $20,000
B – $40,000
C – $40,000
D – ($150,000)
ii) As a consequence, there is a $50,000 unabsorbed loss for Corporation D originating in 1983.
iii) Corporations W, X, Y and Z are members of a different unitary business group in 1983 and have the following amounts of federal taxable income (NOL) for Illinois income tax purposes in that year.
W – $20,000
X – $40,000
Y – $40,000
Z – ($150,000)
iv) As a consequence, there is a $50,000 unabsorbed loss for Corporation Z originating in 1983.
v) In 1980 Corporations A, B, C, D, V, X, Y and Z were all members of the same unitary business group with the following amounts of federal taxable income (NOL) for Illinois income tax purposes.
A – $10,000
B – $10,000
C – $10,000
D – $5,000
V – ($40,000)
X – $15,000
Y – $15,000
Z – $15,000
vi) As a consequence, the combined federal taxable income of the unitary business group, A, B, C, D, V, X, Y and Z in 1980 was $40,000.
B) ANALYSIS AND CONCLUSION:
i) Limitation No. 2 against which the loss carrybacks relating to both Corporations D and Z must be tested is $40,000. Limitation No. 1 for the loss carryback of Corporation D is $35,000 (the 1980 federal taxable incomes for Illinois income tax purposes of Corporations A, B, C and D) and Limitation No. 1 for the loss carryback of Corporation Z is $45,000 (the 1980 federal taxable incomes for Illinois income tax purposes of Corporations X, Y and Z). Even though Corporations D and Z had identical $50,000 unabsorbed net operating losses originating in 1983, different amounts of those losses will be absorbed in 1980. In D's case, $17,500 will be absorbed in 1980, computed as follows:
ii) Corp. D's Limitation No. 1 for 1980/Limitation No. 2 x Combined Limitation No. 1 for 1980 of corporations D and Z
35,000/80,000 x 40,000 = 17,500
iii) and $32,500 will be available for use in other years. In Z's case $22,500 will be absorbed in 1980, computed as follows:
iv) Corp. Z's Limitation No. 1 for 1980/Limitation No. 2 x Combined Limitation No. 1 for 1980 of Corporations Z and D
45,000/80,000 x 40,000 = 22,500
and $27,500 will available for use in future years.
5) EXAMPLE 5:
A) FACTS:
i) Corporations A, B, C and D are members of a unitary business group in 1983. In that year, they have federal taxable income (NOL) for Illinois income tax purposes as follows:
Corporation A – $20,000
Corporation B – $40,000
Corporation C – $40,000
Corporation D – ($150,000)
ii) As a consequence, there is a $50,000 unabsorbed loss for Corporation D originating in 1983. Corporations W, X, Y and Z are members of a different unitary business group in 1983 and have the following amounts of federal taxable income (NOL) for Illinois income tax purposes in that year:
Corporation W – $20,000
Corporation X – $10,000
Corporation Y – $30,000
Corporation Z – ($140,000)
iii) As a consequence, there is an $80,000 unabsorbed loss for Corporation Z originating in 1983. In 1980, Corporations A, B, C, D, V, X, Y and Z were all members of the same unitary business group with the following amounts of federal taxable income (NOL) for Illinois income tax purposes:
Corporation A – $10,000
Corporation B – $10,000
Corporation C – $10,000
Corporation D – ( $5,000)
Corporation V – ($25,000)
Corporation X – $50,000
Corporation Y – $10,000
Corporation Z – ($30,000)
iv) As a consequence, the combined federal taxable income of the unitary business group A, B, C, D, V, X, Y and Z in 1980 was $30,000.
B) ANALYSIS AND CONCLUSION:
i) Limitation No. 2 against which the loss carrybacks relating to both Corporations D and Z must be tested is $30,000. Limitation No. 1 for the loss carryback of Corporation D is $25,000 (the 1980 federal taxable incomes and net operating losses for Illinois income tax purposes of Corporations A, B, C and D). Limitations No. 1 for the loss carryback of Corporation Z is $30,000 (the 1980 federal taxable incomes and net operating losses for Illinois income tax purposes of Corporations X, Y and Z).
ii) Corporation D will be deemed to have used $13,636 of its net operating loss in 1980, computed as follows:
Corp. D's Limitation No. 1/Limitation No. 1 of Corps. D and Z x Limitation No. 2
25,000/55,000 x 30,000
iii) and $36,364 will be available for use in other years. Corporation Z will be deemed to have used $16,364 of its net operating loss in 1980 computed as follows:
Corp. Z's Limitation No. 1/Limitation No. 1 of Corps. Z and D x Limitation No. 2
30,000/55,000 x 30,000
iv) and will have $63,636 of its net operating loss available for use in future years.
f) Application of the loss in the carryback and/or carryforward year.
1) Limitations Nos. 1 and 2 do not obviate the necessity for determining the amount of federal taxable income remaining to each group member in the carryback or carryforward year after application of the loss. This computation is necessary so that the limitation on loss carried from other years can be determined.
2) When the total loss allowed to be carried back or forward is less than the total federal taxable income of the common group members in the carryback or carryforward year, each loss member's share of the total loss shall be used first to offset its own income in the carryback or carryforward year. Any remaining loss (up to the limitation) shall be attributed to each of the common members having federal taxable income in the carry over year pro rata based on each member's income over the total income of the common group members.
3) EXAMPLE:
A) FACTS:
i) In 1983, Corporations A, B, C, D and G are members of the unitary business group with federal taxable incomes (NOL) for Illinois income tax purposes as follows:
Corporation A – ($10,000)
Corporation B – $30,000
Corporation C – $5,000
Corporation D – ($60,000)
Corporation G – $5,000
ii) As a consequence, there is a $30,000 unabsorbed net operating loss originating in 1983 which will be divided between Corporation A and Corporation D for carry back or carry forward purposes as follows:
Corp. A: $10,000/$70,000 x ($30,000) = ($4,286)
Corp. D: $60,000/$70,000 x ($30,000) = ($25,714)
iii) In 1980, Corporations A, B, D and F were members of a unitary business group with federal taxable incomes (NOL) for Illinois income tax purposes as follows:
Corporation A – $15,000
Corporation B – $10,000
Corporation D – $16,000
Corporation F – $20,000
iv) As a consequence, the unitary business group A, B, D and F had combined federal taxable income for 1980 of $61,000.
B) ANALYSIS AND CONCLUSION:
i) As a result of the Limitation No. 1, Corporation A and Corporation D can carryback the entire amount of unabsorbed federal net operating loss originating in 1983 to offset their 1980 income as well as the 1980 income of the other common group member, Corporation B. After application of this 1983 carryback, the unitary business group consisting of Corporations A, B, D and F will have a combined federal taxable income in 1980 of $31,000, i.e., the original 1980 combined federal taxable income of $61,000 less the loss carried back from 1983 to $30,000.
ii) The $30,000 loss carried back from 1983 will be attributed to each of the common group members in 1980 in the following manner. Corporation D will use $16,000 of the $25,714 1983 unabsorbed loss assigned to it to reduce its 1980 federal taxable income to zero. Corporation A will use the entire amount of its 1983 loss of $4,286 against its 1980 federal taxable income of $15,000 resulting in a balance of $10,714. Corporation A and Corporation B will share D's remaining loss between them based on their income in 1980. Thus, Corporation A will be allowed to use $5,828 of Corporation D's remaining loss, resulting in a balance of federal taxable income in 1980 of $4,886. Corporation B will be allowed to use $3,886 of Corporation D's remaining loss against its 1980 federal taxable income of $10,000, resulting in a balance of federal taxable income in 1980 of $6,114.
iii) Corporation A and Corporation's B share of Corporation D's remaining loss carryback from 1983 is computed as follows:
Corp. A: $15,000/$25,000 x ($9,714) = ($5,828)
Corp. B: $10,000/$25,000 x ($9,714) = ($3,886)
g) A further additional complication arises where a member of a unitary business group filing an Illinois income tax return is also a member of an affiliated group filing a consolidated return for federal income purposes. In any such case, the member having a federal net operating loss for Illinois income tax purposes which contributes to the combined federal net operating loss will be required to carry forward (may not carryback) its pro rata share of that combined net operating loss (see IITA Section 203(e)(2)(E)).
h) A schedule shall be attached to the pro form a U.S. 1120 showing the computation of the amount of the carryforward and its derivation, i.e., original federal net operating loss for Illinois income tax purposes less amounts absorbed in the loss year and in previous carryforward years. The taxpayer shall also provide any other documentation required by the Department to support the amount of the carryforward. As indicated with respect to carrybacks, per Limitation No. 1 and Limitation No. 2, the maximum amount of pro rata share of combined federal net operating loss that can be individually carried forward to any year by a member shall be limited to the lesser of the aggregate total of federal taxable incomes and federal net operating losses for Illinois income tax purposes of the loss member and other common members of the unitary business group in the carryforward year or the entire unitary business group's combined federal taxable income in the carryforward year. This means that a member of a unitary business group will not be permitted to carry a loss forward to a year in which the group's combined federal taxable income (without the loss carryforward) is already zero or less nor may it carry a loss forward to a year in which the group had combined federal taxable income if its federal taxable income or federal net operating loss for Illinois income tax purposes in the carryforward year, when added to comparable figures for other common members, did not exceed zero. Unabsorbed losses may be saved for use as appropriate in future years up to the maximum number of years permitted under IRC Section 172.
1) EXAMPLE 1:
A) FACTS:
i) In 1983, Corporations A, B, C and D are members of a unitary business group with federal taxable incomes (NOL) for Illinois income tax purposes as follows:
Corporation A – $100,000
Corporation B – 40,000
Corporation C – 40,000
Corporation D – (200,000)
ii) As a consequence, there is a $20,000 unabsorbed loss for Corporation D originating in 1983. All four corporations are members of an affiliated group filing a consolidated federal income tax return for 1983.
iii) In 1984, Corporation D is an unaffiliated corporation filing an unconsolidated federal income tax return. In filing its own unconsolidated federal income tax return for 1984, Corporation D reflected a federal taxable income of $100,000, being $200,000 taxable income less a federal net operating loss deduction carryforward of $100,000. Corporation D's federal taxable income for Illinois income tax purposes is $200,000, computed by adding to its federal taxable income on its unconsolidated federal income tax return of $100,000 the amount of its net operating loss deduction of $100,000. In 1984, Corporation D was a member of the same unitary business group as in 1983, with federal taxable incomes (NOL) for Illinois income tax purposes as follows:
Corporation A – $ 30,000
Corporation B – 30,000
Corporation C – 30,000
Corporation D – 200,000
iv) As a consequence, there is a $290,000 combined federal taxable income for the group for 1984, prior to any net operating loss carryforward under these rules.
B) ANALYSIS AND CONCLUSION: Because it was a member of an affiliated group filing a consolidated federal income tax return in 1983, Corporation D could not carryback any part of its unabsorbed $20,000 loss for Illinois income tax purposes. The entire amount of that loss can be carried forward to 1984 to reduce the combined federal taxable income of the unitary business group A, B, C and D to $270,000, since neither Limitation No.1 or Limitation No. 2 applies.
2) EXAMPLE 2:
A) FACTS: Same facts as Example6 in subsection (f)(3) above except that in 1984 Corporations A, B, C and D are members of a unitary business group with Corporation E and the five corporations have federal taxable income (NOL) for Illinois income tax purposes as follows:
Corporation A – $ 40,000
Corporation B – 40,000
Corporation C – 40,000
Corporation D – (130,000)
Corporation E – 40,000
B) ANALYSIS AND CONCLUSION: No part of Corporation D's $20,000 unabsorbed loss originating in 1983 may be used in 1984 since Limitation No. 1 against which this loss must be tested is ($10,000), the aggregate total of the federal taxable income for Illinois income tax purposes of Corporations A, B and C and the federal Net operating loss for Illinois income tax purposes of Corporation D.
(Source: Amended at 11 Ill. Reg. 17782, effective October 16, 1987)
Section 100.2240 Net Operating Losses Occurring Prior to December 31, 1986, of Unitary Business Groups: Treatment by Members of the Unitary Business Group: (IITA Section 202) – Effect of Combined Net Operating Loss in Computing Illinois Base Income
a) For purposes of computing the group's combined Illinois base income or equivalent, the group's combined net operating loss (after giving effect to inter member eliminations) can be used to offset the group's combined excess addition modifications. This combined net operating loss (after giving effect to inter member eliminations) can be used to offset the group's combined excess addition modifications. The group's combined excess addition modifications is defined as the total of all addition modifications required by IITA Section 203 (except that prescribed by IITA Section 203(b)(2)(E) and Section 203(c)(2)(E)) for all members of the group, less the total of all subtraction modifications required by IITA Section 203 for all members of the group.
b) However, each group member allowed to carryback or forward a portion of the group's combined federal net operating loss from a year in which that combined federal net operating loss was used to offset any portion of the group's combined excess addition modifications, must take as an addition modification in the carryback and carryforward year its respective share of the NOL addition modification required by IITA Section 203(b)(2)(E) and (c)(2)(E). These respective shares shall be determined in the same manner that the share of the combined federal net operating loss of each member was determined under Section 100.2230(b) of this Part. The amount of the NOL addition modification actually required to be shown in the carryback or carryforward year by any member of the group shall, however, be limited to the amount of loss actually carried to such year by the group member.
1) EXAMPLE 1:
A) FACTS:
i) For 1981, Corporation A filed a separate federal income tax return showing a federal taxable income of $35,000 and an Illinois income tax return reflecting Illinois liability calculated from the $35,000 federal taxable income on a non-combined apportionment basis. For 1984, Corporation A filed a separate federal income tax return showing a net operating loss of $100,000 and an Illinois income tax return reflecting that Corporation A was a member of the same unitary business group as three other corporations – B, C and D – each of which was formed on the first day of the 1984 taxable year. The federal taxable incomes (NOL) for the Illinois income tax purposes and the addition and subtraction modifications of Corporations A, B, C and D for 1984 are as follows:
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Fed. Taxable Income (NOL) For Ill. Income Tax Purposes |
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Total Addition Modifications |
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Total Subtraction Modifications |
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Excess Addition Modifications |
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Corp. |
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A |
(100,000) |
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65,000 |
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40,000 |
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25,000 |
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Corp. |
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B |
60,000 |
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20,000 |
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5,000 |
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15,000 |
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Corp. |
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C |
(30,000) |
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0 |
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15,000 |
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(15,000) |
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Corp. |
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D |
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20,000 |
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0 |
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0 |
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0 |
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Total |
(50,000) |
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85,000 |
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60,000 |
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25,000 |
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ii) Shortly after filing its 1984 return, Corporation A filed an amended federal income tax return for 1981 claiming on appropriate refund based on the carryback of the $100,000 NOL from 1984 against the 1981 taxable income. The refund was paid shortly after the claim was filed and Corporation A is now engaged in preparing an appropriate parallel claim for refund of Illinois income tax liability under 86 Ill. Adm. Code 100.2200.
B) ANALYSIS AND CONCLUSION:
i) The group's combined federal net operating loss for 1984 is (50,000) which will be divided between Corporations A and C (the loss members) for purposes of carryback and carryforward:
Corp. A: $100/$130 x ($50,000) = ($38,462)
Corp. C: $30/$130 x ($50,000) = ($11,538)
ii) The group's excess addition modifications for 1984 will be divided between the loss members in the same proportion as the group's combined federal net operating loss:
Corp. A: $100/$130 x $25,000 = ($19,230)
Corp. C: $30/$130 x $25,000 = ($5,770)
iii) Corporation A's claim for refund of Illinois income tax for 1981 is premised on the NOL carryback of $38,462 from 1984. The amended return which embodies that claim must also reflect an addition modification of $19,230.
2) EXAMPLE 2:
A) FACTS:
i) Same facts as in Example 1 except that Corporation A has a federal net operating loss in 1984 of $65,000 instead of $100,000. Therefore, the federal taxable incomes (NOL) for Illinois income tax purposes and the addition and subtraction modifications of Corporations A, B, C and D for 1984 are as follows:
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Fed. Taxable Income (NOL) For Ill. Income Tax Purposes |
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Total Addition Modifications |
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Total Subtraction Modifications |
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Excess Addition Modifications |
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Corp. |
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A |
(65,000) |
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65,000 |
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40,000 |
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25,000 |
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Corp. |
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B |
60,000 |
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20,000 |
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5,000 |
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15,000 |
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Corp. |
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C |
(30,000) |
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0 |
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15,000 |
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(15,000) |
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Corp. |
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D |
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20,000 |
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0 |
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0 |
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0 |
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Total |
(15,000) |
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85,000 |
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60,000 |
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25,000 |
|
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ii) Shortly after filing its 1984 return, Corporation A filed an amended federal income tax return for 1981 claiming an appropriate refund based on the carryback of the $65,000 NOL from 1984 against the 1981 taxable income. The refund was paid shortly after the claim was filed and Corporation A is now engaged in preparing an appropriate amended Illinois income tax return for 1981 under Section 100.2200 of this Part.
B) ANALYSIS AND CONCLUSION:
i) The group's combined federal net operating loss for 1984 is ($15,000) and the group's excess addition modifications equal $25,000, resulting in a combined 1984 Illinois base income of $10,000, i.e., (15,000) plus $25,000. The group's combined federal net operating loss for 1984 will be divided between Corporations A and C (the loss members) for purposes of carryback and carryforward of Illinois net operating loss:
Corp. A: $65/$95 x ($15,000) = ($10,263)
Corp. C: $30/$95 x ($15,000) = ($4,737)
ii) The amount of the group's excess addition modifications for 1984 that were offset by the group's combined federal net operating loss for 1984 will be divided between the loss members in the same proportion as the group's combined federal net operating loss is divided to compute each loss member's respective share of the 1981 NOL addition modification required by IITA Section 203(b)(2) namely:
Corp. A: $65/$95 x $15,000 = $10,263
Corp. C: $30/$95 x $15,000 = $4,737
iii) Corporation A's amended Illinois income tax for 1981 would reflect an NOL carryback of $10,263 from 1984 and an addition modification of $10,263.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.2250 Net Operating Losses Occurring Prior to December 31, 1986, of Unitary Business Groups: Treatment by Members of the Unitary Business Group: (IITA Section 202) – Deadline for Filing Claims Based on Net Operating Losses Carried Back From a Combined Apportionment Year
A claim for refund based upon the carryback of a share of a combined federal net operating loss may be filed at any time within the period stated by IITA Section 911(b). This section generally requires that such a claim be filed no later than 2 years and 20 days after the date the "federal change" was finalized by IRS payment to the taxpayer. If taxpayer does not have occasion to receive an IRS refund on the NOL because it was absorbed for federal income tax purposes by incomes of other members of the federal affiliated groups, or because the refund was a consolidated refund for federal purposes, then the period of limitation for filing the Illinois claim is as stated in Section 100.5030 of this Part.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
SUBPART D: ILLINOIS NET LOSS DEDUCTIONS FOR LOSSES OCCURRING ON OR AFTER DECEMBER 31, 1986
Section 100.2300 Illinois Net Loss Deduction for Losses Occurring On or After December 31, 1986 (IITA 207)
a) In General - For taxable years ending on or after December 31, 1986, IITA Section 207 provides for computation of Illinois net losses for corporations (including Subchapter S Corporations), trusts, estates and partnerships. If, after applying all of the modifications provided for in IITA Sections 203(b)(2), 203(c)(2) or 203(d)(2) and the allocation and apportionment provisions of IITA Article 3, the taxpayer's net income results in an Illinois net loss, such loss shall be allowed as a carryback or carryover deduction in the manner allowed under Section 172 of the Internal Revenue Code, as in effect during the loss year for tax years ending prior to December 31, 1999. For losses incurred in tax years ending on or after December 31, 1999, the Illinois net loss is allowed as a carryback to the 2 preceding taxable years and as a carryforward to the 20 succeeding tax years. The rules for members of a unitary business group are set out in Sections 100.2340 and 100.2350. Sections 100.2200 through 100.2250 which also relate to net operating losses of unitary business groups are only applicable to losses incurred in taxable years ending prior to December 31, 1986. Section 100.9410(f) sets forth the statute of limitations for reporting an Illinois net loss carryback. An Illinois net loss deduction is not available for individuals. Losses incurred by individuals are recognized for Illinois tax purposes in the computation of adjusted gross income for federal tax purposes.
b) Definitions
1) "Illinois net loss" means the amount of loss determined under IITA Section 207. That is, it is the amount of loss, if any, after applying the modifications and allocation and apportionment provisions of the Act, as calculated for tax years occurring on or after December 31, 1986.
2) "Illinois net loss deduction" means the deduction which may be carried pursuant to IITA Section 207.
3) "Net operating loss" means either: The amount of net operating loss determined for federal tax purposes; or for losses occurring prior to December 31, 1986, the amount recognized for Illinois tax purposes.
4) "Net operating loss deduction" means either: The amount of deduction recognized for federal tax purposes; or for losses occurring prior to December 31, 1986, the amount recognized for Illinois tax purposes.
5) The following terms have the following meanings: NOL - Net Operating Loss NOLD - Net Operating Loss Deduction corp. - corporation Treas. - Treasury Reg. - Regulation Sec. - Section Apport. - Apportionment Ill. - Illinois sep. - separate comb. - combined
c) Treatment of capital losses of corporations. The treatment of capital losses is separate and apart from the rules governing Illinois net losses and Illinois net loss deductions. Capital losses will continue to be governed by federal provisions. For federal purposes, capital losses are permitted only to the extent of capital gains and the carryback of capital losses is permitted only to the extent of capital gains in the carryback year. Since the federal carryback of capital losses changes federal taxable income, Illinois claims for refund based on such a federal change are permitted pursuant to IITA Section 506(b). A change in federal taxable income resulting from a federal capital loss carryback would be given effect before applying an Illinois net loss deduction to the same year.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.2310 Computation of the Illinois Net Loss Deduction for Losses Occurring On or After December 31, 1986 (IITA 207)
a) The amount of the Illinois net loss deduction allowed by IITA Section 207 for any taxable year is the aggregate of the Illinois net loss carryovers and Illinois net loss carrybacks to that taxable year. The steps to be taken in determining the amount of the deduction are as follows:
1) Compute the Illinois net loss in accordance with Section 100.2320 (adjusted as may be required under subsection (c) of this Section) for any preceding or succeeding taxable year from which a net loss may be carried.
2) Compute the Illinois net loss carryovers and carrybacks from the preceding or succeeding taxable years in accordance with Section 100.2330 (adjusted as may be required under subsection (c) of this Section).
3) Add the Illinois net loss carryovers and carrybacks.
b) Every taxpayer claiming an Illinois net loss deduction for any taxable year shall file, in accordance with the tax return instructions for that year, a concise statement in such form as the Department shall require setting forth the amount of the net loss deduction claimed and all material and pertinent facts required by the instructions. The Illinois net loss for any taxable year shall be determined under the law applicable to that year.
c) Adjustment in the Case of Discharge of Indebtedness Income. Under IRC section 108(a), income from discharge of indebtedness may be excluded from gross income in certain circumstances. When discharge of indebtedness income is excluded under this provision, IRC section 108(b) requires the taxpayer to reduce certain "tax attributes", including net operating losses incurred in the year of the discharge or carried over to that year, basis in assets, and net capital losses incurred in the year of discharge or carried over to that year. These reductions generally have the effect of including the discharge of indebtedness income in gross income at some later time. This effective inclusion of the discharge of indebtedness income in gross income automatically causes the discharge of indebtedness income to be included in base income, except in the case of reductions in net operating losses incurred in taxable years ending on or after December 31, 1986, by taxpayers other than individuals. In those cases, the taxpayer would never include the discharge of indebtedness income in its base income because the IITA did not allow deduction of federal net operating losses, but instead provided for computation and carryover of Illinois net losses under IITA Section 207 and, prior to the enactment of Public Act 95-0233, that Section had no provision for reduction of net losses when a taxpayer had discharge of indebtedness income. IITA Section 207(c) provides that a taxpayer required to reduce a federal net operating loss or federal net operating loss carryover under IRC section 108(b)(2)(A), on account of discharge of indebtedness income excluded from gross income under IRC section 108(a) with respect to a taxable year ending on or after December 31, 2008, must reduce its Illinois net loss incurred in the year of the discharge or any Illinois net losses carried over to that year, to the extent provided in this subsection.
1) Amount of Reduction
A) Illinois Net Loss. A taxpayer must reduce any Illinois net loss incurred in a taxable year under Section 100.2320 by an amount equal to the amount of the reduction to the taxpayer's federal net operating loss under IRC section 108(b)(2)(A) for the same taxable year that is allocable to Illinois.
B) Illinois Net Loss Carryover. A taxpayer must reduce any Illinois net loss carryover to a taxable year under Section 100.2330 by an amount equal to the amount of the reduction to the taxpayer's federal net operating loss carryover under IRC section 108(b)(2)(A) for the same taxable year that is allocable to Illinois.
C) The Illinois net losses or net loss carryovers may not be reduced below zero.
2) Attribute Reduction Allocable to Illinois. For purposes of subsection (c)(1), the portion of the reduction to a federal net operating loss or federal net operating loss carryover allocable to Illinois shall be determined by multiplying the reduction required to that loss or loss carryover under IRC section 108(b)(2)(A) by a fraction, the numerator of which is the amount of income excluded from gross income for the taxable year under IRC section 108(a) that would have been allocated to Illinois and the denominator of which is the total income excluded from gross income under IRC section 108(a) for the taxable year. The amount of income excluded from gross income under IRC section 108(a) that would have been allocated to Illinois shall be determined by applying the provisions of Article 3 of the IITA as if that income had not been excluded from gross income.
3) Ordering Rules
A) Reduction Required after Determination of Tax. The reduction required under this subsection (c) shall be made after the determination of the tax imposed under the IITA for the taxable year of the discharge. Accordingly, any Illinois net loss carryover available for the taxable year in which income is excluded under IRC section 108(a) is taken into account in computing the Illinois net loss deduction for that taxable year under subsection (a), and only the amount of the loss remaining to carry forward to the next taxable year, if any, is reduced under this subsection (c).
B) Any reduction required under this subsection (c) to Illinois net loss carryovers shall be made first to the net loss carryover whose carryforward period will expire first, then to the carryover that will expire next, and so forth, until the entire reduction is made or until all carryforwards are reduced to zero.
4) Partnerships and Subchapter S Corporations. Under IRC section 108(d)(6), the provisions of IRC section 108(a), (b), (c) and (g) are applied at the partner level. Accordingly, a partnership does not exclude discharge of indebtedness income and is not required to make any reduction under this subsection (c). Under IRC section 108(d)(7), the provisions of IRC section 108(a), (b), (c) and (g) are applied at the corporate level in the case of a Subchapter S corporation, including by treating any loss or deduction that is disallowed for the taxable year of the discharge under IRC section 1366(d)(1) as a net operating loss for that taxable year. Accordingly, a Subchapter S corporation may be required to make a reduction under this subsection (c).
5) Examples. The provisions of this subsection may be illustrated by the following examples.
A) EXAMPLE 1. For its taxable year ending December 31, 2008, Taxpayer has $50,000 of discharge of indebtedness income excluded from gross income under IRC section 108(a). Under Article 3 of the IITA, but for the exclusion the entire $50,000 would have been included in the Taxpayer's business income and a total of $10,000 of the income would have been apportioned to Illinois. The Taxpayer has a federal net operating loss of $40,000 for its December 31, 2008 taxable year, and an Illinois net loss of $8,000. Under IRC section 108(b)(2)(A), Taxpayer is required to reduce its federal net operating loss from $40,000 to $0. Under this subsection, Taxpayer is required to reduce its Illinois net loss from $8,000 to $0 ($8,000 - [$40,000 × ($10,000/$50,000)]).
B) EXAMPLE 2. Assume the same facts as Example 1, except that the Taxpayer makes an election under IRC section 108(b)(5) to reduce its basis in depreciable property, with the result that no reduction is made to the taxpayer's federal net operating loss. No reduction is required under this subsection (c) to the Taxpayer's Illinois net loss.
C) EXAMPLE 3. For its taxable year ending December 31, 2009, Taxpayer has $200,000 of discharge of indebtedness income excluded from gross income under IRC section 108(a). Under Article 3 of the IITA, but for the exclusion the entire $200,000 would have been included in the Taxpayer's business income and a total of $100,000 of that income would have been apportioned to Illinois. The Taxpayer has $50,000 of federal taxable income for its December 31, 2009 taxable year before application of a federal net operating loss carryover in the amount of $75,000 from its December 31, 2006 taxable year, leaving $25,000 of that loss to carry forward to 2010. In addition, the Taxpayer has an Illinois net loss for its December 31, 2009 taxable year of $10,000, but no Illinois net loss carryovers to that year. Under IRC section 108(b)(4)(A) and (b)(2)(A), the Taxpayer is required to reduce its 2006 federal net operating loss remaining to carry forward to 2010 from $25,000 to $0. Since no reduction is made to a federal net operating loss incurred in 2009 under IRC section 108(b)(2)(A), no reduction is required to be made to the Taxpayer's 2009 Illinois net loss under this subsection (c).
D) EXAMPLE 4. Assume the same facts as in Example 3, except that the Taxpayer has $25,000 of Illinois net income for its December 31, 2009 taxable year and has Illinois net loss carryovers of $20,000 from its December 31, 2007 taxable year and $20,000 from its December 31, 2008 taxable year. Under subsection (c)(3)(B), the $20,000 Illinois net loss carryover from 2007 and $5,000 of the 2008 Illinois net loss carryover are first applied to reduce Taxpayer's Illinois net income to $0 for its December 31, 2009 taxable year. The remaining $15,000 Illinois net loss carryover from 2008 is reduced under this subsection to $2,500 ($15,000 - [$25,000 × ($100,000/$200,000)]). Reduction is required even though the Taxpayer's federal net operating loss carryover relates to its December 31, 2006 taxable year while the Illinois net loss carryover is from Taxpayer's December 31, 2008 taxable year.
E) EXAMPLE 5. For its taxable year ending December 31, 2009, Taxpayer has $200,000 of discharge of indebtedness income excluded from gross income under IRC section 108(a). Under Article 3 of the IITA, but for the exclusion the entire $200,000 would have been included in the Taxpayer's business income and a total of $100,000 of that income would have been apportioned to Illinois. The Taxpayer has a $50,000 federal net operating loss for the 2009 taxable year and federal net operating loss carryovers of $25,000 from its December 31, 2006 taxable year and $75,000 from its December 31, 2007 taxable year. Taxpayer has an Illinois net loss of $25,000 for its December 31, 2009 taxable year, and Illinois net loss carryovers of $6,000 from its December 31, 2006 taxable year and $30,000 from its December 31, 2007 taxable year. Under IRC section 108(b)(2)(A), Taxpayer's $50,000 federal net operating loss for 2009 and $25,000 net operating loss carryover from 2006 are each reduced to $0. In addition, the $75,000 net operating loss carryover from 2007 is reduced to $50,000. Under this subsection, the Taxpayer's Illinois net loss is reduced to $0 ($25,000 - [$50,000 × ($100,000/$200,000)]). In addition, the Taxpayer's Illinois net loss carryover from 2006 is reduced to $0, and its Illinois net loss carryover from 2007 is reduced to $11,000 Under subsection (c)(3)(B), the $25,000 reduction to the Taxpayer's Illinois net loss carryover is first applied to reduce the carryover from 2006 from $6,000 to $0, and the remaining reduction is applied to reduce the carryover from 2007 from $30,000 to $11,000.
(Source: Amended at 33 Ill. Reg. 1195, effective December 31, 2008)
Section 100.2320 Determination of the Amount of Illinois Net Loss for Losses Occurring On or After December 31, 1986
a) Add back of federal net operating loss deduction. The starting point in calculating Illinois net income or loss is taxable income. IITA Section 203(e)(1) provides that taxable income shall mean the amount of taxable income properly reportable for federal income tax purposes, and that taxable income may be less than zero. The IITA requires that certain addition and subtraction modifications be made to taxable income to arrive at base income. In order to avoid the recognition of a federal net operating loss in more than one taxable year, IITA Sections 203(b)(2)(E) and 203(c)(2)(E) require an addition modification for corporations, trusts and estates. Thus, the amount of any federal net operating loss deduction (arising from a loss incurred in a taxable year ending on or after December 31, 1986), taken in arriving at federal taxable income must be added back in the computation of Illinois base income. Since partnership and S corporations are not allowed a net operating loss deduction for federal purposes, this type of add back does not apply to them. The add back is illustrated by the following Example.
EXAMPLE: In 1986, Corporation A reported a ($100) federal net operating loss. Corporation A carried this loss back for federal purposes and claimed a federal NOL deduction in 1983 of $100.On its Illinois amended return for 1983, since the federal NOL deduction taken on its amended 1983 U.S. return relates to an NOL incurred in a tax year ending on or after December 31, 1986, the $100 federal NOLD must be treated as an addition modification on Corporation A's amended 1983 Illinois return.
b) Other modifications, allocation and apportionment. The other addition and subtraction modifications provided in IITA Sections 203(b)(2), 203(c)(2), and 203(d)(2) must be taken into account before an Illinois net loss can be determined. Also, the allocation ad apportionment provisions of IITA Article 3 must be applied before an Illinois net loss can be determined. This is illustrated in the following Example.
EXAMPLE: In 1987, Corporation A has federal taxable income of $200, less a $100 federal NOLD relating to a NOL incurred in 1986. In 1987, Corporation A also has $300 of Illinois addition modifications relating to income from State obligations, $200 of subtraction modifications relating to income from U.S. obligations, $400 of nonbusiness loss allocable to Illinois, and a 50% apportionment factor in Illinois. Corporation A would compute its 1987 Illinois net loss as follows:
|
Line 1 |
– |
taxable income |
100 |
|
Plus |
– |
addition modification for federal NOLD relating to 1986 loss |
100 |
|
Plus |
– |
other addition modification |
300 |
|
Minus |
– |
subtraction modification |
(200) |
|
Equals |
– |
base income |
$300 |
|
Minus |
– |
nonbusiness loss |
(400) |
|
Equals |
– |
business income |
700 |
|
Times |
– |
50% apportionment factor |
350 |
|
Plus |
– |
nonbusiness loss allocable to Illinois |
(400) |
|
Equals |
– |
Illinois net loss |
( 50) |
c) Net operating losses occurring prior to December 31, 1986, carried into tax years ending on or after December 31, 1986
1) Effect on taxable income in the carryforward year. Any federal net operating losses occurring prior to December 31, 1986 and carried into tax years ending on or after December 31, 1986, will be treated as an adjustment to federal taxable income (an adjustment before apportionment), and any such federal net operating loss deduction will not be required to be added back in computing Illinois base income unless such loss has already been used for Illinois purposes (see paragraph 3, below).
2) Effect on excess addition modifications in the carryforward year. Furthermore, IITA Section 203(e)(1), as amended by P.A. 84-1400, permits net operating loss carryforwards from pre- December 31,1986, tax years to tax years ending on or after December 31, 1986, to offset the excess of Illinois addition modifications over subtraction modifications in such years. This is illustrated in the following Example.
EXAMPLE: Corporation A had a $1,000 federal net operating loss in 1985. The loss could not be carried back to a prior year and none of it was absorbed in 1986.In 1987, Corporation A had federal taxable income before special deductions of $200, and it had $100 of excess Illinois addition modifications over subtraction modifications. As a result, the $1,000 federal net operating loss will offset the $200 of taxable income before special deductions and the $100 of excess addition modifications. For Illinois income tax purposes, Illinois base income and Illinois net income will be zero for 1987, and there will remain a $700 federal net operating loss carryforward for 1988 and later years.
3) NOL addition modification in carryforward years. For taxable years in which a net operating loss carryforward from a taxable year ending prior to December 31, 1986, is an element of taxable income, IITA Sections 203(b)(2)(F) and 203(c)(2)(F) provide a special addition modification if that loss carryforward originated in a loss year in which it was used to offset excess Illinois addition modifications in calculating Illinois base income. See Schedule NL or NL-1 (for members of unitary business groups) of the IL-1120.
(Source: Added at 11 Ill. Reg. 17782, effective October 16, 1987)
Section 100.2330 Illinois Net Loss Carrybacks and Net Loss Carryovers for Losses Occurring On or After December 31, 1986 (IITA Section 207)
a) IITA Section 207(a) provides for carryover deductions of any losses that result after applying all of the modifications provided for in Section 203(b)(2), (c)(2) and (d)(2) and the allocation and apportionment provisions of Article 3 of the Act.
b) Years to Which Illinois Net Losses May be Carried
1) In General. Under IITA Section 207(a)(2), an Illinois net loss incurred in a tax year ending on or after December 31, 1999 and prior to December 31, 2003 may be carried back to the two preceding tax years or carried forward to the 20 succeeding tax years. Under IITA Section 207(a)(3)-(4), for any taxable year ending on or after December 31, 2003 and prior to December 31, 2021, the loss is allowed as a carryover to each of the 12 taxable years following the taxable year of the loss, provided that any such loss not having yet expired as of November 16, 2021, the effective date of Public Act 102-0669, shall be allowed as a carryover to each of the 20 taxable years following the taxable year of the loss. For any taxable year ending on or after December 31, 2021, the loss is allowed as a carryover to each of the 20 taxable years following the taxable year of the loss. For tax years ending prior to December 31, 1999, IITA Section 207(a)(1) provides that a carryback or carryover deduction is allowed in the manner allowed under Internal Revenue Code section 172. The federal rules concerning the years to which a loss may be carried are contained in IRC section 172(b) and in Treas. Reg. Sec. 1.172-4(a)(1). These rules, as now in effect or hereafter amended, are followed for Illinois income tax purposes and apply to corporations, partnerships, trusts and estates. In general, for Illinois net losses incurred in tax years beginning prior to August 6, 1997, the net loss is first carried back to the three preceding taxable years and then is carried over to the 15 succeeding taxable years. For Illinois net losses incurred in tax years beginning on or after August 6, 1997 and ending prior to December 31, 1999, the loss generally is first carried back to the two preceding tax years and then is carried forward to the 20 succeeding tax years. In taxable years ending prior to December 31, 1999, special provisions applied to regulated transportation companies, financial institutions, product liability losses and other entities or situations, and the provisions in IRC section 172(b) and the related Treasury Regulations relating to the years to which a loss incurred in one of those years may be carried are followed.
2) Specific Rules for Losses Incurred in Taxable Years Ending Prior to December 31, 1999. IITA Section 207(a)(1) provides that, for losses incurred in any taxable year ending prior to December 31, 1999, the loss is allowed as a carryover or carryback deduction in the manner allowed under IRC section 172. Pursuant to this provision:
A) For losses incurred in taxable years beginning prior to August 6, 1997, a loss generally is first carried back to each of the 3 taxable years preceding the taxable year in which the loss was incurred and then to each of the 15 taxable years following the taxable year in which the loss was incurred. (From IRC section 172(b)(1)(A), as in effect prior to enactment of P.L. 105-34.)
B) For losses incurred in taxable years beginning after August 5, 1997, a loss generally is first carried back to each of the 2 taxable years preceding the taxable year in which the loss was incurred and then to each of the 20 taxable years following the taxable year in which the loss was incurred. (From IRC section 172(b)(1)(A), as in effect after enactment of P.L. 105-34.)
C) Special carryover periods allowed under IRC section 172(b) for specific kinds of losses or taxpayers also apply. For example:
i) "Specified liability losses" may be carried back to each of the 10 taxable years preceding the taxable year in which the loss was incurred. (From IRC section 172(b)(1)(C).)
ii) For losses incurred in taxable years beginning after December 31, 1986, and ending before January 1, 1994, bad debt losses of commercial banks may be carried back to each of the 10 taxable years preceding the taxable year in which the loss was incurred and to each of the 5 taxable years following the taxable year in which the loss was incurred. (From IRC section 172(b)(1)(D).)
c) Election to Forgo Carryback Period
1) For losses incurred in tax years ending prior to December 31, 2003, IITA Section 207(a-5)(A) allows the taxpayer to elect to relinquish the entire carryback period with respect to the loss. The election is made on the taxpayer's return for the taxable year in which the loss is incurred. The election may be made only on or before the due date (including extensions of time) for filing the return. If an election is made, the loss is carried forward and deducted only in years subsequent to the taxable year in which the loss was incurred. The election, once made, is irrevocable. (IITA Section 207(a-5)(A))
2) If the election is made on any combined return filed in accordance with IITA Section 502(e), the election will be considered to be in effect for all eligible members of the combined group filing the return for the taxable year for which the election is made.
3) If the timely return for the taxable year reflects Illinois income and:
A) a finalized federal change eliminates Illinois income thereby creating an Illinois net loss for the year, the taxpayer may make the election to relinquish the entire carryback period for the Illinois net loss on an amended return or form prescribed by the Department within the 120 day time period prescribed by IITA Section 506(b); or
B) an Illinois audit or other Illinois change eliminates Illinois income thereby creating an Illinois net loss for the year, the taxpayer may make the election to relinquish the entire carryback period for the Illinois net loss on forms prescribed by the Department at the time the loss is first reported to Illinois.
d) Portion of Illinois Net Loss That Is a Carryback or a Carryover to the Taxable Year in Issue. Pursuant to IITA Section 207(a-5)(B), the entire amount of a loss is carried to the earliest taxable year to which the loss may be carried. The amount of the loss, which is carried to each of the other taxable years, is the excess, if any, of the amount of the loss over the sum of the deductions for carryback or carryover of the loss allowable for each of the prior taxable years to which the loss may be carried. This is illustrated in the following Example.
EXAMPLE: A taxpayer that makes its return on the calendar year basis has an Illinois net loss for 1986. Under the provisions of IRC section 172(b) as in effect in that year, the entire net loss for 1986 may be carried back to 1983. The amount of the carryback to 1984 is the excess of the 1986 loss over the net income for 1983. The amount of the carryback to 1985 is the excess of the 1986 loss over the aggregate of the net incomes for 1983 and 1984. The amount of the carryover to 1987 is the excess of the 1986 loss over the aggregate of the net incomes for 1983, 1984, and 1985, etc.
e) Carryover of Pre-12/31/86 Losses and Post-12/30/86 Losses. Net operating losses incurred prior to December 31, 1986, can be carried over into years in which Illinois net losses (incurred on or after December 31, 1986) are also carried. In these cases, the losses incurred in tax years ending prior to December 31, 1986 are treated as an adjustment to taxable income (i.e., before apportionment) while the losses incurred in tax years ending after December 30, 1986 are subtracted in computing Illinois net income (i.e., after apportionment). This is illustrated in the following Example.
EXAMPLE: Corporation A is a calendar year taxpayer. It has no partnership income and no nonbusiness income. In 1985, it reported a federal net operating loss of $1,000, and on its Illinois return for 1986, it reported an Illinois net loss of $50, neither of which could be carried back to prior years due to losses existing in those years. In 1987, A had federal taxable income (before special deductions) of $200, and Illinois addition modifications of $100. Corporation A would compute its Illinois net income in 1987 as follows: The $1,000 net operating loss from 1985 would offset the $200 of 1987 federal taxable income and would offset the $100 of 1987 Illinois addition modifications. In 1988, Corporation A would have remaining $700 of net operating loss carryover from 1985 and $50 of Illinois net loss carryover from 1986.
f) Special Rules
1) IITA Section 207(b) provides that any loss determined under subsection (a) of this Section is carried back or carried forward in the same manner for purposes of both the regular income tax imposed by IITA Section 201(a) and (b) and the personal property replacement income tax imposed under IITA Section 201(c) and (d).
2) For the carryforward of losses incurred prior to certain corporate or partnership reorganizations or acquisitions, see Section 100.4500.
3) IITA Section 207(a) provides that losses that may be carried over and deducted in other years are those losses that result after the modifications of IITA Section 203(b)(2), (c)(2) and (d)(2) are made, and after the allocation and apportionment rules of IITA Article 3 are applied. Accordingly:
A) No exemption allowed under IITA Section 204 is taken into account in computing a loss that may be carried over and deducted under IITA Section 207; and
B) No deduction for any loss carried over pursuant to IITA Section 207 is taken into account in computing a loss that may be carried to and deducted in another taxable year under IITA Section 207.
4) Subchapter S Corporations and Partnerships
A) IITA Section 207(a) allows the carryover of losses that result after the modifications of IITA Section 203(b)(2) and (d)(2) are made. IITA Section 203(b) applies to subchapter S corporations and IITA Section 203(d) applies to partnerships. Accordingly, IITA Section 207 allows subchapter S corporations and partnerships carryover deductions for losses incurred.
B) Neither IITA Section 207 nor IRC section 172 distinguishes between subchapter S corporations and corporations governed by subchapter C of the Internal Revenue Code. IRC section 1363(b)(2) provides that no net operating deduction allowable under IRC section 172 is allowed in the computation of taxable income of a subchapter S corporation and IRC section 1371(b) prohibits any carryforward or carryback between a taxable year in which a corporation is a subchapter S corporation and a taxable year in which it is not. Neither IRC section 1363 nor IRC section 1371 is applicable to the carryover and deduction of losses under IITA Section 207. Accordingly, subject to the other provisions of this Section, a loss incurred in a taxable year in which a corporation is a subchapter S corporation shall be carried to and deducted in any taxable year in which it is not a subchapter S corporation in the same manner as if the corporation were a subchapter S corporation in that year, and a loss incurred in a taxable year in which a corporation is not a subchapter S corporation may likewise be carried to and deducted in any taxable year in which it is a subchapter S corporation.
EXAMPLE: X Corporation is a subchapter S corporation throughout the calendar year 1998. Effective for 1999, X Corporation's subchapter S election is terminated. In 2000, X Corporation incurs an Illinois loss. Unless X Corporation elects to carry the loss forward only, the loss is first carried back and deducted in 1998 and only the amount of loss in excess of 1998 taxable income is carried to 1999 and subsequent years.
C) Losses carried over pursuant to IITA Section 207 are deductible only under that Section, and that Section allows the deduction only of losses that result when the taxpayer's own taxable income is less than zero. Accordingly, no loss carried over and deducted by a partnership or subchapter S corporation in a taxable year may reduce the taxable income of any partner or shareholder of the taxpayer in that taxable year.
5) Suspension of Illinois Net Loss Deductions. In the case of a corporation (other than a subchapter S corporation),
A) no carryover deduction shall be allowed under IITA Section 207 for any taxable year ending after December 31, 2010 and prior to December 31, 2012;
B) no carryover deduction shall exceed $100,000 for any taxable year ending on or after December 31, 2012 and prior to December 31, 2014, and for any taxable year ending on or after December 31, 2021 and prior to December 31, 2024; and
C) no carryover deduction shall exceed $500,000 for any taxable year ending on or after December 31, 2024 and prior to December 31, 2027,
For the purposes of determining the taxable years to which a net loss may be carried under IITA Section 207(a), any taxable year for which a deduction is disallowed under this subsection (f)(5), or for which the deduction would exceed $100,000 or $500,000, as applicable, if not for this subsection (f)(5), is not counted. (IITA Section 207(d))
EXAMPLE: Pursuant to this subsection (f)(5), in determining the taxable years to which a loss incurred by C Corporation in its taxable year ending December 31, 2009 may be carried:
A) the taxable year ending December 31, 2011 is not counted even if C Corporation's net income for the year is a negative;
B) the taxable year ending December 31, 2012 is not counted if C Corporation's net income (before any net loss deduction) is greater than $100,000; and
C) the taxable year ending December 31, 2012 is counted if C Corporation's net income (before any net loss deduction) is $100,000 or less or is negative.
6) Holders of Residual Interests in Real Estate Mortgage Investment Companies (REMICs)
A) Under IRC section 860E(a)(1), the taxable income of a holder of a residual interest in a REMIC may not be less than the amount of "excess inclusion" income from the REMIC for that taxable year. If the residual interest holder's federal net income would otherwise be less than the excess inclusion amount, the residual interest holder carries over the excess of its actual federal taxable income over the amount of its federal taxable income computed without regard to IRC section 860E(a)(1) as a net operating loss under IRC section 172.
B) IITA Prior to PA 97-507. Under IITA Section 207, the net loss of a taxpayer (other than an individual) for a taxable year is its taxable income for the year, as properly reportable for federal income tax purposes, after modifications in IITA Section 203(b)(2), (c)(2) and (d)(2). Under IITA Section 203(b)(2)(D) and (c)(2)(D), corporations, trusts and estates add back to their taxable income any net operating loss deduction claimed under IRC section 172 for a loss incurred in a taxable year ending on or after December 31, 1986. As a result, a corporation, trust or estate whose excess inclusion amount exceeded its federal taxable income computed without regard to IRC section 860E(a)(1) for a taxable year would receive no tax benefit from the deductions or losses that caused the excess, because those deductions or losses could not reduce its federal taxable income in the year incurred and any resulting IRC section 172 carryover deduction would need to be added back to taxable income in the carryover years under IITA Section 203(b)(2)(D) or (c)(2)(D).
C) In order to allow a corporation the benefit of deductions otherwise disallowed by IRC section 860E(a)(1) and IITA Section 203(b)(2)(D) and (c)(2)(D), PA 97-507 added subsection (e) to IITA Section 207 to allow a residual interest holder an Illinois net loss carryover computed in the same manner as the federal net operating loss carryover allowed under IRC section 860E. IITA Section 207(e) provides that, in the case of a residual interest holder in a REMIC subject to IRC section 860E, the net loss in IITA Section 207(a) is equal to:
i) the amount computed under IITA Section 207(a), without regard to IITA Section 207(e) or, if that amount is positive, zero;
ii) minus an amount equal to the amount computed under IITA Section 207(a), without regard to IITA Section 207(e), minus the amount that would be computed under IITA Section 207(a) if the taxpayer's federal taxable income were computed without regard to IRC section 860E and without regard to IITA Section 207(e).
D) IITA Section 207(e) applies to all taxable years and is exempt from automatic sunset under IITA Section 250.
(Source: Amended at 49 Ill. Reg. 1295, effective January 15, 2025)
Section 100.2340 Illinois Net Losses and Illinois Net Loss Deductions for Losses Occurring On or After December 31, 1986, of Corporations that are Members of a Unitary Business Group: Separate Unitary Versus Combined Unitary Returns
a) In general. IITA Section 502(f) allows corporations (other than Subchapter S corporations) that are members of the same unitary business group to elect to be treated as one taxpayer for certain purposes including the filing of returns (combined returns) and the determination of the group's tax liability. Consequently, if an election under Section 502(f) is in effect, any Illinois net loss and Illinois net loss deduction of the unitary business group shall be determined as if the group were one taxpayer. If such an election is not in effect, any Illinois net loss and Illinois net loss deduction shall be determined separately on the facts shown on the separate corporate returns of each member of the group. In general, the Section 502(f) election will not affect total amount of net loss or net loss deduction that is available, but it may affect how quickly the loss is absorbed. In general, if an election is in effect, net losses are absorbed more quickly. The rules for determining a net loss or net loss deduction set forth in Sections 100.2310 through 100.2330 apply in the same manner whether or not such an election is in effect. If the business income of a unitary business group results in a loss, the amount of that loss will be the same whether or not a combined return is filed. If a combined return is not filed, any such loss will be apportioned among all members of the group based on each member's apportionment factors in Illinois as compared to their combined apportionment factors everywhere. This is illustrated by the following Example:
EXAMPLE: Assume that Corporation A and Corporation B constitute a unitary business group and there is no nonbusiness income or loss. Under the facts given below, if A and B file separate returns in 1986, using combined apportionment, A will have an Illinois net loss of $100 and B will have an Illinois net loss of $400, and if a combined return is filed, the group will report a combined Illinois net loss of $500.
|
|
Corp A. |
Corp. B |
Combined |
|
Base Income (loss) |
200 |
(1,200) |
(1,000) |
|
Business Income |
|
|
(1,000) |
|
Apport. % (sep. Ill./comb. everywhere) |
10% |
40% |
|
|
Apport. % (comb. Ill./comb. everywhere) |
|
|
50% |
|
Apportioned income (loss) |
(100) |
(400) |
(500) |
|
Illinois Net Income (loss) |
(100) |
(400) |
(500) |
b) Determination of the amount of Illinois net loss. The election provided under IITA Section 502(f) may affect whether or not an Illinois net loss is incurred by particular members of the unitary business group if some members have nonunitary income or loss. This is illustrated in the following Example.
EXAMPLE: Assume that Corporation A and Corporation B constitute a unitary business group in 1986. Under the facts given below, if A and B file separate returns in 1986, using the combined apportionment method, A will have an Illinois net loss of $170 and B will report Illinois net income of $520. If a combined return is filed, the group will report combined Illinois net income of $350.
|
|
Corp. A |
Corp. B |
Combined |
|
Base income |
|
|
1,000 |
|
Nonbusiness loss |
(300) |
|
(300) |
|
Business income |
|
|
1,300 |
|
Apport. % (sep.Ill./comb. everywhere) |
|
10% |
40% |
|
Apport. % (comb. Ill./comb. everywhere |
|
|
50% |
|
Apportioned income |
130 |
520 |
650 |
|
Nonbusiness loss allocable to Illinois |
(300) |
|
(300) |
|
Illinois Net income (loss) |
(170) |
520 |
350 |
c) Illinois net loss carrybacks and carryovers. The election provided in IITA Section 502(f) may affect the amount of Illinois net loss deduction that can be absorbed in a particular year. If a combined return is filed, any Illinois net loss deductions are combined and subtracted from combined Illinois net income, whereas if a separate return is filed, the Illinois net loss deduction of that member only would be subtracted from that member's separate Illinois net income. This is illustrated in the following Example.
EXAMPLE: Assume that Corporation A and Corporation B constitute a unitary business group, that in 1986 there is a $170 Illinois net loss entirely attributable to Corporation A because Corporation B had no property, payroll, or sales in Illinois, and that the loss must be carried forward because of losses in prior years. Assume further that in 1987 both A and B have property, payroll and sales in Illinois. The separate and combined absorption of the loss in 1987 is illustrated below. Under the facts given, if A and B file separate returns, the $170 Illinois net loss deduction will be recognized on A's return only, and A will have a $70 net loss carryover to 1988. B will have to pay tax on net income of $400. If a combined return is filed in 1987, the $170 Illinois net loss from 1986 will be fully absorbed in 1987, and the combined group will pay tax on combined net income of $330.
|
|
Corp. A |
Corp. B |
Combined |
|
Base income |
|
|
1,000 |
|
Business income |
|
|
1,000 |
|
Apport. % (sep. Ill./comb. everywhere |
|
10% |
40% |
|
Apport. % (comb. Ill./comb. everywhere) |
|
|
50% |
|
Apportioned income |
100 |
400 |
500 |
|
Net loss deduction |
(170) |
|
(170) |
|
Net income (loss) |
(70) |
400 |
330 |
(Source: Added at 11 Ill. Reg. 17782, effective October 16, 1987)
Section 100.2350 Illinois Net Losses and Illinois Net Loss Deductions, for Losses Occurring On or After December 31, 1986, of Corporations that are Members of a Unitary Business Group: Changes in Membership
a) Member entering the group from a separate return year. IITA Section 207 provides that the amount of Illinois net loss that is available as a carryback or carryover is determined after applying the allocation and apportionment provisions of Article 3. That Section does not limit the amount of Illinois net loss that may be carried into a given year. As a consequence, no such limitation shall apply.
1) Example 1:
A) In 1986, Corporation A was not a member of a unitary business, and it reported a $170 Illinois net loss on a separate return. The loss could not be carried back. Also in 1986, Corporation B and Corporation constituted a unitary business group, and they reported Illinois net income. On January 1, 1987, B purchased the stock of A, and due to their operations A became part of the unitary business group with B and C. The following facts apply for 1987:
|
|
Corp. A |
Corp. B |
Corp. C |
Combined |
|
Base Income |
|
|
|
1,000 |
|
Business Income |
|
|
|
1,000 |
|
Apportionment Percentage |
10% |
15% |
25% |
50% |
|
Apportionment Income |
100 |
150 |
250 |
500 |
|
Illinois net loss deduction |
(170) |
--- |
--- |
(170) |
|
Illinois net income |
--- |
150 |
250 |
330 |
|
Loss Carryover |
(70) |
|
|
|
B) If A, B, and C file separate returns using the combined apportionment method, A's $170 Illinois net loss deduction will be applied against A's income for that year, and A will have a $70 Illinois net loss carryover to 1988.B and C will report $150 and $250 of Illinois net income, respectively. If A, B, and C file a combined return, A's $170 Illinois net loss deduction will be applied against the group's combined income, and the combined group will report $330 of combined Illinois net income.
2) Example 2:
A) Same facts as Example 1 except that in 1986 A reported Illinois net income instead of an Illinois net loss, and B and C reported Illinois net losses of $200 and $400, respectively, which could not be carried back. Consequently, the following facts apply for 1987:
|
|
Corp. A |
Corp. B |
Corp. C |
Combined |
|
Base Income |
|
|
|
1,000 |
|
Business Income |
|
|
|
1,000 |
|
Apportionment Percentage |
10% |
15% |
25% |
50% |
|
Apportionment Income |
100 |
150 |
250 |
500 |
|
Net loss deduction |
--- |
(200) |
(400) |
(600) |
|
Illinois net income (loss) |
100 |
(50) |
(150) |
(100) |
|
|
|
|
|
|
B) If A, B and C file separate returns in 1987, A will report $100 of Illinois net income, and B and C will have Illinois net losses of $50 and $150, respectively. If A, B and C file a combined return in 1987, the group will have a combined net loss of $100.
b) Member leaving the group during a separate or combined return year. If a corporation ceases to be a member of a unitary business group during the year, regardless of whether it filed a separate or combined return, the amount of net loss attributable to that member for that portion of the tax year prior to leaving shall be determined in accordance with Section 100.5270(f)(2) of this Part.
c) Carryover and Carryback of Combined Net Losses to Separate Return Years
1) This subsection applies to unitary members that have made an election to file a combined return under IITA Section 502(f). If a combined Illinois net loss (as defined in Section 100.5270(b)(3) of this Part) can be carried under the principles of Section 172(b) to a separate return year of a corporation (or could have been so carried if such corporation were in existence) which was a member of a unitary business group in the year in which such loss arose, then the portion of such combined Illinois net loss attributable to such corporation (as determined under subsection (c)(3) below) shall be assigned to such corporation and shall be an Illinois net loss carryover or carryback to such separate return year; accordingly, such portion shall not be included in the combined Illinois net loss carryovers or carrybacks to the equivalent combined return year. Thus, for example, if a member filed a separate return for the third year preceding a combined return year in which a combined Illinois net loss was sustained and if any portion of such loss is assigned to such member for such separate return year, such portion may not be carried back by the group to its third year preceding such combined return year.
2) Nonassignment to certain members not in existence. Notwithstanding subsection (c)(1), the portion of a combined Illinois net loss attributable to a member shall not be assigned to a prior separate return year for which such member was not in existence and shall be included in the combined Illinois net loss carrybacks to the equivalent combined return year of the group (or, if such equivalent year is a separate return year, then to such separate return year), provided that such member was a member of the unitary business group immediately after its organization.
3) Portion of combined Illinois net loss attributable to a member. The portion of a combined Illinois net loss attributable to a member of a group is an amount equal to the combined Illinois net loss of the group multiplied by a fraction, the numerator of which is what would have been the separate Illinois net loss of such corporation had a combined return not been filed, and the denominator of which is the sum of what would have been the separate Illinois net losses of all members of the group in such year having such losses. The separate Illinois net loss of a member of the group shall be determined pursuant to Sections 100.2320 and 100.2340 above.
4) Examples. The provisions of this subsection (c) may be illustrated by the following examples:
A) Example 1:
i) In 1986, Corporations A and B were not members of a unitary business group and each filed separate Illinois returns. Both A and B reported net income in 1986 and prior years. On January 1, 1987, B purchased all the stock of A, and due to their operations A became part of the unitary business group with B. In 1987 A and B file a combined return and the following facts apply:
|
|
Corp. A |
Corp. B |
Combined |
|
Base Income
|
|
|
(200) |
|
Business Income
|
|
|
(200) |
|
Apport. %
|
10% |
20% |
30% |
|
Aport. Income |
(20) |
(40) |
(60) |
|
Illinois Net Loss |
(20) |
(40) |
(60) |
ii) The portion of the 1987 $60 combined Illinois net loss which will be attributable to A and B will be as follows:
|
Corp. A |
60 x 20/60 = 20 |
|
|
|
|
Corp. B |
60 x 40/60 = 40 |
iii) It should be noted that where a combined net loss such as in this Example results entirely from a unitary business loss (i.e. there are no nonbusiness or separate apportionment partnership items of income or loss), and where there are no prior year losses being carried over (compare to Example 2), then each member's portion of the combined net loss can also be calculated by multiplying the combined business loss by each member's separate apportionment percentage (i.e. based on each member's factors in Illinois as compared to the group's combined factors everywhere). This is illustrated by the following calculations:
|
Corp. A |
200 x 10% = 20 |
|
|
|
|
Corp. B |
200 x 20% = |
B) Example 2:
i) In 1986, Corporation A and Corporation B were not members of a unitary business group and each filed separate Illinois returns. A reported a $100 Illinois net loss in 1986 and B reported net income. Corporation A's net loss could not be carried back because of losses in prior years. On January 1, 1987, B purchased all the stock of A, and due to their operations A became part of the unitary business group with B. In 1987 A and B file a combined return and the following facts apply:
|
|
Corp. A |
Corp. B |
Combined |
|
Base Income
|
|
|
200 |
|
Business Income
|
|
|
200 |
|
Apport. %
|
10% |
20% |
30% |
|
Apport. Income |
20 |
40 |
60 |
|
Illinois Net Loss Deduction |
(100) |
|
(100) |
|
Illinois Net Income/Loss
|
(80) |
40 |
(40) |
ii) If A and B file separate returns in 1988, the portion of the 1987 $40 combined Illinois net loss which will be attributable to A and B in 1988 will be as follows:
|
Corp. A |
40 x 100/100 = 40 |
|
|
|
|
Corp. B |
40 x 0/100 = 0 |
C) Example 3:
i) Corporation P was formed on January 1, 1986. P filed a separate return for the calendar year 1986. On March 15, 1987, P formed Corporation S. P and S filed a combined return for 1987. On January 1, 1988, P purchased all the stock of Corporation T, which had been formed in 1987 and had filed a separate return for its taxable year nding December 31, 1987.
ii) P, S, and T join in the filing of a combined return for 1988, which return reflects a combined Illinois net loss of $11,000. $2,000 of such combined net loss is attributable to P, $3,000 to S, and $6,000 to T. Such attribution of the combined net loss was made on the basis of the separate net losses of each member as determined under subsection (c) (3).
iii) $5,000 of the 1988 combined Illinois net loss can be carried back to P's separate return for 1986. Such amount is the portion of the combined net loss attributable to P and S. Even though S was not in existence in 986, the portion attributable to S can be carried back to P's separate return year, since S (unlike T) was a member of the group immediately after its organization. The 1988 combined net loss can be carried back against the group's income in 1987 except to the extent (i.e., $6,000) that it is apportioned to T for its 1987 separate return year and to the extent that it was absorbed in P's 1986 separate return year. The portion of the 1988 combined net loss attributable to T ($6,000) is a net loss carryback to its 1987 separate return.
D) Example 4:
i) Assume the same facts as in Example 3. Assume further that on June 15, 1989, P sells all the stock of T to an outsider, that and S file a combined return for 1989 (which includes the income of T for the period January 1 through June 5), and that T files a separate return for the period June 16 through December 31, 1989.
ii) The 1988 combined Illinois net loss, to the extent not absorbed in prior years, must first be carried to the short period ending June 15, 1989. Any portion of the $6,000 amount attributable to T which is not absorbed in T's 1987 separate return year or in the short combined period ending June 15, 1989, shall then be carried to T's separate short return year ending December 31, 1989.
(Source: Amended at 26 Ill. Reg. 13237, effective August 23, 2002)
Section 100.2360 Illinois Net Losses and Illinois Net Loss Deductions for Losses of Cooperatives Occurring On or After December 31, 1986 (IITA Section 203(e)(2)(F))
a) Under Internal Revenue Code section 1382(b), cooperatives are allowed to deduct distributions of profits made to their members, or "patronage dividends". The deduction may only be taken against a cooperative's taxable income from transactions with its members, or "patronage income". If patronage income is negative, the cooperative may not offset that "patronage loss" against its income from transactions with nonmembers, or "nonpatronage income", but instead carries the patronage loss over as a net operating loss under IRC section 172 to offset patronage income in the carryover year. (See Farm Service Cooperative v. Commissioner, 615 F.2d 1235 (8th Cir. 1980).)
b) IITA Prior to PA 96-932. Under IITA Section 203(b), the base income of a cooperative for a taxable year is its taxable income for the year, as properly reportable for federal income tax purposes, after modifications in IITA Section 203(b)(2). IITA Section 203(b)(2)(D) requires a cooperative to add back to its taxable income any net operating loss deduction claimed under IRC section 172 for a loss incurred in a taxable year ending on or after December 31, 1986. As a result, a cooperative that incurred a patronage loss in the same year it had positive nonpatronage income would receive no tax benefit from the deductions or losses that caused the patronage loss, because the patronage loss could not offset its nonpatronage income in the year it was incurred and any deduction of a carryover of the loss would be added back to taxable income in the carryover years under IITA Section 203(b)(2)(D).
c) PA 96-932 amended IITA Section 203(e)(2)(F) to provide that the taxable income of a cooperative is determined in accordance with the provisions of IRC sections 1381 through 1388, but without regard to the prohibition against offsetting losses from patronage activities against income from nonpatronage activities, However, IITA Section 203(e)(2)(F) provides that a cooperative may make an election to follow its federal income tax treatment of patronage losses and nonpatronage losses. In the event the election is made, the losses are computed and carried over in a manner consistent with IITA Section 207(a) and apportioned by the apportionment factor reported by the cooperative on its Illinois income tax return filed for the taxable year in which the losses are incurred. PA 96-932 provided that it is declaratory of existing law.
d) Making the Election. The election to follow the federal income tax treatment of patronage losses is made by the cooperative checking the appropriate box on Schedule INL, Illinois Net Loss Adjustment for Cooperatives and REMIC Owners, on its original return for its first taxable year ending on or after December 31, 2010 to which it intends the election to apply. The election may be made for years ending prior to December 31, 2010 by filing an amended return for any open year, claiming a deduction under IITA Section 207 for any patronage loss carryover to that year, as allowed under PA 96-932 for those making the election.
1) Effect of Making the Election. If an election has been made, patronage losses carried forward under subsection (c) may be used to offset only patronage income, and nonpatronage losses carried forward under subsection (c) may be used to offset only nonpatronage income. The election is effective for all taxable years, with original returns due on or after the date of the election. Once made, the election may only be revoked upon approval of the Director. (IITA Section 203(e)(2)(F)) Requests for approval of a revocation of the election are made by asking for a private letter ruling approving the revocation under 2 Ill. Adm. Code 1200.110. The request shall give the reasons for the request and state the first taxable year to which the election will no longer apply. The request will be granted or denied by private letter ruling. If a request is denied, the taxpayer may challenge the denial by filing a return in accordance with the election and then filing an amended return that does not apply the election and claiming a refund for overpayment.
2) Effect of Revoking an Election. If an election is revoked, patronage and nonpatronage losses incurred in taxable years to which the election applied under subsection (c), and that are otherwise available to carry over, may be used to offset both patronage and nonpatronage income in taxable years ending on or after the date stated in the private letter ruling request. A cooperative that has revoked an election under this subsection (d) may again make the election for any taxable year after the first taxable year to which the revocation applied. If a subsequent election is made under this subsection (d)(2), any patronage or nonpatronage loss carryover under subsection (c) from a taxable year to which the earlier election applied may be used only to offset patronage or nonpatronage income, respectively, in any taxable year to which the new election applies.
(Source: Added at 42 Ill. Reg. 17852, effective September 24, 2018)
SUBPART E: ADDITIONS TO AND SUBTRACTIONS FROM TAXABLE INCOME OF INDIVIDUALS, CORPORATIONS, TRUSTS AND ESTATES AND PARTNERSHIPS
Section 100.2405 Gross Income, Adjusted Gross Income, Taxable Income and Base Income Defined; Double Deductions Prohibited; Legislative Intention (IITA Section 203(e), (g) and (h))
a) General Definitions. For the purposes of IITA Sections 203 and 803(e), and subject to the exceptions discussed in this Section, a taxpayer's gross income, adjusted gross income or taxable income for the taxable year mean the amount of gross income, adjusted gross income or taxable income properly reportable for federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code. (IITA Section 203(e)(1))
b) Taxable Income Less than Zero. Taxable income may be less than zero. (IITA Section 203(e)(1)) Accordingly, when the computation of a taxpayer's base income begins with its taxable income and its taxable income is negative, it may offset that negative amount against any addition modifications required to be made under IITA Section 203, consistent with the provisions of this subsection (b).
1) Taxable Years Ending On or After December 31, 1986. For taxable years ending on or after December 31, 1986, net operating loss carry-forwards from taxable years ending prior to December 31, 1986 may not exceed the sum of federal taxable income for the taxable year before net operating loss deduction, plus the excess of addition modifications for the taxable year. (IITA Section 203(e)(1))
EXAMPLE: In its taxable year ending December 31, 1986, Corporation A properly reports a federal net operating loss (FNOL) of $100,000, all of which is available to carry forward to its taxable years ending on or after December 31, 1987 for federal income tax purposes. Corporation A has addition modifications for its taxable year ending December 31, 1986 that exceed its subtraction modifications for that year by $5,000. For Illinois income tax purposes, the federal net operating loss available to carry forward is $95,000 (the $100,000 federal net operating loss minus the $5,000 in excess addition modifications). In its taxable year ending December 31, 1987, Corporation A deducts $97,000 of the federal net operating loss. The remainder is deducted in its taxable year ending December 31, 1988. For purposes of IITA Section 203, Corporation A's taxable income for the taxable year ending December 31, 1987 is computed without allowing $2,000 of the federal net operating loss deduction taken in that year and its taxable income for December 31, 1988 is computed without allowing any of the $3,000 federal net operating deduction. In order to avoid a double benefit, Corporation A adds back the ineligible $2,000 and $3,000 of FNOL for Illinois purposes on its Illinois return for 1987 and 1988, respectively.
2) Taxable Years Ending Before December 31, 1986
A) For taxable years ending prior to December 31, 1986, taxable income may never be an amount in excess of the net operating loss for the taxable year as defined in Internal Revenue Code section 172(c) and (d), provided that when taxable income of a corporation (other than a subchapter S corporation), trust, or estate is less than zero and addition modifications, other than those provided by IITA Section 203(b)(2)(E) or (c)(2)(E) for trusts and estates, exceed subtraction modifications, an addition modification is made under those subsections for any other taxable year to which taxable income less than zero (net operating loss) is applied under IRC section 172 or IITA Section 203(e)(2)(E) in conjunction with IRC section 172. (IITA Section 203(e)(1))
B) For application of this provision, see Sections 100.2230 and 100.2410.
3) Pre- and post-1986 net losses are discussed in detail in Sections 100.2200 through 100.2250 and individual net losses are specifically discussed at Section 100.2410.
c) Special Rules Regarding Certain Taxpayers. Many taxpaying entities do not calculate federal taxable income on a federal taxable return or use a special variation of federal taxable income. For these taxpayers, IITA Section 203(e)(2) defines federal taxable income. Thus, for purposes of IITA Section 203, the taxable income properly reportable by the following taxpayers for federal income tax purposes means:
1) Certain Life Insurance Companies – for life insurance companies taxable under IRC section 801, life insurance company taxable income, plus the amount of distribution from pre-1984 policyholder surplus accounts as calculated under IRC section 815a. (IITA Section 203(e)(2)(A));
2) Mutual Insurance Companies – for mutual insurance companies taxable under IRC section 831, insurance company taxable income. (IITA Section 203(e)(2)(B));
3) Regulated Investment Companies (RICs) – for RICs taxable under IRC section 852, investment company taxable income. (IITA Section 203(e)(2)(C));
4) Real Estate Investment Trusts (REITs) – for REITs taxable under IRC section 857, REIT taxable income. (IITA Section 203(e)(2)(D));
5) Consolidated Corporations – for a corporation that is a member of an affiliated group of corporations filing a federal consolidated income tax return for the taxable year, taxable income determined as if that corporation had filed a separate return federally for the taxable year and for each preceding taxable year for which it was a member of an affiliated group and also determined as if the election provided under IRC section 243(b)(2) had been in effect for all years. (IITA Section 203(e)(2)(E)). However, for purposes of computing the combined taxable income and combined base income of a unitary business group for purposes of IITA Sections 304(e) and 502(e), Section 100.5270 provides that the unitary business group generally applies the federal consolidated return regulations;
6) Cooperatives – for cooperative corporations or associations, taxable income of such organization determined in accordance with IRC sections 1381 through 1388, inclusive, but without regard to the prohibition against offsetting losses from patronage activities against income from nonpatronage activities; except that a cooperative corporation or association may make an election to follow its federal income tax treatment of patronage losses and nonpatronage losses. In the event the election is made, patronage losses and nonpatronage losses are computed and carried over in a manner consistent with IITA Section 207(a) and apportioned by the apportionment factor reported by the cooperative on its Illinois income tax return filed for the taxable year in which the losses are incurred. (IITA Section 203(e)(2)(F)) (see PA 96-932). (See Section 100.2360 for more guidance.);
7) Subchapter S Corporations – Subchapter S corporations are not generally subject to federal income tax but instead act as conduits through which items of gain, loss, income and deduction flow to their owners. Accordingly, a special rule for computing "taxable income" is necessary to enable them to compute their Illinois base income for purposes of determining their Illinois Personal Property Tax Replacement Income Tax liability under IITA Section 201(c) and (d).
A) Election in Effect. For subchapter S corporations for which there is in effect an election for the taxable year under IRC section 1362, "taxable income" means taxable income determined in accordance with IRC section 1363(b), except that taxable income takes into account those items that are separately stated under IRC section 1363(b)(1). (IITA Section 203(e)(2)(G)(i))
B) Items that are separately stated under IRC section 1363(b)(1), as listed in 26 CFR 1.1366-1(a)(2), include:
i) The corporation's combined net amount of gains and losses from sales or exchanges of capital assets;
ii) The corporation's combined net amount of gains and losses from sales or exchanges of property used in the trade or business and involuntary conversions;
iii) Charitable contributions paid by the corporation within the taxable year of the corporation;
iv) The taxes described in IRC section 901 that have been paid (or accrued) by the corporation to foreign countries or to possessions of the United States;
v) Each of the corporation's separate items involved in the determination of credits against tax allowable under IRC part IV, subchapter A (section 21 et seq.), except for any credit allowed under IRC section 34 (relating to certain uses of gasoline and special fuels);
vi) Each of the corporation's separate items of gains and losses from wagering transactions (IRC section 165(d)); soil and water conservation expenditures (IRC section 175); deduction under an election to expense certain depreciable business expenses (IRC section 179); medical, dental, etc., expenses (IRC section 213); the additional itemized deductions for individuals provided in part VII of subchapter B of the Internal Revenue Code (IRC section 212 et seq.); and any other itemized deductions for which the limitations on itemized deductions under IRC section 67 or IRC section 68 applies;
vii) Any of the corporation's items of portfolio income or loss, and related expenses, as defined in 26 CFR 1.469-0 through 11 (2007) under IRC section 469;
viii) The corporation's tax-exempt income. For purposes of subchapter S, tax-exempt income is income that is permanently excludible from gross income in all circumstances in which the applicable provision of the Internal Revenue Code applies. For example, income that is excludible from gross income under IRC section 101 (certain death benefits) or IRC section 103 (interest on state and local bonds) is tax-exempt income, while income that is excludible from gross income under IRC section 108 (income from discharge of indebtedness) or IRC section 109 (improvements by lessee on lessor's property) is not tax-exempt income; and
ix) Any other item identified in guidance (including forms and instructions) issued by the Commissioner of Internal Revenue as an item required to be separately stated.
C) Treatment of Items That Are Separately Stated Under IRC Section 1363(b)(1). Many items are separately stated because their deduction is limited by the taxable income or adjusted gross income of the taxpayer, and this limitation is determined by each shareholder rather than by the subchapter S corporation. IITA Section 203(e)(2)(G) permits the deduction of these items without imposing the limitations that could apply to the shareholder. For example, charitable deductions that are separately stated are deductible by a subchapter S corporation without regard to the limitations under IRC section 170(b).
D) Items that are not separately stated under IRC section 1363(b), and that are not taken into account in computing "taxable income" for purposes of IITA Section 203, include:
i) IRC section 199(d)(1)(A) provides that the deduction under IRC section 199 for the domestic production activities income of a subchapter S corporation are taken at the shareholder level, rather than by the corporation. Because these deductions are separately stated under this provision and not under IRC section 1363(b)(1), a subchapter S corporation shall not take these deductions in computing its taxable income for purposes of IITA Section 203.
ii) IRC section 613A(c)(11) provides that percentage depletion deductions for oil and gas property of a subchapter S corporation are computed separately for each shareholder. Because these deductions are separately stated under this provision and not under IRC section 1363(b)(1), a subchapter S corporation shall not take these deductions in computing its taxable income for purposes of IITA Section 203. However, in the case of any subchapter S corporation that deducted percentage depletion on oil and gas properties on any return filed prior to March 31, 2008 in reliance on the return instructions for the Form IL-1120-ST, any increase in Illinois income tax liability that would result from disallowing the percentage depletion deduction for oil and gas property for that year is abated under Section 4(c) of the Taxpayers' Bill of Rights Act [20 ILCS 2520/4(c)].
E) Election Not in Effect. For subchapter S corporations for which there is in effect an election to opt out of the provisions of the Subchapter S Revision Act of 1982 and that have applied instead the prior federal subchapter S rules as in effect on July 1, 1982, "taxable income" means the taxable income of such corporation determined in accordance with the federal subchapter S rules as in effect on July 1, 1982. (IITA Section 203(e)(2)(G)(ii));
8) Partnerships – Partnerships are not generally subject to federal income tax, but instead act as conduits through which items of gain, loss, income and deduction flow to their owners. Accordingly, a special rule for computing "taxable income" is necessary to enable partnerships to compute their Illinois base income for purposes of determining their Illinois Personal Property Tax Replacement Income Tax liability under IITA Section 201(c) and (d). For partnerships, "taxable income" is taxable income determined in accordance with IRC section 703, except that taxable income shall take into account those items that are separately stated under IRC section 703(a)(1), but would be taken into account by an individual in calculating his or her taxable income. (IITA Section 203(e)(2)(H))
A) Items That Are Separately Stated Under IRC Section 703(a)(1). IRC section 703(a)(1) provides that items listed in IRC section 702(a) are separately stated. These items are:
i) gains and losses from sales or exchanges of capital assets held for not more than 1 year;
ii) gains and losses from sales or exchanges of capital assets held for more than 1 year;
iii) gains and losses from sales or exchanges of property described in IRC section 1231 (relating to certain property used in a trade or business and involuntary conversions);
iv) charitable contributions (as defined in IRC section 170(c));
v) dividends entitled to capital gains treatment under IRC section 1(h)(11) or to the corporate dividends-received deduction under part VIII of subchapter B of the Internal Revenue Code;
vi) taxes for which the foreign tax credit may be allowed under IRC section 901, paid or accrued to foreign countries and to possessions of the United States; and
vii) other items of income, gain, loss, deduction or credit to the extent provided by regulations prescribed by the Secretary of the Treasury (see 26 CFR 1.702-1).
B) Treatment of Items That Are Separately Stated Under IRC Section 703(a)(1). Many items are separately stated because their deduction is limited by the taxable income or adjusted gross income of the taxpayer, and this limitation is determined by each partner rather than by the partnership. IITA Section 203(e)(2)(H) permits the deduction of these items without imposing the limitations that could apply to the partner. For example, charitable deductions that are separately stated are deductible by a partnership without regard to the limitations under IRC section 170(b).
C) Items not separately stated under IRC section 703(a)(1), and that are not taken into account in computing "taxable income" for purposes of IITA Section 203, include:
i) IRC section 199(d)(1)(A) provides that the deduction under IRC section 199 for the domestic production activities income of a partnership is taken at the partner level, rather than by the partnership. Because these deductions are separately stated under this provision and not under IRC section 703(a)(1), a partnership does not take these deductions in computing its taxable income for purposes of IITA Section 203;
ii) IRC section 613A(c)(11) provides that percentage depletion deductions for oil and gas property of a partnership is computed separately for each partner. Because these deductions are separately stated under this provision and not under IRC section 703(a)(1), a partnership does not take these deductions in computing its taxable income for purposes of IITA Section 203. However, in the case of any partnership that deducted percentage depletion on oil and gas properties on any return filed prior to March 31, 2008 in reliance on the return instructions for the Form IL-1065, any increase in Illinois income tax liability that would result from disallowing the percentage depletion deduction for oil and gas property for that year is abated under Section 4(c) of the Taxpayers' Bill of Rights Act [20 ILCS 2520/4(c)]; and
iii) IRC section 108(a) provides that a taxpayer in bankruptcy or that is insolvent does not recognize income from discharge of indebtedness. IRC section 108(d)(6) provides that, when indebtedness of a partnership is discharged, this exemption applies only at the partner level. Accordingly, the exemption in IRC section 108(a) does not apply in determining the taxable income of a partnership;
9) Electing Small Business Trust (ESBT). An ESBT that owns both stock in one or more subchapter S corporations and other property is treated as two separate trusts under IRC section 641. However, the IRS practice is to require the ESBT to file a single return and pay tax on the income from both sources. In these cases, the income of the ESBT derived by the ESBT from investments in subchapter S corporations is not reported, but rather the tax liability attributable to that income is computed separately and added to the tax liability computed for the other property of the ESBT. In order to allow the ESBT to file a single Illinois income tax return, an ESBT that owns both stock in subchapter S corporations and other property shall include income from both sources in its taxable income for purposes of IITA Section 203.
d) Special Rule Regarding Recapture of Business Expenses on Disposition of Asset or Business. Notwithstanding any other law to the contrary, if in prior years income from an asset or business has been classified as business income and in a later year is demonstrated to be non-business income, then all expenses, without limitation, deducted in such later year and in the two immediately preceding taxable years related to that asset or business that generated the non-business income, are added back and recaptured as business income in the year of the disposition of the asset or business. The amount of the add-back is apportioned to Illinois using the greater of the apportionment fraction computed for the business under IITA Section 304 for the taxable year or the average of the apportionment fractions computed for the business under IITA Section 304 for the taxable year and for the two immediately preceding taxable years. (IITA Section 203(e)(3)) This provision is effective for tax years ending on or after July 30, 2004 (the effective date of PA 93-840).
1) IITA Section 203(e)(3) requires recapture of expenses treated as business expenses in a taxable year for which the taxpayer has made an election under IITA Section 1501(a)(1) to treat all of its income (other than employee compensation) as business income whenever, in a subsequent year, the taxpayer fails to make that election, so that income from an asset is treated as business income in the earlier year and as nonbusiness income in the subsequent year.
2) IITA Section 203(e)(3) does not require recapture of business expenses passed through to a partner in any taxable year by a partnership that qualifies as an investment partnership under IITA Section 1501(a)(11.5) in a subsequent taxable year, causing all income of the partnership to be characterized as nonbusiness income under IITA Section 305(c-5).
3) IITA Section 203(e)(3) does not require recapture of business expenses passed through to a partner, a shareholder in a subchapter S corporation, or a beneficiary of a trust or estate by the partnership, subchapter S corporation, trust or estate for a taxable year merely because nonbusiness income is passed through the partnership, subchapter S corporation, trust or estate in a subsequent year. However, recapture of those business expenses passed through in a taxable year shall be required by the partner, shareholder or beneficiary if the partnership, subchapter S corporation, trust or estate is required to recapture business expenses for that taxable year or if the business expenses were passed through in the same year that the partnership, subchapter S corporation, trust or estate also passed through nonbusiness income that the partner, shareholder or beneficiary elected to treat as business income under IITA Section 1501(a)(1) and the partner, shareholder or beneficiary fails to make that election with respect to nonbusiness income passed through by the partnership, subchapter S corporation, trust or estate in a subsequent year.
e) Illinois Base Income Defined. "Illinois base income" is the amount determined by applying addition and subtraction modifications specifically authorized under the IITA to either federal adjusted gross income (in the case of individuals) or federal taxable income (in the case of all other taxpayers). An item taken into account on the federal income tax return after the computation of federal taxable income or federal adjusted gross income is not taken into account on the corresponding Illinois income or replacement income tax return unless specifically authorized in the IITA. For example, itemized deductions, which are taken on Schedule A to the U.S. 1040 after federal adjusted gross income has already been calculated, are not reflected in Illinois base income.
f) Double Deductions Prohibited. No item of deduction may be taken into account twice in the calculation of Illinois base income unless specifically authorized under the IITA. If a subtraction modification applies to an item that is already excluded or deducted in computing adjusted gross income or federal taxable income, or to which another subtraction applies, it will be disallowed. (See IITA Section 203(g).)
g) Legislative Intention. IITA Section 203(h) provides that, unless specifically authorized under the IITA Section 203, no modifications or limitations on the amounts of income, gain, loss or deduction are taken into account in determining gross income, adjusted gross income or taxable income for federal income tax purposes for the taxable year, or in the amount of such items entering into the computation of Illinois base income and net income (defined at Section 100.2050) for the taxable year, whether in respect of property values as of August 1, 1969 or otherwise.
(Source: Amended at 42 Ill. Reg. 17852, effective September 24, 2018)
Section 100.2410 Net Operating Loss Carryovers for Individuals, and Capital Loss and Other Carryovers for All Taxpayers (IITA Section 203)
a) Scope. IITA Section 203 requires all taxpayers other than individuals to add back to their base income any carryover deduction taken in computing federal taxable income for a net operating loss incurred in a tax year ending prior to December 31, 1986. IITA Section 203(e) provides for adjustments to taxable income of taxpayers, other than individuals, related to deductions of net operating losses incurred in tax years ending prior to December 31, 1986. IITA Section 203(h) provides that, except as expressly provided by that subsection, there shall be no modifications or limitations on the amounts of income, gain, loss or deduction taken into account in determining gross income, adjusted gross income or taxable income for federal income tax purposes for the taxable year, or in the amount of such items entering into the computation of base income and net income. Accordingly, no taxpayer shall make any adjustment to, or otherwise increase or decrease, the amount properly allowed in computing adjusted gross income (for individuals) or taxable income (for all other taxpayers) on the taxpayer's federal income tax return for:
1) in the case of an individual, any net operating loss deduction carried over under IRC section 172; provided that (notwithstanding the amount of the federal net operating deduction claimed by the individual or allowed by the Internal Revenue Service), in order to prevent the double deduction of the same carryover as required by IITA Section 203(g) and Madison Park Bank v. Zagel, 97 Ill.App.3d 743 (1981), aff'd 91 Ill.2d 231 (1982), the deduction properly allowed in computing federal adjusted gross income in a taxable year may not exceed the amount that reduces the taxpayer's taxable income for that year to zero, after making the modifications specified in IRC section 172(b)(2)(A), and therefore shall not include any amount available to carry over to other taxable years under IRC section 172(b)(2);
2) capital losses carried over under IRC section 1212;
3) deductions allowed to a partner under IRC section 704(d) for his distributive share of a partnership loss that exceeded the adjusted basis in his partnership interest as of the end of the tax year in which the loss was incurred;
4) deductions allowed to a shareholder under IRC section 1366(d)(2) for his share of a loss or deduction of a Subchapter S corporation that exceeded his adjusted basis in the stock or indebtedness of the Subchapter S corporation in the year the loss or deduction was incurred;
5) passive activity losses allocated to tax years subsequent to the year in which the loss was incurred under IRC section 469(b);
6) deductions for losses in excess of amounts at risk allocated to years subsequent to the year incurred under IRC section 465(a)(2); and
7) losses recognized as the result of adjustment events subsequent to a transaction governed by IRC section 338 and carried back pursuant to Treas. Reg. § 1.338(b)-3T(h)(2)(ii)(B).
b) Allocation and Apportionment of Deductions.
1) Deductions described in subsection (a) of this Section that are taken into account in a taxable year shall be allocated and apportioned according to the facts and circumstances of that taxable year. A taxpayer may request alternative apportionment of business losses or deductions by filing a petition pursuant to Section 100.3390 of this Part.
Example 1: An individual incurs a federal net operating loss in 1995, when he is a nonresident. None of the individual's 1995 income is allocated or apportioned to Illinois. At the beginning of 1996, the individual moves to Illinois and becomes a resident. Any net operating loss carried forward from 1995 and deducted in computing the individual's 1996 federal adjusted gross income is allocated to Illinois pursuant to IITA Section 301(a), which in the case of a resident allocates to Illinois all items of income or deduction which were taken into account in the computation of base income for the taxable year.
Example 2: A nonresident individual conducts a business as a sole proprietorship. During 1998, the individual apportions 20% of his business income from the proprietorship to Illinois pursuant to IITA Section 304(a). In 2000, the business is conducted entirely outside Illinois and has no Illinois apportionment factor. If the individual incurs net operating loss in 2000 from the sole proprietorship and carries the loss back to 1998, 20% of the loss will be apportioned to Illinois.
Example 3: In 1999, a resident individual incurs a passive activity loss from rental of real estate located in Indiana. The individual's income from the property is nonbusiness income. At the beginning of 2000, the individual moves away from Illinois and becomes a nonresident. For federal income tax purposes, the individual is allowed to deduct the loss in 2000. Because the individual is not a resident, the deduction allowed in 2000 is allocated to Indiana under IITA Section 303(c)(1).
Example 4: A nonresident individual incurs a federal net operating loss in 1995 from his investment in Partnership A. Partnership A has only business income. For 1995, Partnership A's Illinois apportionment factor under IITA Section 304 is 50%. For federal income tax purposes, the individual carries the net operating loss back to 1992. Partnership A's Illinois apportionment factor under IITA Section 304 is 25% for 1992. Accordingly, 25% of the individual's 1992 net operating loss is apportioned to Illinois.
2) Deductions arising in the same taxable year and subject to apportionment or allocation under different rules. When two or more deductions to which this Section applies arise in the same taxable year, but are apportioned or allocated under different rules, the amount of each such deduction carried over from that year shall be in proportion to the total of all such deductions arising in that year, and the amount of each such deduction allowed in a carryover year shall be in proportion to the total amount of such deductions carried over to that year from the same taxable year.
Example 5: In 2000, Corporation A engages in three capital transactions. In the first, it realizes $700 in capital gain, which is characterized as business income. In the second, it incurs $400 in capital loss, which is characterized as business income from the same business as the gain in the first transaction. In the third, it incurs $600 in capital loss on real property located in Illinois, which is characterized as nonbusiness income allocable entirely to Illinois. Corporation A's apportionment factor in 2000 is 20%.
On its federal income tax return for 2000, Corporation A reports net capital gain of zero, because corporations are not allowed to deduct capital losses in excess of capital gains. In actuality, it is allowed to deduct $700 in capital losses and carry over $300 to be deducted in another year.
In 2000, Corporation A is treated as deducting $280 in business loss from the second transaction ($400 in loss, divided by the $1,000 in total capital losses, multiplied by the $700 capital loss deduction allowed) and $420 in nonbusiness capital loss ($600 in loss, divided by $1,000, and multiplied by $700). The $280 in business loss would be combined with Corporation A's other business income, and 20% would be apportioned to Illinois. The entire $420 in nonbusiness capital loss will be allocated to Illinois.
If Corporation A carries the $300 excess loss back to offset $200 in capital gains realized in 1997, $80 of the 1997 deduction will be business loss (the $120 excess loss attributable to the business transaction, divided by the entire $300 in excess loss, times $200) and $120 will be nonbusiness loss ($180 divided by $300, times $200). The $80 of business loss will be combined with Corporation A's other business income from 1997 and apportioned according to Corporation A's 1997 apportionment factor. The entire $120 in nonbusiness loss will be allocated to Illinois.
Example 6: Assume the same facts as in Example 5, except that the $600 nonbusiness capital loss was incurred on the sale of an intangible asset, and so is allocated to the commercial domicile of Corporation A. At the time the loss was realized in 2000, Corporation A's commercial domicile was in State X, so the $420 in nonbusiness capital loss deducted in that year would be allocated to State X. However, in 1997, Corporation A's commercial domicile was in Illinois. The $120 in nonbusiness capital loss deducted in 1997 would be allocated entirely to Illinois, because that is the commercial domicile of Corporation A at the time the deduction is taken.
Example 7: In 2002, Taxpayer, a nonresident individual, has $20,000 in federal net losses from Partnership A and $180,000 in net losses from Partnership B. Taxpayer has $100,000 in income from other sources, and so Taxpayer's adjusted gross income for 2002 is a net operating loss of $100,000. Taxpayer carries the entire $100,000 loss back to 2000, when Partnership A's Illinois apportionment factor is 30% and Partnership B's apportionment factor is zero. In determining Taxpayer's Illinois net income for 2000, 10% of the federal net operating loss carryback ($20,000 loss from Partnership A divided by $200,000 in total losses incurred from partnerships in 2002), $3,000 of the net operating loss deduction in 2000 is apportioned to Illinois (Partnership A's 30% apportionment factor times the 10% of the $100,000 federal net operating loss carryback attributable to Partnership A's loss). The remaining 90% of the net operating loss deduction is from Partnership B, and none of that loss is apportioned to Illinois.
c) Special Issues.
1) Taxpayers with taxable income (adjusted gross income, in the case of an individual) that is less than zero for a taxable year may offset such negative amount against any net addition modifications for the taxable year, but only to the extent the negative income has not been carried back to and deducted in any prior taxable year as a loss or deduction governed by this Section. (See IITA Section 203(g) (prohibiting double deductions) and Madison Park Bank v. Zagel, 97 Ill.App.3d 743 (1981), aff'd 91 Ill.2d 231 (1982).) The sum of carryover deductions taken in all years, plus the net addition modifications offset against the loss in the year incurred, may not exceed the amount of the loss. Notwithstanding subsection (a) of this Section, whenever a carryover deduction taken in any year plus the net addition modifications offset against a loss in the year incurred plus all carryover deductions of that loss allowed in prior years exceeds the loss incurred, such excess must be added back.
Example 8: In 1996, an individual's adjusted gross income is a loss of $10,000, $5,000 of which the taxpayer carries back to prior years as federal net operating loss deductions. The individual's 1996 addition modifications exceed his subtraction modifications by $7,000. The individual's base income for 1996 is $2,000 (negative $10,000 in adjusted gross income, reduced by the $5,000 carried back to prior years, plus $7,000 in net addition modifications). The taxpayer has used up all of the loss and, for Illinois income tax purposes, may not carry any of the loss forward. Any carryforward deduction claimed for the 1996 loss in a subsequent year must be added back.
2) Any change in federal taxable income (adjusted gross income, in the case of an individual) that results from a deduction or change in the amount of a deduction of an item governed by this Section is a federal change subject to the reporting requirements of IITA Section 506(b).
3) Net loss carryforwards under IITA Section 207. The allocation of losses under this Section can result in a nonresident's net income being less than zero. Under IITA Section 207, a taxpayer (other than an individual, to whom IITA Section 207 does not apply) may carry over any Illinois net loss resulting from the allocation of losses under this Section to other taxable years.
Example 9: For federal income tax purposes, a corporation partially offsets a $100,000 nonbusiness capital gain allocated to Missouri with a $70,000 nonbusiness capital loss carryforward allocated to Illinois. If the corporation has no other income and no Illinois modifications, it would have base income of $30,000, but would allocate a $70,000 loss to Illinois. The resulting negative net income computed under IITA Section 207 may be carried over pursuant to that provision.
Example 10: For federal income tax purposes, a nonresident individual has positive adjusted gross income for a taxable year. For that year, the individual has $200,000 in base income from sources outside Illinois and a $20,000 loss, all of which is allocable to Illinois. The individual's Illinois net income for the year is therefore less than zero. Because IITA Section 207 does not apply to individuals, and there is no other provision for carryovers of losses or deductions, the individual may not carry that negative amount over to any other taxable year.
(Source: Added at 28 Ill. Reg. 1378, effective January 12, 2004)
Section 100.2430 Addition and Subtraction Modifications for Transactions with 80/20 and Noncombination Rule Companies
a) For taxable years ending on or after December 31, 2004, IITA Section 203 requires a taxpayer, in computing base income, to add back deductions allowed in computing federal taxable income or adjusted gross income for interest expenses and intangible expenses incurred in transactions with a person who would be a member of a unitary business group with the taxpayer, if not for the 80/20 test. These provisions were expanded by Public Act 95-233 and Public Act 95-707 to also require the add-back of deductions for interest expenses, intangible expenses and insurance premium expenses when incurred in taxable years ending on or after December 31, 2008, in transactions with a person who would be a member of a unitary business group with a taxpayer if not for the prohibition in IITA Section 1501(a)(27) against including in a single unitary business group taxpayers who use different apportionment formulas under IITA Section 304 (the "noncombination rule"). The noncombination rule was repealed by Public Act 100-22, so that the expansions of the add-back provisions in Public Act 95-233 and Public Act 95-707 have no application for taxable years ending on or after December 31, 2017. Taxpayers are also allowed subtraction modifications that would ensure that the addition modifications do not result in double taxation. Exceptions are provided for instances in which requiring the addition modifications would not be appropriate.
b) Definitions
1) Dividend Included in Base Income. "Dividend" means any item defined as a dividend under 26 USC 316 and any other item of income characterized or treated as a dividend under the Internal Revenue Code, and includes any item included in gross income under Sections 951 through 964 of the Internal Revenue Code and amounts included in gross income under Section 78 of the Internal Revenue Code. (IITA Section 203(a)(2)(D-17), (D-18) and (D-19), (b)(2)(E-12), (E-13) and (E-14), (c)(2)(G-12), (G-13) and (G-14), and (d)(2)(D-7), (D-8) and (D-9)) A dividend is included in base income of a taxpayer only to the extent the dividend is neither deducted in computing the federal taxable or adjusted gross income of the taxpayer nor subtracted from federal taxable income or adjusted gross income under IITA Section 203.
2) Foreign Person. A "foreign person" is any person who would be included in a unitary business group with the taxpayer if not for the fact that 80% or more of that person's business activities are conducted outside the United States. (IITA Section 1501(a)(30))
3) Interest. "Interest" means "compensation for the use or forbearance of money". (See Deputy v. du Pont, 308 U.S. 488, 498 (1940).) Interest includes the amortization of any discount at which an obligation is purchased and is net of the amortization of any premium at which an obligation is purchased.
4) Intangible Expense. "Intangible expense" includes expenses, losses, and costs for, or related to, the direct or indirect acquisition, use, maintenance or management, ownership, sale, exchange, or any other disposition of intangible property; losses incurred, directly or indirectly, from factoring transactions or discounting transactions; royalty, patent, technical, and copyright fees; licensing fees; and other similar expenses and costs. (IITA Section 203(a)(2)(D-18), (b)(2)(E-13), (c)(2)(G-13) and (d)(2)(D-8))
5) Intangible Income. "Intangible income" means the income received or accrued by a person from a transaction that generates intangible expense for the other party to the transaction.
6) Intangible Property. "Intangible property" includes patents, patent applications, trade names, trademarks, service marks, copyrights, mask works, trade secrets, and similar types of intangible assets. (IITA Section 203(a)(2)(D-18), (b)(2)(E-13), (c)(2)(G-13) and (d)(2)(D-8))
7) Related Party. "Related parties" means persons disallowed a deduction for losses by section 267(b), (c) and (f) of the Internal Revenue Code, as well as a partner and its partnership and each of the other partners in that partnership.
8) Noncombination Rule Company. "Noncombination rule company" means any person who would be a member of a unitary business group with a taxpayer if not for the prohibition in IITA Section 1501(a)(27) against including in a single unitary business group persons who use different apportionment formulas under IITA Section 304.
9) Insurance Premiums. "Insurance premiums" means the total amount paid or accrued during the taxable year, net of refunds or abatements, for coverage against any risk under a policy issued by an entity that is required to apportion its business income under the provisions of IITA Section 304(b) or that would be required to do so if it were subject to Illinois income taxation.
10) Federal Deduction Allowed for Interest Paid to a Foreign Person
A) Under 26 USC 163(j), for taxable years beginning after December 31, 2017, a taxpayer's federal income tax deduction for business interest paid is limited to an amount equal to the sum of the taxpayer's business interest income plus 30% of its adjusted taxable income plus its floor plan financing interest. Business interest in excess of that limitation is carried forward under 26 USC 163(j)(2) and treated as interest paid in the following taxable year. For purposes of this Section, in the case of a taxpayer whose federal income tax deduction for business interest expense for a taxable year beginning after December 31, 2017 is subject to limitation by 26 USC 163(j):
i) the deduction allowed in computing federal taxable income for business interest paid to a foreign person for that taxable year equals the business interest paid to that foreign person for that taxable year (including any amount of business interest paid to that foreign person in the preceding taxable year and carried forward from the preceding taxable year under 26 USC 163(j)(2)) times a fraction equal to the deduction allowed under 26 USC 163(j) in computing federal taxable income for business interest paid for that taxable year divided by the total business interest paid for that taxable year (including any amount of business interest paid in the preceding taxable year and carried forward from the preceding taxable year under 26 USC 163(j)(2)); and
ii) the amount of business interest paid to a foreign person for a taxable year and carried forward to the next taxable year under 26 USC 163(j)(2) equals the business interest paid to that foreign person for that taxable year (including any amount of business interest carried forward from the preceding taxable year under 26 USC 163(j)(2)) times a fraction equal to the total amount of business interest to be carried forward to the next taxable year under 26 USC 163(j)(2) divided by the total business interest paid for that taxable year (including any amount of business interest carried forward from the preceding taxable year and carried forward to that taxable year under 26 USC 163(j)(2)).
B) EXAMPLE:
i) In Year 1, Taxpayer paid $100 in business interest to Foreign Person and $1,000 in total business interest. There was no carryforward under 26 USC 163(j)(2) from the prior year. Under 26 USC 163(j), Taxpayer's federal income tax deduction for business interest in Year 1 was limited to $800. In Year 2, Taxpayer paid $130 in business interest to Foreign Person and $1,800 in total business interest. Taxpayer's federal income tax deduction for business interest in Year 2 was limited under 26 USC 163(j) to $1,200.
ii) For purposes of this Section, the federal income tax deduction allowed to Taxpayer for interest paid to Foreign Person in Year 1 equals $80: the $100 actually paid multiplied by 80% (the $800 federal income tax deduction allowed for business interest divided by the $1,000 in total business interest paid). The carryforward of interest paid to Foreign Person in Year 1 to Year 2 equals $20: the $100 actually paid to Foreign Person multiplied by 20% (the $200 carryforward to Year 2 divided by the $1,000 in total business interest paid in Year 1).
iii) For purposes of this Section, the federal income tax deduction allowed to Taxpayer for interest paid to Foreign Person in Year 2 equals $90: the $130 in interest actually paid to Foreign Person in Year 2 plus the $20 paid to Foreign Person in Year 1 and carried forward to Year 2, or $150, multiplied by 60% (the $1,200 federal income tax deduction allowed for business interest divided by the $2,000 in total business interest for Year 2, which equals the $1,800 actually paid plus the $200 carryover from Year 1). The carryforward of interest paid to Foreign Person in Year 2 to Year 3 equals $60: the $150 paid to Foreign Person in Year 2 or carried forward from Year 1, multiplied by 40% (the $800 carryforward to Year 3 divided by the $2,000 in total business interest paid in Year 2 or carried forward from Year 1).
c) Addition Modifications
1) Interest. Except as otherwise provided in this subsection (c)(1), every taxpayer must add back to its base income any deduction otherwise allowed in the taxable year for interest paid to a foreign person or (for taxable years ending on or after December 31, 2008 and prior to December 31, 2017) to a noncombination rule company, to the extent the interest exceeds the amount of dividends received from the foreign person or noncombination rule company by the taxpayer and included in base income for the same taxable year. (See IITA Section 203(a)(2)(D-17), (b)(2)(E-12), (c)(2)(G-12) and (d)(2)(D-7).) This addition modification shall not apply to an item of interest expense if:
A) The foreign person or noncombination rule company is subject in a foreign country or state, other than a state that requires mandatory unitary reporting by the taxpayer and the foreign person or noncombination rule company, to a tax on or measured by net income with respect to the interest. The foreign person or noncombination rule company is subject to a tax on or measured by net income with respect to the interest if the interest is included in its tax base, even if the tax base is offset in whole or in part by deductions for expenses incurred in the production of income or by generally-applicable exemptions, or if the tax imposed by the foreign country or state is offset in whole or in part by credits that are not contingent on the receipt of the interest. If the foreign person or noncombination rule company is a partnership, subchapter S corporation or trust, the foreign person or noncombination rule company is subject to a tax on or measured by net income with respect to the interest to the extent that the interest is included in the tax base of a partner, shareholder or beneficiary who is subject to a tax on or measured by net income in a foreign country or state. For purposes of this subsection (c)(1)(A), it is irrelevant that, under the laws of the foreign country or state, the interest is included in the tax base in a period other than the taxable year in which the deduction is otherwise allowable.
B) The taxpayer can establish, based on a preponderance of the evidence, both of the following:
i) the foreign person or noncombination rule company (during the same taxable year in which the taxpayer paid the interest) paid, accrued, or incurred the interest to a person that is not a related party; and
ii) the transaction giving rise to the interest expense between the taxpayer and the foreign person or noncombination rule company did not have as a principal purpose the avoidance of Illinois income tax, and interest is paid pursuant to a contract or agreement that reflects an arms-length interest rate and terms.
C) The taxpayer can establish, based on clear and convincing evidence, that the item of interest relates to a contract or agreement entered into at arms-length rates and terms and the principal purpose for the payment is not federal or Illinois tax avoidance.
D) The taxpayer establishes by clear and convincing evidence that the adjustment would be unreasonable.
E) The taxpayer has received permission under Section 100.3390 to use an alternative method of apportionment allowing the deduction of the item.
2) Intangible Expenses. Except as otherwise provided in this subsection (c)(2), every taxpayer must add back to its base income any deduction otherwise allowed in the taxable year for intangible expenses incurred with respect to transactions with a foreign person or (for taxable years ending on or after December 31, 2008 and prior to December 31, 2017) with a noncombination rule company, to the extent the intangible expenses exceed the amount of dividends received from the foreign person or noncombination rule company by the taxpayer and included in base income for the same taxable year. If a taxpayer incurs both interest and intangible expenses with the same foreign person or noncombination rule company, any dividends received from that foreign person or noncombination rule company shall be applied first against interest under subsection (c)(1) and only the excess (if any) of the dividends over the interest expenses shall be applied against intangible expenses under this subsection (c)(2). (See IITA Section 203(a)(2)(D-18), (b)(2)(E-13), (c)(2)(G-13) and (d)(2)(D-8).) This addition modification shall not apply to an item of intangible expense if:
A) The item arises from a transaction with a foreign person or noncombination rule company who is subject in a foreign country or state, other than a state that requires mandatory unitary reporting by the taxpayer and the foreign person or noncombination rule company, to a tax on or measured by net income with respect to the intangible income related to the item. The foreign person or noncombination rule company is subject to a tax on, or measured by net income with respect to, the intangible income if the intangible income is included in its tax base, even if the tax base is offset in whole or in part by deductions for expenses incurred in the production of income or by generally-applicable exemptions or if the tax imposed by the foreign country or state is offset in whole or in part by credits that are not contingent on the receipt of the intangible income. If the foreign person or noncombination rule company is a partnership, subchapter S corporation or trust, the foreign person or noncombination rule company is subject to a tax on or measured by net income with respect to the intangible income to the extent that the intangible income is included in the tax base of a partner, shareholder or beneficiary who is subject to a tax on or measured by net income in a foreign country or state. For purposes of this subsection (c)(2)(A), it is irrelevant that, under the laws of the foreign country or state, the intangible income is included in the tax base in a period other than the taxable year in which the deduction for the intangible expense is otherwise allowable.
B) The taxpayer can establish, based on a preponderance of the evidence, both of the following:
i) the foreign person or noncombination rule company (during the same taxable year in which the taxpayer paid the intangible expense) paid, accrued, or incurred the intangible expense to a person that is not a related party; and
ii) the transaction giving rise to the intangible expense between the taxpayer and the foreign person or noncombination rule company did not have as a principal purpose the avoidance of Illinois income tax, and is paid pursuant to a contract or agreement that reflects arms-length terms.
C) If the taxpayer establishes, by clear and convincing evidence, that the adjustments are unreasonable.
D) The taxpayer has received permission under Section 100.3390 to use an alternative method of apportionment, allowing the deduction of the item.
3) Insurance Premiums. For taxable years ending on or after December 31, 2008 and prior to December 31, 2017, every taxpayer must add back to its base income any deduction otherwise allowed in the taxable year for insurance premiums paid to a noncombination rule company, to the extent the insurance premium expense exceeds the amount of dividends received from the noncombination rule company by the taxpayer and included in base income for the same taxable year. If a taxpayer incurs both interest or intangible expenses and insurance premium expenses with the same noncombination rule company, any dividends received from that noncombination rule company shall be applied first against interest under subsection (c)(1), then against intangibles expenses under subsection (c)(2), and only the excess (if any) of the dividends over the interest expenses and intangible expenses shall be applied against insurance premium expenses under this subsection (c)(3). (See IITA Section 203(a)(2)(D-19), (b)(2)(E-14), (c)(2)(G-14) and (d)(2)(D-9).)
d) Subtraction Modifications
1) Interest Income of a Foreign Person or Noncombination Rule Company. If interest paid to a foreign person or noncombination rule company is added back by a taxpayer under subsection (c)(1), the foreign person or noncombination rule company is allowed a subtraction for the amount of that interest included in its base income for the taxable year, net of deductions allocable to that income. The subtraction allowed under this subsection (d)(1) shall not exceed the amount of the corresponding addition under subsection (c)(1). (See IITA Section 203(a)(2)(CC), (b)(2)(V), (c)(2)(T) and (d)(2)(Q).)
2) Intangible Income of a Foreign Person or Noncombination Rule Company. If intangible expense incurred in a transaction with a foreign person or noncombination rule company is added back by a taxpayer under subsection (c)(2), the foreign person or noncombination rule company is allowed a subtraction for the amount of the intangible income from that transaction included in its base income for the taxable year, net of deductions allocable to that income. The subtraction allowed under this subsection (d)(2) shall not exceed the amount of the corresponding addition under subsection (c)(2). (See IITA Section 203(a)(2)(CC), (b)(2)(V), (c)(2)(T) and (d)(2)(Q).)
3) Interest Income from a Foreign Person or Noncombination Rule Company. A taxpayer who receives interest income from a foreign person or noncombination rule company is allowed a subtraction for the amount of that interest income, net of deductions allocable to that income. The subtraction allowed in this subsection (d)(3) for a taxable year may not exceed the amount of the addition modification for the taxable year under subsection (c)(1) for interest paid by the taxpayer to the foreign person or noncombination rule company. (See IITA Section 203(a)(2)(DD), (b)(2)(W), (c)(2)(U) and (d)(2)(R).)
4) Intangible Income from a Foreign Person or Noncombination Rule Company. A taxpayer who receives intangible income from a transaction with a foreign person or noncombination rule company is allowed a subtraction for the amount of the intangible income, net of deductions allocable to that income. The subtraction allowed in this subsection (d)(4) for the taxable year may not exceed the amount of the addition modification for the taxable year under subsection (c)(2) for intangible expenses incurred by the taxpayer in transactions with the foreign person or noncombination rule company. (See IITA Section 203(a)(2)(EE), (b)(2)(X), (c)(2)(V) and (d)(2)(S).)
5) Insurance Premium Income of a Noncombination Rule Company. If insurance premium expense incurred in a transaction with a noncombination rule company is added back by a taxpayer under subsection (c)(3), the noncombination rule company is allowed a subtraction for the amount of the insurance premium income from that transaction included in its base income for the taxable year, net of deductions allocable to that income. The subtraction allowed under this subsection (d)(5) shall not exceed the amount of the corresponding addition under subsection (c)(3). (See IITA Section 203(b)(2)(V).)
6) Insurance Paid by a Noncombination Rule Company. For taxable years ending on or after December 31, 2011, in the case of a taxpayer who added back any insurance premiums under subsection (c)(3), the taxpayer may elect to subtract that part of a reimbursement received from the insurance company to which the premiums were paid equal to the amount of the expense or loss (including expenses incurred by the insurance company) that would have been taken into account as a deduction for federal income tax purposes if the expense or loss had not been insured by the policy for which the premiums were paid. If a taxpayer makes the election provided for by this subsection (d)(6), the insurer to which the premiums were paid must (if required to file an Illinois income tax return) add back to its taxable income the amount subtracted by the taxpayer under this subsection (d)(6). (See IITA Section 203(a)(2)(GG), (b)(2)(Y) (c)(2)(Y) and (d)(2)(T).)
e) Unitary Business Groups. The provisions of this Section apply both to persons who are members of a unitary business group and to persons who are not members of a unitary business group because of the application of the 80/20 rule or (for taxable years ending on or after December 31, 2008 and prior to December 31, 2017) because of the prohibition in IITA Section 1501(a)(27) against including in a single unitary business group taxpayers using different apportionment formulas under IITA Section 304(a) through (d). In applying the provisions of this Section in the case of a unitary business group, any reference to the "taxpayer" in this Section shall be deemed to refer to the unitary business group.
(Source: Amended at 44 Ill. Reg. 10907, effective June 10, 2020)
Section 100.2435 Addition Modification for Student-Assistance Contribution Credit (IITA Sections 203(a)(2)(D-23), (b)(2)(E-16), (c)(2)(G-15), (d)(2)(D-10))
a) For taxable years ending on or after December 31, 2009, IITA Section 203 requires a taxpayer to make an addition modification in computing base income equal to the credit allowable to the taxpayer under IITA Section 218(a), determined without regard to IITA Section 218(c). (IITA Section 203(a)(2)(D-23), (b)(2)(E-16), (c)(2)(G-15), (d)(2)(D-10)) IITA Section 218 allows a credit for certain amounts paid by an employer to an Illinois qualified tuition program. (See Section 100.2510 of this Part.)
b) For purposes of IITA Section 203 and this Section, the "credit allowable to the taxpayer" that must be added to base income is the amount of the credit under IITA Section 218 eligible to be claimed by the taxpayer for a taxable year on a return filed with the Department, without reduction for any part of the credit that must be carried forward to taxable years following the credit year because the credit exceeds the taxpayer's liability. (See IITA Section 203(a)(2)(D-23), (b)(2)(E-16), (c)(2)(G-15), (d)(2)(D-10).)
(Source: Added at 35 Ill. Reg. 15092, effective August 24, 2011)
Section 100.2450 IIT Refunds (IITA Section 203(a)(2)(H), (b)(2)(F), (c)(2)(J) and (d)(2)(F))
a) The "tax benefit rule" codified in Internal Revenue Code section 111 applies when a taxpayer receives a tax benefit from claiming a deduction for an expense in one year and recovers or is compensated or reimbursed for the expense in a subsequent taxable year. Under the tax benefit rule, the recovery or compensation for the expense is included in income in the year it is received. Thus, when the taxpayer deducts State income taxes paid in one taxable year and receives a refund of some or all of the payment in a subsequent year, the tax benefit rule requires the taxpayer to include the refund in federal taxable income or adjusted gross income for the taxable year of the refund. If, however, the expense did not reduce the taxpayer's federal income tax, the recovery or compensation is excluded from income under Internal Revenue Code section 111(a).
b) The regular income tax imposed directly on an individual is allowed only as an itemized deduction for federal income tax purpose and so is not deducted in computing adjusted gross income. Because Illinois does not allow itemized deductions, and any Personal Property Tax Replacement Income Tax deducted in computing adjusted gross income because it is passed through from a partnership, Subchapter S corporation, or trust is added back under IITA Section 203(a)(2)(B), IITA Section 203(a)(2)(H) allows individuals to subtract any such refund included in adjusted gross income. The purpose of this subtraction and the addition of IITA Section 203(a)(2)(B) is to render the payment of Illinois income tax and replacement income tax neutral in the computation of adjusted gross income.
c) All other taxpayers are required to add back any Illinois regular income tax or replacement tax deducted in computing their federal taxable income. (See IITA Section 203(b)(2)(B) (corporations), (c)(2)(C) (trusts and estates) and (d)(2)(B) (partnerships)). Because these taxpayers receive no Illinois income tax benefit from these deductions, any refund of Illinois regular income tax or replacement tax that is included in the taxpayer's federal taxable income may be subtracted under IITA Section 203(b)(2)(F) (corporations), (c)(2)(J) (trusts and estates) and (d)(2)(F) (partnerships).
(Source: Added at 32 Ill. Reg. 3400, effective February 25, 2008)
Section 100.2455 Subtraction Modification: Federally Disallowed Deductions (IITA Sections 203(a)(2)(M), 203(b)(2)(I), 203(c)(2)(L) and 203(d)(2)(J))
a) Taxpayers are entitled to subtract from taxable income (adjusted gross income, in the case of an individual), an amount equal to the sum of all amounts disallowed as deductions by sections 171(a)(2) and 265(2) of the Internal Revenue Code of 1954, and all amounts of expenses allocable to interest and disallowed as deductions by section 265(1) of the Internal Revenue Code of 1954, and, for taxable years ending on or after August 13, 1999, sections 171(a)(2), 265, 280C, 291(a)(3) and 832(b)(5)(B)(i) of the Internal Revenue Code. (IITA Section 203) In order to prevent double deductions, no subtraction is allowed under these provisions for amounts already subtracted because of an exemption from taxation by virtue of Illinois law or the Illinois or U.S. Constitution, or by reason of U.S. treaties or statutes (see Section 100.2470).
b) Section 171 of the Internal Revenue Code requires amortization of premiums paid for a tax-exempt bond over the period between the purchase date and either the maturity date or, if earlier, the first date on which the bond may be called. Section 171(a)(2) of the Internal Revenue Code states that, when the interest of a tax-exempt bond is excludable from gross income, there shall be no deduction for the amortizable bond premium for the taxable year. The IITA allows taxpayers to subtract the bond premium amortization required by section 171 of the Internal Revenue Code for that year to the extent the taxpayer was prohibited from deducting the amortization by section 171(a)(2) of the Internal Revenue Code. Illinois does not provide any adjustment to federal taxable income (adjusted gross income in the case of an individual) related to gains or losses on the sales of bonds. The only subtraction is for the amortization of bond premium that is allocable to that particular tax year. If the bond is called before maturity, then there is no subtraction for periods after the call date.
c) Section 265 of the Internal Revenue Code provides that no deduction shall be allowed from federal taxable income (adjusted gross income in the case of an individual) for expenses relating to tax-exempt income (section 265(a)(1) of the Internal Revenue Code), and for interest relating to tax-exempt income (section 265(a)(2) of the Internal Revenue Code). These expense and interest amounts, determined in a manner consistent with the provisions of the Internal Revenue Code, are allowable subtractions for Illinois income tax purposes.
d) Section 280C(a) of the Internal Revenue Code provides that no deduction shall be allowed for that portion of wages or salaries paid or incurred for the taxable year that is equal to the sum of the credits determined for the taxable year under sections 45A (the Indian Employment Credit), 51(a) (the Work Opportunity Credit), 1396(a) (the Empowerment Zone Employment Credit), 1400P(b) (employer provided housing for individuals affected by Hurricane Katrina), and 1400R (employee retention by employers affected by hurricanes) of the Internal Revenue Code. Section 280C(b) of the Internal Revenue Code provides that no deduction shall be allowed for that portion of the qualified clinical testing expenses for certain drugs for rare diseases or conditions otherwise allowable as a deduction for the taxable year that is equal to the amount of the credit allowable for the taxable year under section 45(C) of the Internal Revenue Code. Section 280(C)(c) of the Internal Revenue Code provides that no deduction or credit shall be allowed for that portion of the qualified research expenses or basic research expenses otherwise allowable as a deduction or credit for the taxable year that is equal to the amount of the credit determined for such taxable year under section 41(a) of the Internal Revenue Code.
e) Section 291(a)(3) of the Internal Revenue Code provides that the amount allowable as a deduction with respect to certain financial institution preference items shall be reduced by 20%. Illinois provides a subtraction modification for the remaining 20% not deducted federally with respect to those financial institution preference items.
f) Section 835(b)(5)(B)(i) of the Internal Revenue Code provides that the amount of federal deduction for losses incurred on insurance company contracts shall be reduced by an amount equal to 15% of the sum of tax-exempt interest received or accrued during the taxable year. Illinois provides a subtraction modification for the remaining 15% not deducted federally with respect to the tax-exempt interest received or accrued during the taxable year from insurance company contracts.
(Source: Added at 32 Ill. Reg. 10170, effective June 30, 2008)
Section 100.2465 Claim of Right Repayments (IITA Section 203(a)(2)(P), (b)(2)(Q), (c)(2)(P) and (d)(2)(M))
a) In computing base income, a taxpayer may subtract from federal taxable income or adjusted gross income an amount equal to the amount of the deduction used to compute the federal income tax credit for restoration of substantial amounts held under claim of right for the taxable year pursuant to IRC section 1341 or of any itemized deduction taken from adjusted gross income in the computation of taxable income for restoration of substantial amounts held under claim of right for the taxable year. (IITA Section 203(a)(2)(P), (b)(2)(Q), (c)(2)(P) and (d)(2)(M))
b) For federal income tax purposes, if a taxpayer is required to include a receipt in taxable income under the "claim of right" principle because the taxpayer had an unrestricted right to the item when received, and is subsequently required to repay the item, the taxpayer must deduct the repayment in the year of repayment, rather than exclude the receipt from income. However, IRC section 1341 allows some taxpayers to claim a credit against their federal income tax liability in the year of repayment equal to the tax attributable to the inclusion of the receipt in taxable income, in lieu of the deduction. In order to avoid taxing income received under a claim of right that is subsequently repaid, IITA Section 203(a)(2)(P), (b)(2)(Q), (c)(2)(P) and (d)(2)(M) allows a taxpayer who claimed a credit under IRC section 1341 for a taxable year to subtract an amount equal to the amount of the repayment that would otherwise have been deductible in that taxable year.
c) In the case of an individual, the deduction allowed for repayment of claim of right income is an itemized deduction taken from adjusted gross income. Because, in the case of an individual, the computation of base income begins with the taxpayer's adjusted gross income, an individual is allowed no deduction for repayment of claim of right income unless expressly provided in IITA Section 203. (See IITA Section 203(a)(1) and (h).) In 2011, Public Act 97-0507 amended IITA Section 203(a)(2)(P) to allow individuals who had claimed an itemized deduction for repayment of claim of right income to subtract the amount of that deduction from their adjusted gross income. This amendment is not, by its terms, required to be applied prospectively only, and the subtraction will be allowed for any taxable year, subject to the statute of limitations for claims for refund.
(Source: Added at 40 Ill. Reg. 14762, effective October 12, 2016)
Section 100.2470 Subtraction of Amounts Exempt from Taxation by Virtue of Illinois Law, the Illinois or U.S. Constitutions, or by Reason of U.S. Treaties or Statutes (IITA Sections 203(a)(2)(N), 203(b)(2)(J), 203(c)(2)(K) and 203(d)(2)(G))
a) In calculating base income, taxpayers are entitled to subtract an amount equal to all amounts included in such total which are exempt from taxation by this State either by reason of its statutes or Constitution or by reason of the Constitution, treaties or statutes of the United States; provided that, in the case of any statute of this State that exempts income derived from bonds or other obligations from the tax imposed under this Act, the amount exempted shall be the interest net of bond premium amortization (IITA 203(a)(2)(N)). There are also provisions of Illinois law that exempt the income of certain obligations of state and local governments from Illinois income taxation (see subsection (f)).
b) Interest on obligations of the United States. A federal statute exempts stocks and obligations of the United States Government, as well as the interest on the obligations, from state income taxation (see 31 USC 3124(a)).
1) "Obligations of the United States" are those obligations issued "to secure credit to carry on the necessary functions of government." Smith v. Davis (1944) 323 U.S. 111, 119, 89 L. Ed. 107, 113, 65 S. Ct. 157, 161. The exemption is aimed at protecting the "Borrowing" and "Supremacy" clauses of the Constitution. Society for Savings v. Bowers (1955) 349 U.S. 143, 144, 99 L. Ed. 2d 950, 955, 75 S. Ct. 607, 608. Hibernia v. City and County of San Francisco (1906) 200 U.S. 310, 313, 50 L. Ed. 495, 496, 26 S. Ct. 265, 266.
A) Tax-exempt credit instruments possess the following characteristics:
i) they are written documents;
ii) they bear interest;
iii) they are binding promises by the United States to pay specified sums at specified dates;
iv) they have congressional authorization which also pledges the faith and credit of the United States in support of the promise to pay. Smith v. Davis, supra.
B) A governmental obligation that is secondary, indirect, or contingent, such as a guaranty of a nongovernmental obligor's primary obligation to pay the principal amount of and interest on a note, is not an obligation of the type exempted under 31 USC Section 3124(a). Rockford Life Ins. Co. v. Department of Revenue, 107 S. Ct. 2312 (1987).
2) Based on the above, the following types of income are exempt under 31 USC Section 3124(a):
A) Interest on U.S. Treasury bonds, notes, bills, certificates, and savings bonds.
B) Income from GSA Public Building Trust Participation Certificates: First Series, Series A through E; Second Series, Series F; Third Series, Series G; Fourth Series H and I.
c) Income exempted by reason of other federal statutes. Federal statutes provide exemption from state income taxation with respect to various specifically named types of income. Following is a list (intended to be exhaustive) of exempt income and the specific statutes to which each item relates:
1) Banks for Cooperatives − Income from notes, debentures, and other obligations issued by Banks for Cooperatives (12 USC 2134).
2) Commodity Credit Corporation − Interest derived from bonds, notes, debentures, and other similar obligations issued by Commodity Credit Corporation (15 USC 713a-5).
3) Farm Credit System Financial Assistance Corporation (Financial Assistance Corporation) − Income from notes, bonds, debentures, and other obligations issued by the Financial Assistance Corporation (12 USC 2278b-10(b)).
4) Federal Deposit Insurance Corporation − Interest derived from notes, debentures, bonds, or other such obligations issued by Federal Deposit Insurance Corporation (12 USC 1825).
5) Federal Farm Credit Banks − Income from consolidated system-wide notes, bonds, debentures, and other obligations issued jointly and severally under 12 USC 2153 by Banks of the Federal Farm Credit System (12 USC 2023; 12 USC 207; 12 USC 2098; and 12 USC 2134).
6) Federal Home Loan Banks − Interest derived from notes, debentures, bonds, and other such obligations issued by Federal Home Loan Banks and from consolidated Federal Home Loan bonds and debentures (12 USC 1433).
7) Federal Intermediate Credit Banks − Income from notes, debentures, bonds, and other obligations issued by Federal Intermediate Credit Banks (12 USC 2079).
8) Federal Land Banks and Federal Land Bank Association − Income from notes, debentures, bonds, and other obligations issued by Federal Land Banks and Federal Land Bank Associations (12 USC 2055).
9) Federal Savings and Loan Insurance Corporation − Interest derived from notes, bonds, debentures, and other such obligations issued by Federal Savings and Loan Insurance Corporation (12 USC 1725(e)).
10) Financing Corporation (FICO) − Income from obligations issued by the Financing Corporation (12 USC 1441(e)(8)).
11) General Insurance Fund
A) Interest derived from debentures issued by General Insurance Fund under the War Housing Insurance Law (12 USC 1739(d)); or
B) Interest derived from debentures issued by General Insurance Fund to acquire rental housing projects (12 USC 1747g(g)); or
C) Interest derived from Armed Services Housing Mortgage Insurance Debentures issued by the General Insurance Fund (12 USC Section 1748b(f)).
12) Guam − Interest derived from bonds issued by the government of Guam (48 USC 1423a). This income is not presently included in federal taxable income. Under Illinois law, it must be added back to federal taxable income and then claimed as a subtraction on an Illinois income tax return.
13) Mutual Mortgage Insurance Fund − Income from such debentures as are issued in exchange for property covered by mortgages insured after February 3, 1988 (12 USC 1710(d)). This income is not presently included in federal taxable income. Under Illinois law, it must be added back to federal taxable income and then claimed as a subtraction on an Illinois income tax return.
14) National Credit Union Administration Central Liquidity Facility − Income from the notes, bonds, debentures, and other obligations issued on behalf of the Central Liquidity Facility (12 USC 1795K(b)).
15) Production Credit Association − Income from notes, debentures, and other obligations issued by Production Credit Association (12 USC 2098).
16) Puerto Rico − Interest derived from bonds issued by the Government of Puerto Rico (48 USC 745). This income is not presently included in federal taxable income. Under Illinois law, it must be added back to federal taxable income and then claimed as a subtraction on an Illinois income tax return.
17) Railroad Retirement Act − Annuity and supplemental annuity payments as qualified under the Railroad Retirement Act of 1974 (45 USC 231m). Please be sure to use the line specified on your Illinois return for this item.
18) Railroad Unemployment Insurance Act − Unemployment benefits paid pursuant to the Railroad Unemployment Insurance Act (45 USC 352(e)).
19) Resolution Funding Corporation − Interest from obligations issued by the Resolution Funding Corporation (12 USC 1441b(f)(7)(A)).
20) Special Food Service Program − Assistance to children under the Special Food Service Program (42 USC 1760(e)).
21) Student Loan Marketing Association − Interest derived from obligations issued by the Student Loan Marketing Association (20 USC 1087-2(h)(221)).
22) Tennessee Valley Authority − Interest derived from bonds issued by the Tennessee Valley Authority (16 USC 831n-4(d).
23) United States Postal Service − Interest derived from obligations issued by the United States Postal Service (39 USC 2005(d)(4)).
24) Virgin Islands − Interest derived from bonds issued by the Government of the Virgin Islands (48 USC 1574(b)(ii)(A)). This income is not presently included in income taxable federally. Under Illinois law, it must be added back to federal taxable income and then claimed as a subtraction on an Illinois income tax return.
25) American Samoa − Interest on bonds issued by the Government of American Samoa (48 USC 1670(b)).
26) Northern Mariana Islands − Interest on bonds issued by the Government of the Northern Mariana Islands (48 USC 1801 note).
d) Distributions from money market trusts (mutual funds). Taxpayers may subtract income received from any of the obligations listed in subsections (b) and (c), even if the obligations are owned indirectly through owning shares in a mutual fund.
1) If the fund invests exclusively in these state tax exempt obligations, the entire amount of the distribution (income) from the fund may be subtracted.
2) If the fund invests in both exempt and non-exempt obligations, the amount represented by the percentage of the distribution that the mutual fund identifies as exempt may be subtracted.
3) If the mutual fund does not identify an exempt amount or percentage, taxpayers may figure the subtraction by multiplying the distribution by the following fraction: as the numerator, the amount invested by the fund in state-exempt U.S. obligations; as the denominator, the fund's total investment. Use the year-end amounts to figure the fraction if the percentage ratio has remained constant throughout the year. If the percentage ratio has not remained constant, take the average of the ratios from the fund's quarterly financial reports.
e) Getting a refund of tax you already paid. If you paid Illinois income tax on these state tax exempt distributions, you may file an amended return to claim a refund for any year still within the statute of limitations.
f) Interest on obligations of state and local governments. Income from state and local obligations is not exempt from Illinois income tax except where authorizing legislation adopted after August 1, 1969, specifically provides for an exemption. To date, authorizing legislation provides exemption for the income from the securities listed below. Taxpayers must show income from these exempt bonds as an addition and then as a subtraction on the Illinois income tax return. Income from these bonds is not exempt if the bonds are owned indirectly through owning shares in a mutual fund.
1) Notes and bonds issued by the Illinois Housing Development Authority (except housing-related commercial facilities notes and bonds) [20 ILCS 3805/31].
2) Bonds authorized pursuant to the Export Development Act of 1983 (former Ill. Rev. Stat. 1991, ch. 127, par. 2513, repealed by P.A. 87-860, effective July 1, 1992).
3) Bonds issued by the Illinois Development Finance Authority pursuant to Sections 7.50 through 7.61 (venture fund and infrastructure bonds) [20 ILCS 3505/7.61], (repealed by P.A. 93-205, effective January 1, 2004, which provides in 20 ILCS 3501/845-60 that bonds issued under this provision continue to be exempt from taxation).
4) Bonds and notes issued by the Quad Cities Regional Economic Development Authority, if the Authority so determines [70 ILCS 510/11 and13 and 70 ILCS 515/11 and 12].
5) College Savings Bonds issued under the General Obligation Bond Act in accordance with the Baccalaureate Savings Act [110 ILCS 920/7].
6) Bonds issued by the Illinois Sports Facilities Authority [70 ILCS 3205/15].
7) Bonds issued on or after September 2, 1988, pursuant to the Higher Education Student Assistance Act [110 ILCS 947/145] (transferred from 105 ILCS 5/30-15.18 by P.A. 87-997).
8) Bonds issued by the Illinois Development Finance Authority or the Illinois Finance Authority under the Asbestos Abatement Finance Act [20 ILCS 3510/8].
9) Bonds and notes issued under the Rural Bond Bank Act [30 ILCS 360/3-12] (repealed by P.A. 93-205, effective January 1, 2004, which provides in 20 ILCS 3501/845-60 that bonds issued under this provision continue to be exempt from taxation).
10) Bonds issued pursuant to Sections 7.80 through 7.87 of the Illinois Development Finance Authority Act [20 ILCS 3505/7-86] (repealed by P.A. 93-205, effective January 1, 2004, which provides in 20 ILCS 3501/845-60 that bonds issued under this provision continue to be exempt from taxation).
11) Bonds issued by the Quad Cities Interstate Metropolitan Authority under the Quad Cities Interstate Metropolitan Authority Act [45 ILCS 35/110].
12) Bonds issued by the Southwestern Illinois Development Authority pursuant to the Southwestern Illinois Development Authority Act [70 ILCS 520/7.5].
13) Bonds issued by the Illinois Finance Authority under the Local Government Article and the Financially Distressed City Program in the Illinois Finance Authority Act [20 ILCS 3501/820-60 and 825-55].
14) Illinois Power Agency bonds issued by the Illinois Finance Authority under the Other Powers Article of the Illinois Finance Authority Act [20 ILCS 3501/825-90], if the Authority so determines.
15) Bonds issued by the Central Illinois Economic Development Authority under the Central Illinois Economic Development Authority Act [70 ILCS 504/40], if the Authority so determines.
16) Bonds issued by the Eastern Illinois Economic Development Authority under the Eastern Illinois Economic Development Authority Act [70 ILCS 506/40], if the Authority so determines.
17) Bonds issued by the Southeastern Illinois Economic Development Authority under the Southeastern Illinois Economic Development Authority Act [70 ILCS 518/40], if the Authority so determines.
18) Bonds issued by the Southern Illinois Economic Development Authority under the Southern Illinois Economic Development Authority Act [70 ILCS 519/5‑45], if the Authority so determines.
19) Bonds issued by the Upper Illinois River Valley Development Authority under the Upper Illinois River Valley Development Authority Act [70 ILCS 530/7.1], if the Authority so determines.
20) Bonds issued by the Illinois Urban Development Authority under the Illinois Urban Development Authority Act [70 ILCS 531/11], if the Authority so determines.
21) Bonds issued by the Western Illinois Economic Development Authority under the Western Illinois Economic Development Authority Act [70 ILCS 532/45], if the Authority so determines.
22) Bonds issued by the Downstate Illinois Sports Facilities Authority under the Downstate Illinois Sports Facilities Authority Act [70 ILCS 3210/60], if the Authority so determines.
23) Bonds issued by the Will-Kankakee Regional Development Authority under the Will-Kankakee Regional Development Authority Law [70 ILCS 535/14], if the Authority so determines.
24) Bonds issued by the Tri-County River Valley Development Authority under the Tri-County River Valley Development Authority Law [70 ILCS 525/2007.1], if the Authority so determines.
25) Bonds issued by the New Harmony Bridge Authority under the New Harmony Bridge Authority Act [45 ILCS 185/5-50]. This exemption is subject to sunset under IITA Section 250, and does not apply to taxable years beginning on or after August 19, 2023, the fifth anniversary of the effective date of P.A. 100-981.
26) Bonds issued by the New Harmony Bridge Bi-State Commission under the New Harmony Bridge Interstate Compact Act [45 ILCS 190/10-5]. This exemption is subject to sunset under IITA Section 250, and does not apply to taxable years beginning on or after August 19, 2023, the fifth anniversary of the effective date of P.A. 100-981.
g) Other income exempt from Illinois income taxation by reason of Illinois statute:
1) Income earned by certain trust accounts established under the Illinois Pre-Need Cemetery Sales Act [815 ILCS 390/16] or the Illinois Funeral or Burial Funds Act [225 ILCS 45/4a(c)]. Section 16(f) of the Illinois Pre-Need Cemetery Sales Act and Section 4a(c) of the Illinois Funeral or Burial Funds Act provide that: because it is not known at the time of deposit or at the time that income is earned on the trust account to whom the principal and the accumulated earnings will be distributed, for purposes of determining the Illinois Income Tax due on these trust funds, the principal and any accrued earnings or losses relating to each individual account shall be held in suspense until the final determination is made as to whom the account shall be paid.
2) Income in the form of education loan repayments made for health care providers who agree to practice in designated shortage areas for a specified period of time under the terms of the Family Practice Residency Act [110 ILCS 935/4.10].
3) Income earned by nuclear decommissioning trusts established pursuant to Section 8-508.1 of the Public Utilities Act [220 ILCS 5/8-508.1]. The terms "Decommissioning trust" or "trust" means a fiduciary account in a bank or other financial institution established to hold the decommissioning funds provided pursuant to Section 8-508.1(b)(2) of the Public Utilities Act for the eventual purpose of paying decommissioning costs, which shall be separate from all other accounts and assets of the public utility establishing the trust. [220 ILCS 5/8-508.1(a)(3)]
4) Income from the Illinois prepaid tuition program, other than disbursements to beneficiaries which are not used in accordance with the applicable prepaid tuition contract under the Illinois Prepaid Tuition Act [110 ILCS 979]. The Illinois prepaid tuition program was created in 1997 for the express purpose of allowing savings for higher education to earn tax-exempt returns under IRC section 529. If a prepaid tuition contract qualifies under IRC section 529, earnings on contributions made to the Illinois Prepaid Tuition Trust Fund under the contract are exempt from federal income taxation (and therefore Illinois income taxation) until distributed. The legislative intent in creating the Illinois prepaid tuition program does not guarantee that every prepaid tuition contract will qualify under IRC section 529 and there is no guarantee that IRC section 529 will continue in effect. However, Section 55 of the Illinois Prepaid Tuition Act [110 ILCS 979/55] provides that assets of the Illinois Prepaid Tuition Trust Fund and its income and operation shall be exempt from all taxation by the State and that disbursements to a beneficiary shall be similarly exempt from all taxation by the State of Illinois and any of its subdivisions, so long as they are used for educational purposes in accordance with the provisions of an Illinois prepaid tuition contract. Under this provision, any undistributed earnings of the Illinois Prepaid Tuition Trust which are included in a taxpayer's federal taxable income or adjusted gross income because a prepaid tuition contract does not qualify under IRC section 529 may be subtracted in computing the taxpayer's base income, and all disbursements included in a beneficiary's adjusted gross income may be subtracted to the extent used in accordance with the Illinois prepaid tuition contract under which the disbursements are made, regardless of whether the prepaid tuition contract qualifies under IRC section 529.
5) Income from the College Savings Pool, other than disbursements to beneficiaries that are not used to pay qualified expenses under the State Treasurer Act [15 ILCS 505/16.5]. Under the State Treasurer Act, distributions from the College Savings Pool must generally be used for qualified expenses, which are defined to mean tuition, fees, and the costs of books, supplies, and equipment required for enrollment or attendance at an eligible educational institution and certain room and board expenses. Distributions made for qualified expenses must be made directly to the eligible educational institution, directly to a vendor, or in the form of a check payable to both the beneficiary and the institution or vendor. The College Savings Pool was created in PA 91-607 for the express purpose of allowing savings for higher education to earn tax-exempt returns under IRC section 529. If an investment in the College Savings Pool qualifies under IRC section 529, earnings on that investment are exempt from federal income taxation (and therefore Illinois income taxation) until distributed. The legislative intent in creating the College Savings Pool does not guarantee that investments will qualify under IRC section 529 and there is no guarantee that IRC section 529 will continue in effect. However, the State Treasurer Act [15 ILCS 505/16.5], as amended in PA 91-829, provides that assets of the College Savings Pool and its income and operation shall be exempt from all taxation by the State and that disbursements to a beneficiary shall be similarly exempt from all taxation by the State of Illinois and any of its subdivisions, so long as they are used for qualified expenses. Under this provision, any undistributed earnings of the College Savings Pool that are included in a taxpayer's federal taxable income or adjusted gross income because a College Savings Pool investment does not qualify under IRC section 529 may be subtracted in computing the taxpayer's base income, and all disbursements included in a beneficiary's adjusted gross income may be subtracted to the extent used to pay qualified expenses, regardless of whether the College Savings Pool investment qualifies under IRC section 529.
6) Income earned on investments made pursuant to the Home Ownership Made Easy Program [310 ILCS 55/5.1].
7) Up to $2,000 of income derived by individuals from investments made in accordance with College Savings Programs established under Section 75 of the Higher Education Student Assistance Act [110 ILCS 947/75]. This subtraction is allowed only for taxable years ending prior to August 9, 2013, the effective date of PA 98-0251, which repealed Section 75 of the Higher Education Student Assistance Act.
h) Income not exempt from Illinois income taxation. The following types of income are not exempt from Illinois income taxation:
1) Income from securities commonly known as GNMA "Pass-Through Securities" and also known as GNMA "Mortgage-Backed Securities" issued by approved issuers under 12 USC 1721(g) and guaranteed by GNMA under 12 USCA 1721(g) (Rockford Life Insurance Co. v. Department of Revenue, 112 Ill.2d 174, 492 N.E. 2d 1278 (1986), reh. den. June 2, 1986) and income from debentures, notes, and bonds issued by the Federal National Mortgage Association including mortgage-backed bonds issued under authority of 12 USCA 1719(d) and guaranteed by GNMA under 12 USC 1721(g).
2) Accumulated interest on Internal Revenue Service tax refunds. Illinois Department of Revenue Letter Ruling No. 86-0640, dated July 11, 1986, citing Glidden Co. v. Glander, 151 Ohio St. 344, 86 N.E. 2d 1, 9 A.L.R. 2d 515 (1949).
3) Income from U.S. securities acquired by a taxpayer under a repurchase agreement ("repo") with a bank or similar financial organization. The Department takes the position that, for income tax purposes, such agreements are generally to be treated as loans. That is, the taxpayer "loans" money to the bank and receives interest in return. The securities subject to repurchase by the bank serve as collateral for the loan. The bank remains legally entitled to receive the interest payments from the issuing authority and remains the actual owner of the securities. Therefore, any tax benefit attributable to the "exempt" income paid by the issuing authority accrues to the bank and not to the investor.
4) Section 514(a) of the Employee Retirement Income Security Act of 1974 (ERISA, 29 USC 1144(a)) does not preempt the taxation of unrelated business income of an Employee Benefit Plan governed by ERISA. Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806, 808 (1997). Taxpayers that relied upon the Department's letter rulings IT 90-0073, IT 93-0017 and IT 93-0187, prior to July 1, 2002, shall not incur liability for taxes or penalties pursuant to Section 4(c) of the Taxpayers' Bill of Rights Act [20 ILCS 2520].
i) Method for computing the subtraction of exempt income. The Department emphasizes that before a taxpayer may subtract an item of exempt income, the taxpayer must be sure that he or she has included the item in Illinois income. Some tax-exempt items are "automatically" included in base income because they are included in federal adjusted gross income, which is a part of base income. Interest on U.S. Treasury notes is in this category. Other exempt items must be included as an addition on the Illinois tax return in figuring base income. In other words, the taxpayer must list certain tax-exempt items as additions and then as subtractions in figuring base income. Interest on the state and local government bonds described in subsection (f) is in this category.
(Source: Amended at 44 Ill. Reg. 2845, effective January 30, 2020)
Section 100.2480 Enterprise Zone and River Edge Redevelopment Zone Dividend Subtraction (IITA Sections 203(a)(2)(J), 203(b)(2)(K), 203(c)(2)(M) and 203(d)(2)(K))
a) Taxpayers are entitled to subtract from taxable income (adjusted gross income, in the case of an individual) an amount equal to dividends paid by a corporation which conducts business operations in an enterprise zone or zones created under the Illinois Enterprise Zone Act or in a river edge redevelopment zone or zones created under the River Edge Redevelopment Zone Act, and conducts all or substantially all of its operations in the enterprise zone or zones or the river edge redevelopment zone or zones (IITA Section 203(a)(2)(J), 203(b)(2)(K), 203(c)(2)(M) and 203(d)(2)(K)).
1) Dividends received from a corporation that conducts all or substantially all of its operations in a river edge redevelopment zone or zones are eligible for subtraction under this Section only if received after July 12, 2006, the effective date of PA 94-1021, which enacted this subtraction.
2) Dividends received from a corporation that conducts all or substantially all of its operations in an enterprise zone or zone are eligible for subtraction under this Section only if received prior to August 7, 2012, the effective date of PA 97-905, which repealed this subtraction.
b) A corporation conducts substantially all of its business within an enterprise zone or river edge redevelopment zone when 95% or more of its total business activity during a taxable year is operated within an enterprise zone or river edge redevelopment zone. For the purpose of this Section, business activity within an enterprise zone or river edge redevelopment zone shall be measured by means of the factors ordinarily applicable to the corporation under IITA Section 304 (a),(b),(c) or (d), except that, in the case of a corporation ordinarily required to apportion business income under IITA Section 304(a), the corporation shall not use the sales factor in the computation. Thus, for example, for taxable years ending on or after December 31, 2000, for purposes of determining whether dividends may be subtracted under this Section, a corporation that apportions its business income under IITA Section 304(a) using only the sales factor in accordance with IITA Section (h) 304 must still compute its property and payroll factors. In measuring the business activity of a corporation within an enterprise zone or river edge redevelopment zone, the apportionment factors of that corporation shall be determined without regard to the factors or business activity of any other corporation and, in the case of a corporation engaged in a unitary business with any other person, the apportionment factors of that corporation shall be determined as if it were not engaged in a unitary business with such other person.
1) Section 304(a) Corporations: A corporation using Section 304(a) to apportion business income to Illinois shall compare the corporation's property and payroll within an enterprise zone or river edge redevelopment zone to the corporation's property and payroll everywhere. The result of the property and payroll factor computations shall be divided by 2 (by one if either the property or payroll factor has a denominator of zero). If the amount so computed is 95% or greater, the dividends paid by the corporation shall qualify for this subtraction. In the case where a corporation does not have any payroll or property within an enterprise zone or river edge redevelopment zone, the corporation is not conducting any of its business operations within an enterprise zone or river edge redevelopment zone for the purpose of this Section.
2) All Other Corporations: A corporation using a 1-factor apportionment formula under IITA Section 304(b),(c) or (d) shall determine business activity conducted within an enterprise zone or river edge redevelopment zone by comparing business income from sources within the enterprise zone or river edge redevelopment zone and everywhere else pursuant to its ordinarily applicable factor under IITA Section 304(b), (c) or (d). A corporation using an alternative method of apportionment under Section 304(f) shall petition the Department for approval of an appropriate method of determining its qualification under this Section, and only upon the Department's approval shall the corporation be allowed to use a method not provided in this Section.
3) EXAMPLE: In the tax year ending December 31, 1995, Taxpayer received dividends from a bank holding company, whose sole asset was the stock in a bank with which it was conducting a unitary business. Both the bank holding company and the bank are headquartered in an enterprise zone created under the Illinois Enterprise Zone Act. During 1995, the operations of the bank consisted of accepting deposits, making loans and purchasing investments. The bank conducted business in its branches located throughout the State. However, the bank holding company's sole source of income on a separate-company basis was the dividends it received from the bank, and all of this income was received within the enterprise zone. In determining its business income apportionable to Illinois in 1995, the bank holding company and the bank used the apportionment formula under IITA Section 304(c) on a combined basis. In order to determine whether 95% or more of its income is from sources within the enterprise zone, the bank holding company is required to use the same apportionment formula under IITA Section 304(c) as if it were not engaged in a unitary business with the bank. Pursuant to the formula, dividends which are received within this State are apportionable to Illinois. As a result, the bank holding company in this case must compute the percentage of dividends which are received within the enterprise zone to determine income apportionable to the enterprise zone. Since it received all of its business income from sources within the enterprise zone, the bank holding company would meet the 95% test.
c) Taxpayers are entitled to this subtraction in the taxable year in which qualifying dividends are paid by corporations.
1) Corporations paying dividends shall be deemed to have started business operations within an enterprise zone from the later of:
A) The date the enterprise zone in which the corporation paying the dividends is located was officially designated by the Department of Commerce and Economic Opportunity;
B) The date the corporation paying dividends commenced operations in the enterprise zone; or
C) The effective date of the Public Act enacting this subtraction (December 7, 1982).
2) Corporations paying dividends shall be deemed to have started business operations within a river edge redevelopment zone from the later of:
A) The date the river edge redevelopment zone in which the corporation paying the dividends is located was officially designated by the Department of Commerce and Economic Opportunity;
B) The date the corporation paying dividends commenced operations in the river edge redevelopment zone; or
C) July 12, 2006, the effective date of PA 94-1021, which enacted this subtraction.
d) Limitations
1) This Section allows taxpayers to subtract distributions from a corporation only to the extent:
A) such distributions are characterized as dividends;
B) such dividends are included in federal taxable income (in the case of an individual, adjusted gross income) of the taxpayer; and
C) the taxpayer has not subtracted such dividends from federal taxable income (in the case of an individual, adjusted gross income) under any other provision of IITA Section 203.
2) EXAMPLE: Taxpayer, a Subchapter S corporation shareholder, receives a distribution from an S corporation which conducts substantially all of its business in an enterprise zone. Although the Subchapter S corporation satisfies the 95% test, Taxpayer is not entitled to this subtraction modification since a distribution by a Subchapter S corporation is generally not characterized as a dividend. See section 1368 of the Internal Revenue Code.
3) EXAMPLE: Taxpayer, a corporation, receives a dividend from another corporation that qualifies for the 70% dividends received deduction under section 243(a)(1) of the Internal Revenue Code. Because only 30% of the dividend is included in Taxpayer's federal taxable income, this Section allows Taxpayer to subtract only 30% of the dividend from its federal taxable income.
(Source: Amended at 38 Ill. Reg. 9550, effective April 21, 2014)
Section 100.2490 Foreign Trade Zone/High Impact Business Dividend Subtraction (IITA Sections 203(a)(2)(K), 203(b)(2)(L), 203(c)(2)(O), 203(d)(2)(M))
a) Taxpayers are entitled to subtract from taxable income (adjusted gross income, in the case of an individual) an amount equal to dividends paid by a corporation that:
1) conducts business operations in a federally designated Foreign Trade Zone or Sub-Zone, and
2) is designated by the Department of Commerce and Community Affairs as a High Impact Business located in Illinois.
However, only dividends not eligible for the subtraction provided in Section 100.2480 of this Part may be subtracted under this Section.
b) A corporation conducts business operations in a federally designated Foreign Trade Zone or Sub-Zone when any portion of its total business activity during a taxable year is operated within a federally designated Foreign Trade Zone or Sub-Zone. For the purpose of this Section, business activity within a federally designated Foreign Trade Zone or Sub-Zone shall be measured by means of the factors ordinarily applicable to the corporation under IITA Section 304(a), (b), (c) or (d); except that, in the case of a corporation ordinarily required to apportion business income under Section 304(a), such corporation shall not use the sales factor in the computation. Thus, for example, for taxable years ending on or after December 31, 2000, for purposes of determining whether dividends may be subtracted under this Section, a corporation that apportions its business income under Section 304(a) using only the sales factor in accordance with Section 304(h) must still compute its property and payroll factors. In measuring the business activity of a corporation within a federally designated Foreign Trade Zone or Sub-Zone, the apportionment factors of that corporation shall be determined without regard to the factors or business activity of any other corporation and, in the case of a corporation engaged in a unitary business with any other person, the apportionment factors of that corporation shall be determined as if it were not engaged in a unitary business with such other person.
1) 304(a) Corporations. A corporation using Section 304(a) to apportion business income to Illinois shall determine the ratio of the corporation’s property and payroll within a federally designated Foreign Trade Zone or Sub-Zone to the corporation’s property and payroll everywhere. If the ratio so computed is greater than 0%, and the other requirements of this Section are met, the dividends paid by the corporation shall qualify for this subtraction. In the case where a corporation does not have any property or payroll within a federally designated Foreign Trade Zone or Sub-Zone, the corporation is not conducting any portion of its business operations within a federally designated Foreign Trade Zone or Sub-Zone for the purpose of this Section.
A) Example 1: In the tax year ending December 31, 1995, Taxpayer received dividends from X corporation (hereafter referred to as "X"). X, a calendar year taxpayer, manufactures and sells widgets at wholesale in Illinois and various other states. The widgets are manufactured at X’s plant in Illinois, which is not located in a federally designated Foreign Trade Zone or Sub-Zone. X does not have employees who perform any services in a federally designated Foreign Trade Zone or Sub-Zone. X owns 100% of the stock of A corporation (hereafter referred to as "A"), whose sole business activity consists of the distribution of X’s widgets. A’s trucks take delivery of the widgets at X’s plant, and then deliver the widgets to customers of X, including customers located in a federally designated Foreign Trade Zone. In determining its business income apportionable to Illinois in 1995, X used the 3-factor formula of property, payroll, and sales under IITA Section 304(a). Thus, in order to determine whether it conducts business operations in a federally designated Foreign Trade Zone or Sub-Zone, X must compute the ratio of its property and payroll in a federally designated Foreign Trade Zone or Sub-Zone to its property and payroll everywhere. In making such computation, it may not use its sales factor, nor may it consider the factors or business activity of A. As a result, regardless of whether X is designated a High Impact Business located in Illinois, Taxpayer may not subtract dividends paid by X. Because X does not have any property or payroll within a federally designated Foreign Trade Zone or Sub-Zone, it is not conducting any portion of its business operations within a federally designated Foreign Trade Zone or Sub-Zone as required by this Section.
B) Example 2: The facts are the same as in Example 1, except that X rents a warehouse in which it maintains an inventory of widgets pending shipment to customers. The warehouse is located in a federally designated Foreign Trade Zone. Since the ratio of X’s property and payroll within a federally designated Foreign Trade Zone or Sub-Zone to its property and payroll everywhere is greater than 0%, X conducts a portion of its business operations within a federally designated Foreign Trade Zone. Thus, Taxpayer has met the requirement under this Section that it receive dividends from a corporation that conducts business operations within a federally designated Foreign Trade Zone or Sub-Zone.
2) All Other Corporations. A corporation using a 1-factor apportionment formula under IITA Section 304(b), (c) or (d) shall determine business activity conducted within a federally designated Foreign Trade Zone or Sub-Zone by comparing business income from sources within a federally designated Foreign Trade Zone or Sub-Zone and everywhere else pursuant to its ordinarily applicable factor under Section 304(b), (c) or (d). A corporation using an alternative method of apportionment under Section 304(f) shall petition the Department for approval of an appropriate method of determining its qualification under this Section, and only upon the Department’s approval shall the corporation be allowed to use a method not provided in this Section.
A) Example 3: In the tax year ending December 31, 1996, Taxpayer received dividends from Z Airlines, Inc (hereafter referred to as "Z"). Z provides interstate transportation of passengers and freight. Z’s corporate headquarters is located in a federally designated Foreign Trade Zone in Illinois. Its hub is also located in Illinois, but not in a federally designated Foreign Trade Zone or Sub-Zone. Z’s planes regularly arrive and depart from its hub, and regularly fly over a federally designated Foreign Trade Zone in route to various locations. Z owns 100% of the stock of B corporation (hereafter referred to as "B"). B’s sole business activity consists of transporting freight from Z’s planes to local destinations in Illinois. B’s trucks take delivery of the freight at Z’s hub, and deliver the freight to Z’s customers, including customers located in a federally designated Foreign Trade Sub-Zone. In 1996, B delivered within the federally designated Foreign Trade Sub-Zone at least 1 ton of freight the distance of one mile for a consideration. In determining its business income apportionable to Illinois in 1996, Z and B used the apportionment formula under IITA Section 304(d) on a combined basis. In order to determine whether it conducts business operations within a federally designated Foreign Trade Zone or Sub-Zone, Z is required to use the same apportionment formula under IITA Section 304(d) as if it were not engaged in a unitary business with B. As a result, regardless of whether Z is a High Impact Business located in Illinois, Taxpayer may not subtract dividends paid by Z. Because Z has no business income from sources within a federally designated Foreign Trade Zone or Sub-Zone applying IITA Section 304(d), no portion of Z’s business operations are conducted in a federally designated Foreign Trade Zone or Sub-Zone as required by this Section.
B) Example 4: The facts are the same as in Example 1, except that Z conducts the activities of B as a division. In determining its business income apportionable to Illinois in 1997, Z used the apportionment formula under IITA Section 304(d). In order to determine whether it conducts business operations within a federally designated Foreign Trade Zone or Sub-Zone, Z must use the same formula. Since Z has business income from sources within a federally designated Foreign Trade Sub-Zone, it conducts a portion of its business operations within a federally designated Foreign Trade Zone or Sub-Zone. Thus, Taxpayer has met the requirement under this Section that it receive dividends from a corporation that conducts business operations within a federally designated Foreign Trade Zone or Sub-Zone.
c) Taxpayers are entitled to this subtraction in the taxable year in which qualifying dividends are paid by corporations. Dividends are qualifying dividends if paid by the corporation during a taxable year of the corporation with respect to which the requirements of this Section are met. Corporations paying dividends shall be deemed to have started business operations within a federally designated Foreign Trade Zone or Sub-Zone from the later of:
1) The date the Foreign Trade Zone or Sub-Zone in which the corporation paying the dividends is located was officially federally designated;
2) The date the corporation paying dividends commenced operations in the federally designated Foreign Trade Zone or Sub-Zone as a designated High Impact Business located in Illinois; or
3) The effective date of the Public Act enacting this subtraction (January 1, 1986).
d) See 20 ILCS 655/5.5 regarding designation by the Department of Commerce and Community Affairs as a High Impact Business.
e) Limitations.
1) This Section allows taxpayers to subtract distributions from a corporation only to the extent:
A) The distributions are characterized as dividends;
B) The dividends are included in federal taxable income (in the case of an individual, adjusted gross income) of the taxpayer;
C) The dividends are not eligible for the subtraction provided in IITA Section 203(a)(2)(J), IITA Section 203(b)(2)(K), IITA Section 203(c)(2)(M), or IITA Section 203(d)(2)(K) (regarding dividends paid by a corporation that conducts all or substantially all of its operations in an Illinois Enterprise Zone or Zones); and
D) The taxpayer has not subtracted the dividends from federal taxable income (in the case of an individual, adjusted gross income) under any other provision of Section 203 of the IITA.
2) Example 5: Taxpayer, an S corporation shareholder, receives a distribution from an S corporation designated a High Impact Business and that conducts business operations in a federally designated Foreign Trade Zone. The Taxpayer is not entitled to the subtraction modification provided under this Section since a distribution by an S corporation is generally not characterized as a dividend. See Section 1368 of the Internal Revenue Code.
3) Example 6: Taxpayer, a corporation, receives a dividend from another corporation that qualifies for the 70% dividends received deduction under Section 243(a)(1) of the Internal Revenue Code. Because only 30% of the dividend is included in Taxpayer’s federal taxable income, this Section allows Taxpayer to subtract only 30% of the dividend from its federal taxable income.
(Source: Added at 27 Ill. Reg. 13536, effective July 28, 2003)
SUBPART F: BASE INCOME OF INDIVIDUALS
Section 100.2510 Subtraction for Contributions to Illinois Qualified Tuition Programs (Section 529 Plans) (IITA Section 203(a)(2)(Y))
a) IITA Section 203(a)(2)(Y) allows individuals a subtraction modification in the computation of base income for taxable years beginning on and after January 1, 2002 equal to the amount contributed during the taxable year to an Illinois qualified tuition program, subject to the limitation described in subsection (b) of this Section. For purposes of this Section, "Illinois qualified tuition program" means:
1) A College Savings Pool Account under Section 16.5 of the State Treasurer Act [15 ILCS 505/16.5].
2) For taxable years beginning on and after January 1, 2005, an Illinois Prepaid Tuition Trust Fund under the Illinois Prepaid Tuition Act [110 ILCS 979].
b) For taxable years beginning on or after January 1, 2005, the total subtraction modification allowed a taxpayer under IITA Section 203(a)(2)(Y) and subsection (a) of this Section shall not exceed $10,000 ($20,000 if married filing jointly) per taxable year.
c) "Contribution" Defined. For purposes of IITA Section 203(a)(2)(Y) and this Section, the term "contribution" means any payment directly allocated to an account for the benefit of a designated beneficiary or used to pay late fees or administrative fees associated with the account. In the case of a College Savings Pool Account, the contribution is the amount paid by the taxpayer to the College Savings Pool. In the case of an Illinois prepaid tuition contract, the contribution is the amount paid by the taxpayer for the contract under Section 45 of the Illinois Prepaid Tuition Act [110 ILCS 979/45].
1) Rollovers
A) From an Out-of-State Plan. In the case of a rollover, as defined under IRC Section 529(c)(3)(C)(i), in which an amount is transferred from a qualified tuition program established and maintained by another state to an Illinois qualified tuition program, only the portion of the rollover that constituted investment in the account for federal income tax purposes shall be considered a contribution for purposes of IITA Section 203(a)(2)(Y) and this Section. (See IITA Section 203(a)(2)(Y).)
B) From an Illinois Plan. In the case of a rollover, as defined under IRC Section 529(c)(3)(C)(i), in which an amount is transferred from one Illinois qualified tuition program to another Illinois qualified tuition program, no portion of the rollover shall be considered a contribution for purposes of IITA Section 203(a)(2)(Y) and this Section. The purpose of the subtraction modification for contributions to an Illinois qualified tuition program is to encourage and better enable Illinois families to finance the costs of higher education by increasing savings for higher education. A taxpayer's savings for higher education is not increased when amounts are rolled over from one Illinois plan to another Illinois plan. In addition, IITA Section 203(g) prohibits deduction of the same item more than once.
2) Change in Beneficiaries. A change in the beneficiaries of an existing plan shall not be considered a contribution for purposes of IITA Section 203(a)(2)(Y) and this Section.
3) Employer Contributions. For purposes of this subtraction, contributions made by an employer on behalf of an employee under IITA Section 218 shall be treated as made by the employee.
d) Limitations on Subtraction Modification
1) The subtraction modification under IITA Section 203(a)(2)(Y) is allowed only to individuals. In the case of a contribution to a College Savings Pool Account, the subtraction is allowed only to the account "participant" or "donor" as defined in Section 16.5 of the State Treasurer Act. In the case of a contribution to an Illinois prepaid tuition contract, the subtraction is allowed only to the account "purchaser" as defined in Section 10 of the Illinois Prepaid Tuition Act.
2) The subtraction modification is allowed only for contributions to either the Illinois College Savings Pool or Illinois Prepaid Tuition Trust Fund. There is no subtraction modification for contributions to a qualified tuition program established and maintained by another state.
(Source: Added at 35 Ill. Reg. 15092, effective August 24, 2011)
Section 100.2565 Subtraction for Recovery of Itemized Deductions (IITA Section 203(a)(2)(I))
a) In computing base income, an individual is allowed to subtract from his or her federal adjusted gross income an amount equal to all amounts included in that total pursuant to the provisions of IRC section 111 as a recovery of items previously deducted from adjusted gross income in the computation of taxable income. (IITA Section 203(a)(2)(I))
b) Under IRC section 111, a taxpayer who is allowed a deduction in computing federal taxable income in one taxable year, and recovers the deductible expenditure in a subsequent taxable year, includes the recovery in gross income in the year of recovery. For example, an individual who claims an itemized deduction for State income taxes paid in 2015 on his or her 2015 federal income tax return, and in 2016 receives a refund of some of that tax, includes the refund in gross income for 2016. This procedure prevents the taxpayer from receiving a tax benefit for an expenditure that ultimately did not cost the taxpayer, without requiring the filing of an amended return to remove the deduction from the computation of taxable income in the year the deduction was taken.
c) Under IITA Section 203(a)(1), the computation of an individual's base income begins with his or her federal adjusted gross income, which is equal to taxable income before itemized deductions, the standard deduction and personal exemptions are taken into account. As a result, individuals receive no Illinois income tax benefit from federal itemized deductions. Accordingly, recoveries of federal itemized deductions do not need to be included in an individual's base income to prevent the individual receiving a tax benefit for the item. IITA Section 203(a)(2)(I) therefore allows individuals to subtract recoveries of itemized deductions that are included in their federal adjusted gross income.
d) IITA Section 203(a)(2)(I) was enacted before the September 16, 1994 effective date of PA 88-660, which enacted the automatic sunset provisions in IITA Section 250. The automatic sunset provisions therefore do not apply to this Section.
(Source: Added at 42 Ill. Reg. 17852, effective September 24, 2018)
Section 100.2580 Medical Care Savings Accounts (IITA Sections 203(a)(2)(D-5), 203(a)(2)(S) and 203(a)(2)(T))
a) For the purposes of this Section, "Act" means the Medical Care Savings Account Act [820 ILCS 152], repealed January 1, 2000, or the Medical Care Savings Account Act of 2000 [820 ILCS 153], which re-enacted the provisions of the repealed Act.
b) "Medical care savings account" or "account" means an account established in this State pursuant to a medical care savings account program to pay the eligible medical expenses of an employee and his or her dependents. (Section 5 of the Act) An employer, except as otherwise provided by statute, contract, or a collective bargaining agreement, may offer a medical care savings account program to the employer's employees.
c) A medical care savings account program must include the following:
1) The purchase by an employer of a qualified higher deductible health plan for the benefit of an employee and his or her dependents. (Section 5 of the Act)
2) The contribution on behalf of an employee into a medical care savings account by his or her employer of all or part of the premium differential realized by the employer based on the purchase of a qualified higher deductible health plan for the benefit of the employee. An employer that did not previously provide a health coverage policy, certificate, or contract for his or her employees may contribute all or part of the deductible of the plan purchased pursuant to subsection (c)(1). For 1994, a contribution under this Section may not exceed $6,000 for 2 taxpayers filing a joint return, if each taxpayer has a medical care savings account but neither is covered by the other's health coverage, or $3,000 in all other cases. These maximum amounts shall be adjusted annually by the Department of Revenue to reflect increases in the consumer price index for the United States as defined and officially reported by the United States Department of Labor. (Section 5 of the Act)
A) The Department will announce adjustments in the maximum amounts, as well as in the minimum higher deductible, by annual publication of a Notice of Public Information in the Illinois Register.
B) The Consumer Price Index (CPI) annual average for all urban consumers was 144.5 for calendar year 1993 and 148.2 for calendar year 1994. Therefore, the thresholds established under the Act were adjusted upward by 2% for 1995. Hence, for 1995, the minimum higher deductible is $1026, the maximum higher deductible is $3078, the maximum contribution for 2 taxpayers filing a joint return is $6156 and the maximum contribution for all others is $3078.
C) For the years 1994 through 2006, the thresholds are as follows:
|
Year |
Minimum Higher Deductible |
Maximum Higher Deductible |
Maximum Contribution For Two |
Maximum Contribution All Others |
|
1994 |
$1,000 |
$3,000 |
$6,000 |
$3,000 |
|
1995 |
$1,026 |
$3,078 |
$6,156 |
$3,078 |
|
1996 |
$1,055 |
$3,164 |
$6,238 |
$3,164 |
|
1997 |
$1,086 |
$3,256 |
$6,512 |
$3,256 |
|
1998 |
$1,111 |
$3,331 |
$6,662 |
$3,331 |
|
1999 |
$1,129 |
$3,384 |
$6,768 |
$3,384 |
|
2000 |
$1,154 |
$3,458 |
$6,917 |
$3,458 |
|
2001 |
$1,193 |
$3,576 |
$7,152 |
$3,576 |
|
2002 |
$1,226 |
$3,676 |
$7,352 |
$3,676 |
|
2003 |
$1,246 |
$3,735 |
$7,470 |
$3,735 |
|
2004 |
$1,275 |
$3,821 |
$7,642 |
$3,821 |
|
2005 |
$1,309 |
$3,924 |
$7,848 |
$3,924 |
|
2006 |
$1,354 |
$4,057 |
$8,114 |
$4,057 |
3) An account administrator to administer the medical care savings account from which payment of claims is made. Not more than 30 days after an account administrator begins to administer an account, the administrator shall notify in writing each employee on whose behalf the administrator administers an account of the date of the last business day of the administrator's business year. (Section 5 of the Act)
d) Section 5 of the Act contains a number of definitions:
1) "Account administrator" means any of the following:
A) A national or state chartered bank, a federal or State chartered savings and loan association, a federal or State chartered savings bank, or a federal or State chartered credit union.
B) A trust company authorized to act as a fiduciary.
C) An insurance company authorized to do business in this State under the Illinois Insurance Code or a health maintenance organization authorized to do business in this State under the Health Maintenance Organization Act.
D) A dealer, salesperson, or investment adviser registered under the Illinois Securities Law of 1953.
E) An administrator as defined in Section 511.101 of the Illinois Insurance Code who is licensed under Article XXXI¼ of that Code.
F) A certified public accountant registered under the Illinois Public Accounting Act.
G) An attorney licensed to practice in this State.
H) An employer, if the employer has a self-insured health plan under the federal Employee Retirement Income Security Act of 1974 (ERISA).
I) An employer that participates in the medical care savings account program.
2) "Deductible" means the total deductible for an employee and all the dependents of that employee for a calendar year.
3) "Dependent" means the spouse of the employee or a child of the employee if the child is any of the following:
A) under 19 years of age, or under 23 years of age and enrolled as a full-time student at an accredited college or university,
B) legally entitled to the provision of proper or necessary subsistence, education, medical care, or other care necessary for his or her health, guidance, or well-being and not otherwise emancipated, self-supporting, married, or a member of the armed forces of the United States, or
C) mentally or physically incapacitated to the extent that he or she is not self-sufficient.
4) "Domicile" means a place where an individual has his or her true, fixed, and permanent home and principal establishment, to which, whenever absent, he or she intends to return. Domicile continues until another permanent home or principal establishment is established.
5) "Eligible medical expense" means an expense paid by the taxpayer for medical care described in Section 213(d) of the Internal Revenue Code.
6) "Employee" means the individual for whose benefit or for the benefit of whose dependents a medical care savings account is established. Employee includes a self-employed individual.
7) "Higher deductible" means a deductible of not less than $1,000 and not more than $3,000 for 1994. This minimum and maximum shall be adjusted annually by the Department of Revenue to reflect increases in the consumer price index for the United States as defined and officially reported by the United States Department of Labor.
8) "Qualified higher deductible health plan" means a health coverage policy, certificate, or contract that provides for payments for covered benefits that exceed the higher deductible and that is purchased by an employer for the benefit of an employee for whom the employer makes deposits into a medical care savings account.
e) Before making any contribution to an account, an employer that offers a medical care savings account program shall inform all its employees in writing of the federal tax status of contributions made. (Section 10(b) of the Act) The contributions made pursuant to the Medical Care Savings Account Act will be taxable federally unless and to the extent the medical care savings account qualifies as a tax-favored medical savings account under section 220 of the Internal Revenue Code (26 USC 220).
f) Use of Account Moneys
1) The account administrator shall utilize the moneys held in a medical care savings account solely for the purpose of paying the medical expenses of the employee or his or her dependents or to purchase a health coverage policy, certificate, or contract if the employee does not otherwise have health insurance coverage. Moneys held in a medical care savings account may not be used to cover medical expenses of the employee or his or her dependents that are otherwise covered, including but not limited to medical expenses covered pursuant to an automobile insurance policy, worker's compensation insurance policy or self-insured plan, or another health coverage policy, certificate, or contract. (Section 15(a) of the Act)
2) The employee may submit documentation of medical expenses paid by the employee in the tax year to the account administrator, and the account administrator shall reimburse the employee from the employee's account for eligible medical expenses. (Section 15(b) of the Act)
3) If an employer makes contributions to a medical care savings account program on a periodic installment basis, the employer may advance to an employee, interest free, an amount necessary to cover medical expenses incurred that exceed the amount in the employee's medical care savings account when the expense is incurred if the employee agrees to repay the advance from future installments or when he or she ceases to be an employee of the employer. (Section 15(c) of the Act)
4) Upon the death of the employee, the account administrator shall distribute the principal and accumulated interest of the medical care savings account to the estate of the employee. (Section 20(d) of the Act)
g) Illinois Income Tax Consequences
1) Except as provided in subsection (f)(2), principal contributed to and interest earned on a medical care savings account and money reimbursed to an employee for eligible medical expenses are exempt from taxation under the Illinois Income Tax Act and shall be a modification decreasing federal adjusted gross income in arriving at Illinois taxable income of the employee for the taxable year.
2) Notwithstanding subsection (f)(3), and subject to subsection (f)(4), an employee may withdraw money from his or her medical care savings account for any purpose other than a purpose described in subsection (f)(1) only on the last business day of the account administrator's business year. Money withdrawn pursuant to this subsection (g)(2) shall be a modification increasing federal adjusted gross income in arriving at Illinois taxable income of the employee in the taxable year of the withdrawals. (Section 20(a) of the Act)
3) If the employee withdraws money for any purpose other than a purpose described in subsection (f)(1) at any other time, all of the following apply:
A) The amount of the withdrawal shall be a modification increasing federal adjusted gross income in arriving at Illinois taxable income of the employee in the taxable year of the withdrawal.
B) The administrator shall withhold and on behalf of the employee shall pay a penalty to the Department equal to 10% of the amount of the withdrawal. (Section 20(a)(2) of the Act) The administrator must remit the penalty to the Department along with a copy of Form IL-601 "Medical Care Savings Account Penalty Payment."
C) Interest earned on the account during the taxable year in which a withdrawal under this subsection is made shall be a modification increasing federal adjusted gross income in arriving at Illinois taxable income of the employee.
4) The amount of a disbursement of any assets of a medical care savings account pursuant to a filing for protection under Title 11 of the United States Code, 11 USC 101 to 1330, by an employee or person for whose benefit the account was established is not considered a withdrawal for purposes of this Section. The amount of a disbursement is not subject to taxation under the Illinois Income Tax Act, and subsection (g)(3) does not apply. (Section 20(c) of the Act)
5) In the event that all of the following occur:
A) an employee is no longer employed by an employer that participates in a medical care savings account program,
B) the employee, not more than 60 days after his or her final day of employment, transfers the account to a new account administrator or requests in writing to the former employer's account administrator that the account remain with that administrator, and
C) that account administrator agrees to retain the account, then the money in the medical care savings account may be utilized for the benefit of the employee or his or her dependents subject to this Act, remains exempt from taxation, and shall be a modification decreasing federal adjusted gross income in arriving at Illinois taxable income of the employee or his or her dependents for the taxable year. Not more than 30 days after the expiration of the 60 days, if an account administrator has not accepted the former employee's account, the employer shall mail a check to the former employee, at the employee's last known address, for an amount equal to the amount in the account on that day, and that amount is subject to taxation pursuant to subsection (g)(3)(A), and shall be a modification increasing federal adjusted gross income in arriving at Illinois taxable income of the employee but is not subject to the penalty under subsection (g)(3)(B). If an employee becomes employed with a different employer that participates in a medical care savings account program, the employee may transfer his or her medical care savings account to that new employer's account administrator. (Section 20(e) of the Act)
h) The Act shall expire on 1/1/2010. As a result of repeal of the Act, for taxable years beginning on and after January 1, 2010:
1) The subtraction modification provided for in subsection (g)(1) of this Section and IITA Section 203(a)(2)(S) and (T) for principal contributed to and interest earned on a medical care savings account shall not apply;
2) The subtraction modification provided for in subsection (g)(1) of this Section and Section 10(c) of the Act for money reimbursed to an employee for eligible medical expenses shall not apply;
3) The addition modification provided for in subsection (g)(2) of this Section and Section 20(a) of the Act for money withdrawn from a medical care savings account for any purpose other than a purpose described in subsection (f)(1) of this Section shall not apply;
4) The addition modification provided for in subsection (g)(3) of this Section and IITA Section 203(a)(2)(D-5) for the amount of a withdrawal for any purpose other than a purpose described in subsection (f)(1) of this Section and for interest earned on the account during the taxable year of the withdrawal shall not apply;
5) The penalty provided for in subsection (g)(3) of this Section and Section 20(c) of the Act equal to 10% of the amount of a withdrawal for any purpose other than a purpose described in subsection (f)(1) of this Section shall not apply.
(Source: Amended at 36 Ill. Reg. 2363, effective January 25, 2012)
Section 100.2590 Taxation of Certain Employees of Railroads, Motor Carriers, Air Carriers and Water Carriers
a) Federal law affects the authority of the State of Illinois to subject certain employees of railroads, motor carriers, merchant mariners, and air carriers to Illinois income taxation. By virtue of the provisions of federal laws cited in this Section, compensation that would otherwise be subject to Illinois income taxation and withholding by virtue of IITA Sections 302(a) and 304(a)(2)(B) is subtracted from adjusted gross income in determining Illinois base income (and is not subject to Illinois income tax withholding) pursuant to IITA Section 203(a)(2)(N), which provides a subtraction from adjusted gross income for an amount equal to all amounts included in adjusted gross income that are exempt from taxation by this State by reason of the statutes of the United States.
1) Railroad Employees. 49 USC 11502(a) states that no part of the compensation paid by a rail carrier subject to the jurisdiction of the Surface Transportation Board to an employee who performs regularly assigned duties as an employee on a railroad in more than one state shall be subject to the income tax laws of any state or subdivision of that state, other than the state or subdivision thereof of the employee's residence.
2) Motor Carrier Employees. 49 USC 14503(a)(1) states that no part of the compensation paid by a motor carrier providing transportation subject to the jurisdiction of the Surface Transportation Board or by a motor private carrier to an employee who performs regularly assigned duties in 2 or more states as an employee with respect to a motor vehicle shall be subject to the income tax laws of any state or subdivision of that state, other than the state or subdivision thereof of the employee's residence.
3) Merchant Mariner Employees. 46 USC 11108 states that no part of the compensation paid by a merchant mariner to an employee who performs regularly assigned duties in more than one state shall be subject to the income tax laws of any state or subdivision of that state, other than the state or subdivision of the employee's residence.
4) Air Carrier Employees. 49 USC 40116(f)(2) states that no part of the compensation paid by an air carrier to an employee who performs regularly assigned duties as an employee on an aircraft in more than one state, shall be subject to the income tax laws of any state or its subdivision other than the state or subdivision of the employee's residence and the state or subdivision in which the employee's scheduled flight time would have been more than 50% of the employee's total scheduled flight time for the calendar year.
b) Examples
1) EXAMPLE 1: A is a locomotive engineer employed by Interstate Railway. Interstate operates a rail yard in Illinois. Interstate also operates in Missouri, where it has a rail yard, as well as its administrative and payroll offices. A is a resident of Missouri. A is assigned to, and primarily reports to, the Illinois rail yard of Interstate and drives locomotives for Interstate on trips that go throughout the United States. However, on occasion, A is required to report to the Missouri rail yard of Interstate and drive locomotives on trips that originate in Missouri. Pursuant to 49 USC 11502(a), Interstate may only withhold the Missouri personal income tax on A's wages, and A is not subject to Illinois income tax on the wages paid by Interstate.
2) EXAMPLE 2: A is an airline pilot for World-Wide Airlines. World-Wide provides passenger and freight service to various destinations throughout the United States from an airport in Missouri, as well as from an airport in Illinois. A lives in Missouri, but A reports to and flies out of the World-Wide airport in Illinois. A primarily flies to destinations outside of Illinois. Less than 50% of A's compensation (as determined by flight time in Illinois versus flight time everywhere) is earned within Illinois. Therefore, A is only subject to Missouri income taxation on his or her compensation from World-Wide.
3) EXAMPLE 3: The facts are the same as in Example 2, except that A pilots commuter planes between airports in Illinois. In this situation, A will be subject to Illinois income taxation by virtue of the fact that A earns more than 50% of his or her compensation within the State of Illinois.
(Source: Amended at 44 Ill. Reg. 10907, effective June 10, 2020)
SUBPART G: BASE INCOME OF CORPORATIONS
Section 100.2655 Subtraction Modification for Enterprise Zone and River Edge Redevelopment Zone Interest (IITA Section 203(b)(2)(M))
a) A corporation that is a "financial organization" within the meaning of IITA Section 304(c) may subtract an amount included in its taxable income as interest income from a loan or loans made by such taxpayer to a borrower, to the extent that such a loan is secured by property which is eligible for the enterprise zone investment credit (IITA Section 203(b)(2)(M)) or the river edge redevelopment zone investment credit under IITA Section 201(f). The subtraction for interest from loans secured by property eligible for the enterprise zone investment credit is allowed only for interest received or accrued prior to August 7, 2012, the effective date of PA 97-905, which repealed this subtraction.
b) Eligible Property. For purposes of this Section, "Eligible Property" shall mean:
1) for tax years ending prior to June 8, 1984 (the effective date of PA 83-1114), property for which the borrower had successfully claimed the credit under IITA Section 201(h) (prior to recodification as IITA Section 201(f) by PA 85-731); and
2) for tax years ending on or after June 8, 1984, property that is "qualified property" as defined under IITA Section 203(f)(2) and Section 100.2131(e) or that would have been qualified property under those provisions if placed in service in an enterprise zone at the time it was new by a taxpayer otherwise eligible to claim the credit under IITA Section 203(f).
c) Portion of Loan Secured by Eligible Property. To determine the portion of a loan that that is secured by Eligible Property, the entire principal amount of the loan between the taxpayer and the borrower should be divided into the basis of the Eligible Property which secures the loan, using for this purpose the original basis of such property on the date it was placed in service in the enterprise zone or the river edge redevelopment zone. The subtraction modification available to the taxpayer in any year under this Section shall be the portion of the total interest paid by the borrower with respect to such loan attributable to the Eligible Property as calculated under the previous sentence. (IITA Section 203(b)(2)(M)) There is no limitation to the length of time for which the subtraction may be taken with respect to a particular loan.
d) Basis. For purposes of the computation in subsection (c), the basis of Eligible Property shall be its borrower's basis in the Eligible Property for federal income tax purposes, including the costs of any improvements or repairs included in that basis, but without adjustment for depreciation or IRC section 179 deductions claimed with respect to the property.
e) Examples. This subsection provides examples of various fact situations and the Department's interpretation of how this subtraction would apply:
1) EXAMPLE 1. Bank lends $1,000 to Borrower, secured by Eligible Property with a basis of $900. The portion of the loan secured by Eligible Property is the $900 basis of the borrower in Eligible Property divided by the $1,000 principal amount of the loan, or 90%.
2) EXAMPLE 2. Bank lends $1,000 to Borrower, secured by Eligible Property with a basis of $1,000 and by other property with a basis of $2,000. The portion of the loan secured by Eligible Property is the $1,000 basis of the borrower in Eligible Property divided by the $1,000 principal amount of the loan, or 100%. The existence of other property securing the loan is irrelevant.
3) EXAMPLE 3. In 1996, ABC Company built a new warehouse in an enterprise zone at the cost of $1,000,000 and is able to claim the enterprise zone investment credit under IITA Section 201(f). ABC takes out a $2,000,000 loan at Bank A, which then places a lien on the property. In 1999, when the warehouse had an adjusted basis (after depreciation) of $900,000 and a fair market value of $1,300,000, ABC refinanced the loan for the same principal amount, but at a lower interest rate. For both loans, the portion of the loan secured by Eligible Property is the $1,000,000 original basis in the warehouse divided by the $2,000,000 principal. Neither the adjusted basis after depreciation nor the fair market value are relevant to the computation for the refinanced amount.
4) EXAMPLE 4. The facts are the same as in Example 3, except that, in 2001, ABC Company again refinanced the loan, this time at Bank B (unrelated to Bank A). There was no change in the principal amount. Bank B takes a lien on the warehouse to secure the new loan. The portion of the Bank B loan that qualifies for the subtraction modification is 50% because the principal amount of the loan and ABC Company's original basis in the property remain unchanged.
5) EXAMPLE 5. Same facts as in Example 4, except that Bank B purchased the refinanced loan from Bank A. The loan is not refinanced. ABC continues to pay the same amount, but now pays Bank B rather than Bank A. Bank B does not qualify for the subtraction modification, which is allowed only with respect to a loan "made by such taxpayer to a borrower" and Bank B did not make the loan.
6) EXAMPLE 6. X Corp., headquartered outside the river edge redevelopment zone, builds a $100,000,000 warehouse in a river edge redevelopment zone in 2007 and claims the river edge redevelopment zone credit. X takes out a 20-year loan at Bank A in the principal amount of $1,000,000. In 2017, X takes out a new $1,750,000 loan at the same bank and uses $1,000,000 of the proceeds to pay off the old loan and spends the remaining $750,000 to renovate its corporate headquarters located outside the zone. Bank A takes a lien on the warehouse as security for each loan. Because X Corp.'s $100,000,000 basis in the warehouse exceeds the principal amount of each loan, Bank A is entitled to subtract the entire amount of interest received from each loan. The portion of the loan whose interest may be subtracted need not be reduced by the $750,000 portion not spent inside the river edge redevelopment zone because use of the borrowed funds is not relevant to the subtraction.
7) EXAMPLE 7. The F Church, located in an enterprise zone, decides to borrow $500,000 in 2003 from Bank A for roof repairs and a new addition. The church cannot claim the enterprise zone credit because it did not have unrelated business taxable income and was not required to file an IL-990-T for 2003. Bank A may claim the subtraction modification. The loan is secured by property that is either qualified property or could be qualified property, and the property has been placed in service within an enterprise zone.
(Source: Amended at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.2657 Subtraction Modification for High Impact Business Interest (IITA Section 203(b)(2)(M-1))
a) A corporation that is a "financial organization" within the meaning of IITA Section 304(c) may subtract an amount included in its taxable income as interest income from a loan or loans made by such taxpayer to a borrower, to the extent that such a loan is secured by property which is eligible for the High Impact Business Investment Credit under IITA Section 201(h). (IITA Section 203(b)(2)(M-1))
b) Coordination with Subtraction for Enterprise Zone Interest. Notwithstanding subsection (a), a taxpayer may not claim a subtraction modification under IITA Section 203(b)(2)(M-1) and this Section for any taxable year in which the taxpayer is allowed to claim the subtraction modification under IITA Section 203(b)(2)(M) and Section 100.2655 of this Part for interest on a loan secured by property eligible for the enterprise zone investment credit or river edge redevelopment zone investment credit. (IITA Section 203(b)(2)(M-1))
c) Eligible Property. For purposes of this Section, "eligible property" shall mean property that is "qualified property", as defined under IITA Section 201(h) and Section 100.2130(e) of this Part, and that is placed in service on or after the date the owner is designated as a high impact business by the Department of Commerce and Economic Opportunity. To be considered eligible property, it is not necessary that the property be placed in service in a federally designated foreign trade zone or subzone.
d) Portion of Loan Secured by Eligible Property. To determine the portion of a loan that is secured by eligible property, the entire principal amount of the loan between the taxpayer and the borrower should be divided into the basis of the eligible property which secures the loan, using for this purpose the original basis of such property on the date it was placed in service. The subtraction modification available to the taxpayer in any year under IITA Section 203(b)(2)(M-1) shall be that portion of the total interest paid by the borrower with respect to such loan attributable to the eligible property as calculated under the previous sentence. (IITA Section 203(b)(2)(M-1)) There is no limitation to the length of time for which the subtraction may be taken with respect to a particular loan.
e) Basis. For purposes of the computation in subsection (d), the basis of eligible property shall be its borrower's basis in the eligible property for federal income tax purposes, including the costs of any improvements or repairs included in that basis, but without adjustment for depreciation or IRC section 179 deductions claimed with respect to the property.
f) Examples. The provisions of IITA Section 203(b)(2)(M-1) and this Section may be illustrated by the following examples.
1) EXAMPLE 1. Bank lends $1,000 to Borrower, secured by eligible property with a basis of $900. The portion of the loan secured by eligible property is the $900 basis of the borrower in eligible property divided by the $1,000 principal amount of the loan, or 90%.
2) EXAMPLE 2. Bank lends $1,000 to Borrower, secured by eligible property with a basis of $1,000 and by other property with a basis of $2,000. The portion of the loan secured by eligible property is the $1,000 basis of the borrower in eligible property divided by the $1,000 principal amount of the loan, or 100%. The existence of other property securing the loan is irrelevant.
3) EXAMPLE 3. In 2008, DCEO designated ABC Company a high impact business. In 2009, ABC Company built a new warehouse at the cost of $1,000,000 and is able to claim the high impact business investment credit under IITA Section 201(h) with respect to the warehouse. ABC takes out a $2,000,000 loan at Bank A, which then places a lien on the property. In 2010, when the warehouse had an adjusted basis (after depreciation) of $900,000 and a fair market value of $1,300,000, ABC refinanced the loan for the same principal amount, but at a lower interest rate. For both loans, the portion of the loan secured by eligible property is the $1,000,000 original basis in the warehouse divided by the $2,000,000 principal. Neither the adjusted basis after depreciation nor the fair market value is relevant to the computation for the refinanced amount.
4) EXAMPLE 4. Assume the facts are the same as in Example 3, except that, in 2011, ABC Company again refinanced the loan, this time at Bank B (unrelated to Bank A). There was no change in the principal amount. Bank B takes a lien on the warehouse to secure the new loan. The portion of the Bank B loan that qualifies for the subtraction modification is 50% because the principal amount of the loan and ABC Company's original basis in the property remain unchanged.
5) EXAMPLE 5. The facts are the same as in Example 4, except that Bank B purchased the refinanced loan from Bank A. The loan is not refinanced. ABC continues to pay the same amount, but now pays Bank B rather than Bank A. Bank B does not qualify for the subtraction modification, which is allowed only with respect to a loan "made by such taxpayer to a borrower" and Bank B did not make the loan.
(Source: Added at 38 Ill. Reg. 9550, effective April 21, 2014)
Section 100.2665 Subtraction for Payments to an Attorney-in-Fact (IITA Section 203(b)(2)(R))
a) Under an interinsurance or reciprocal insurance arrangement, the members or subscribers are liable to reimburse each other for insured losses. The operations of an interinsurer or reciprocal insurer are conducted by an attorney-in-fact. Interinsurers and reciprocal insurers are subject to federal income tax as mutual insurance companies. (See Internal Revenue Code section 832(f).) Under IRC section 835, an interinsurer or reciprocal insurer can elect to limit its deduction for fees paid to its attorney-in-fact to the amount of deductible expenses incurred by the attorney-in-fact that are attributable to those fees. An interinsurer or reciprocal insurer that makes this election is allowed a credit equal to the federal income tax liability of its attorney-in-fact with respect to the fees received from the interinsurer or reciprocal insurer.
b) The effect of making an election under IRC section 835 is that the net income of the attorney-in-fact related to the interinsurer or reciprocal insurer that made the election is included in the federal taxable income of both the attorney-in-fact and the interinsurer or reciprocal insurer, but the interinsurer or reciprocal insurer is allowed a federal credit that eliminates the double taxation of that income. Prior to the enactment of PA 91-205, that income would be included in the base incomes of the interinsurer or reciprocal insurer and of the attorney-in-fact. On and after July 20, 1999 (the effective date of PA 91-205), in the case of an attorney-in-fact with respect to whom an interinsurer or a reciprocal insurer has made the election under IRC section 835, the attorney-in-fact is allowed to subtract an amount equal to the excess, if any, of the amounts paid or incurred by that interinsurer or reciprocal insurer in the taxable year to the attorney-in-fact over the deduction allowed to that interinsurer or reciprocal insurer with respect to the attorney-in-fact under IRC section 835 for the taxable year. (IITA Section 203(b)(2)(R)) The provisions of IITA Section 203(b)(2)(R) are exempt from automatic sunset under the provisions of Section 250.
(Source: Added at 42 Ill. Reg. 17852, effective September 24, 2018)
Section 100.2668 Subtraction for Dividends from Controlled Foreign Corporations (IITA Section 203(b)(2)(Z))
a) Under Internal Revenue Code section 965(e), the taxable income of a shareholder of a controlled foreign corporation (CFC) may not be less than the "nondeductible CFC dividends" received from that CFC, as defined in IRC section 965(e)(3). If the shareholder's federal net income would otherwise be less than the nondeductible CFC dividends, the shareholder carries over the excess of its nondeductible CFC dividends over the amount of its federal taxable income computed without regard to IRC section 965(e) as a net operating loss under IRC section 172.
b) IITA Prior to PA 97-507. Under IITA Section 203(b), the base income of a corporation for a taxable year is its taxable income for the year, as properly reportable for federal income tax purposes, after modifications in IITA Section 203(b)(2). Under IITA Section 203(b)(2)(D), any net operating loss deduction claimed by a corporation under IRC section 172 for a loss incurred in a taxable year ending on or after December 31, 1986, is added back to the corporation's taxable income. Under IITA Section 207, the net loss of a taxpayer (other than an individual) for a taxable year is its taxable income for the year, as properly reportable for federal income tax purposes, after modifications in IITA Section 203(b)(2). As a result, a corporation whose nondeductible CFC dividends exceeded its federal taxable income computed without regard to IRC section 965(e) for a taxable year would receive no tax benefit from the deductions or losses that caused the excess, because those deductions or losses could not reduce its federal taxable income in the year incurred and any resulting IRC section 172 deduction would be added back to taxable income in the carryover years under IITA Section 203(b)(2)(D).
c) In order to allow a corporation the benefit of deductions otherwise disallowed by IRC section 965(e) and IITA Section 203(b)(2)(D), PA 97-507 added IITA Section 203(b)(2)(Z) to allow a subtraction for the difference between the nondeductible controlled foreign corporation dividends under IRC section 965(e)(3) over the taxable income of the taxpayer, computed without regard to IRC section 965(e)(2)(A), and without regard to any net operating loss deduction. IITA Section 203(b)(2)(Z) applies to all taxable years, and is exempt from automatic sunset under the provisions of Section 250.
(Source: Added at 42 Ill. Reg. 17852, effective September 24, 2018)
SUBPART H: BASE INCOME OF TRUSTS AND ESTATES
Section 100.2770 Subtraction for Recovery of Itemized Deductions of a Decedent (IITA Section 203(c)(2)(W))
a) In computing its base income, an estate is allowed to subtract from its federal taxable income an amount equal to all amounts included in that total pursuant to the provisions of IRC section 111 as a recovery of items previously deducted by the decedent from adjusted gross income in the computation of taxable income. (IITA Section 203(c)(2)(W))
b) Under IRC section 111, a taxpayer who is allowed a deduction in computing federal taxable income in one taxable year, and recovers the deductible expenditure in a subsequent taxable year, includes the recovery in gross income in the year of recovery. For example, an individual who claims an itemized deduction for State income taxes paid in 2015 on his or her 2015 federal income tax return, and in 2016 receives a refund of some of that tax, includes the refund in gross income for 2016. This procedure prevents the taxpayer from receiving a tax benefit for an expenditure that ultimately did not cost the taxpayer, without requiring the filing of an amended return to remove the deduction from the computation of taxable income in the year the deduction was taken.
c) If the estate of a deceased individual recovers an item that the individual had deducted in a taxable year prior to his or her death, the estate must include the recovery in its taxable income.
d) Under IITA Section 203(a)(1), the computation of an individual's base income begins with his or her federal adjusted gross income, which is equal to taxable income before itemized deductions, the standard deduction and personal exemptions are taken into account. As a result, individuals receive no Illinois income tax benefit from federal itemized deductions. Accordingly, recoveries of federal itemized deductions taken by a decedent do not need to be included in the base income of the decedent's estate to prevent receiving a tax benefit for the item. IITA Section 203(c)(2)(W) therefore allows an estate to subtract recoveries of itemized deductions taken by the decedent that are included in the estate's federal taxable income.
e) IITA Section 203(c)(2)(W) provides that it is exempt from the automatic sunset provisions of IITA Section 250.
(Source: Added at 42 Ill. Reg. 17852, effective September 24, 2018)
Section 100.2775 Subtraction for Refunds of Taxes Paid to Other States for Which a Credit Was Claimed (IITA Section 203(c)(2)(X))
a) In computing its base income, an estate is allowed to subtract from its federal taxable income an amount equal to the refund included in that total of any tax deducted for federal income tax purposes, to the extent that deduction was added back under IITA Section 203(c)(2)(F). (IITA Section 203(c)(2)(X))
b) Under IRC section 111, a taxpayer who is allowed a deduction in computing federal taxable income in one taxable year, and recovers the deductible expenditure in a subsequent taxable year, includes the recovery in gross income in the year of recovery. For example, a trust or estate that claims a deduction for State income taxes paid in 2015 on its 2015 federal income tax return, and in 2016 receives a refund of some of that tax, includes the refund in gross income for 2016. This procedure prevents the taxpayer from receiving a tax benefit for an expenditure that ultimately did not cost the taxpayer, without requiring the filing of an amended return to remove the deduction from the computation of taxable income in the year the deduction was taken.
c) If a trust or estate claims a credit for taxes paid to other states under IITA Section 601(b)(3), the taxpayer adds back to its federal taxable income any deduction taken for payment of a state tax for which the credit is claimed. (See IITA Section 203(c)(2)(F).) If a trust or estate has added back the federal income tax deduction for a state tax, a refund of that tax does not need to be included in the taxpayer's base income to prevent receiving a tax benefit for the item. IITA Section 203(c)(2)(X) therefore allows the taxpayer to subtract refunds of these taxes that are included in the taxpayer's federal taxable income.
d) IITA Section 203(c)(2)(X) provides that it is exempt from the automatic sunset provisions of IITA Section 250.
(Source: Added at 42 Ill. Reg. 17852, effective September 24, 2018)
SUBPART I: BASE INCOME OF PARTNERSHIPS
Section 100.2850 Subtraction Modification for Personal Service Income or Reasonable Allowance for Compensation to Partners (IITA Section 203(d)(2)(H))
a) In General. A partnership is allowed to subtract from taxable income any income of the partnership that constitutes personal service income as defined in 26 USC 1348(b)(1) (as in effect December 31, 1981) or a reasonable allowance for compensation paid or accrued for services rendered by partners to the partnership, whichever is greater. (IITA Section 203(d)(2)(H)) Therefore, pursuant to this Section, a partnership is allowed a subtraction modification in an amount equal to the greater of the amount computed under subsection (b) or the amount computed under subsection (c).
1) Purpose. Under the IRC and federal income tax law, a partner is not an employee of the partnership. Consequently, a partnership generally may not deduct in computing the taxable income of the partnership amounts paid to a partner for services rendered to the partnership. (Estate of Tilton, 8 BTA 914 (1927)) Instead, these amounts are considered distributive shares of partnership income (Revenue Ruling 55-30, 1955-1 C.B. 430). In contrast, a shareholder of a corporation may also be employed by the corporation. Amounts paid by the corporation to the shareholder that constitute compensation for services rendered as an employee may be deducted by the corporation in computing its taxable income under 26 USC 162(a)(1). The purpose of the subtraction modification under IITA Section 203(d)(2)(H) and this Section is to allow partnerships, for purposes of computing their liability for the tax imposed under IITA Section 201(c) and (d) (replacement tax), a deduction for compensation paid to partners for services rendered to the partnership similar to the deduction allowed to a corporation for compensation paid a shareholder-employee for services rendered to the corporation.
2) Amounts that Qualify for Subtraction.
A) The amounts computed under subsections (b) and (c) are comprised of the distributive shares of the partners in the income of the partnership. Under 26 USC 707(c) to the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital are considered as made to a person who is not a partner, but only for the purposes of 26 USC 61(a) (relating to gross income) and, subject to 26 USC 263, for purposes of IRC section 162(a) (relating to trade or business expenses). 26 CFR 1.707-1(c) states that, for the other purposes of the IRC, a guaranteed payment is regarded as a distributive share of the ordinary income of the partnership. Accordingly, a guaranteed payment to a partner may be included in the computation of the amounts computed under subsections (b) and (c).
B) Under 26 USC 707(a), if a partner engages in a transaction with the partnership other than in his or her capacity as a partner, the transaction is generally considered as occurring between the partnership and one who is not a partner. When a partnership pays or accrues an amount to a non-partner for services rendered, the partnership is allowed a deduction in the computation of its taxable income (see, e.g., 26 USC 162). Therefore, a payment to a partner subject to 26 USC 707(a) may not be included in the amounts computed under subsections (b) and (c) (see IITA Section 203(g) and subsection (a)(5) of this Section). A distribution by the partnership subject to 26 USC 731 is treated as a return of capital and/or gain from the sale or exchange of the partnership interest of the distributee partner and, therefore, in no event may a distribution be included in the amounts computed under subsections (b) and (c). However, an allocation of partnership income to a partner may be considered compensation for services for purposes of this Section, whether or not accompanied by a corresponding distribution under 26 USC 731.
3) Double Deductions Prohibited. IITA Section 203(g) states that nothing in that Section shall permit the same item to be deducted more than once.
A) Under IITA Section 203(d)(2)(I), a subtraction modification is allowed to the partnership for income distributable to an entity subject to replacement tax or to organizations exempt from federal income tax by reason of IRC section 501(a). Therefore, neither a guaranteed payment nor a distributive share of net income or gain of a partner subject to replacement tax or exempt from federal income tax under IRC section 501(a) may be included in the subtraction modification allowed under this Section.
B) In addition, when a partnership pays or accrues an amount to a non-partner for services rendered, the partnership is allowed a deduction in the computation of its taxable income. Therefore, a payment to a partner subject to 26 USC 707(a) because the partner is not acting in his or her capacity as a partner, whether or not the payment is currently deducted by the partnership or capitalized, may not be subtracted under this Section. Similarly, when a person receives a partnership interest for the provision of services, the partnership's deduction is determined under 26 USC 83(h). Therefore, no amount may be deducted by the partnership under this Section for the transfer of a partnership interest in connection with the performance of services.
b) Personal Service Income. When the personal service income of the partnership, as defined in this subsection (b), is greater than a reasonable allowance for compensation paid or accrued for services rendered by partners, the subtraction modification under this Section shall be equal to the personal service income of the partnership. The personal service income of the partnership is equal to the aggregate of the distributive shares of the partners in the income of the partnership that would constitute personal service income in the hands of the partners (less deductions allocable to that income as provided in subsection (b)(2)). See Rev. Rul. 74-231, 1974-1 C.B. 240.
1) Definitions
Personal Service Income. The term "personal service income", as defined in 26 USC 1348(b)(1) (as in effect December 31, 1981) means: "any income which is earned income within the meaning of 26 USC 401(c)(2)(C) or 26 USC 911(b) or which is an amount received as a pension or annuity which arises from an employer-employee relationship or from tax-deductible contributions to a retirement plan. For purposes of this subparagraph, 26 USC 911(b) shall be applied without regard to the phrase, 'not in excess of 30 percent of his share of net profits of such trade or business'. The term 'personal service income' does not include any amount to which 26 USC 72(m)(5), 402(a)(2), 402(e), 403(a)(2), 408(e)(2), 408(e)(3), 408(e)(4), 408(e)(5), 408(f) or 409(c) applies; or which is includible in gross income under 26 USC 409(b) because of the redemption of a bond which was not tendered before the close of the taxable year in which the registered owner attained age 70½." See also 26 CFR 1.1348-3. Under 26 USC 1348, only an individual (or trust or estate in the case of income in respect of a decedent) may receive personal service income. Therefore, only the distributive share of an individual partner (or trust or estate in the case of income in respect of a decedent) may be included in the personal service income of the partnership under this subsection (b).
2) Personal Service Income is Net of Allocable Expenses. For purposes of determining the subtraction modification under this subsection (b), the personal service income of the partnership shall be the aggregate of the distributive shares of the partners in the income of the partnership that would constitute personal service income in the hands of the partners less deductions allocable to that income. In Treasury Decision 7446, Maximum Tax on Earned Income (August 13, 1976), the IRS stated that, in order to achieve a logical result in applying the maximum tax provisions of Section 1348 and to prevent the conversion of passive income into earned income, a proportional allocation of expenses to earned income is required in the case of a business in which capital is a material income-producing factor. In addition, if passive income is derived from investments held by a trade or business, expenses of the trade or business must be allocated between such passive income and the income available for payment as personal service income. Therefore, when a partnership incurs a loss from a trade or business, it does not have personal services income for purposes of the subtraction modification under this Section.
c) Reasonable Compensation for Services. When a reasonable allowance for compensation paid or accrued for services actually rendered by partners is greater than the personal service income of the partnership, as defined in subsection (b), the subtraction modification under this Section is equal to that reasonable allowance. The reasonable compensation allowance of the partnership under this subsection is equal to the sum of the distributive shares of all partners who render services to or on behalf of the partnership of the income of the partnership to the extent that the distributive share would have been allowed as a deduction to the partnership under 26 USC 162 if it had been paid to the service partner for services performed in the capacity of an employee of the partnership rather than a partner. No part of the distributive share of a partner who performs no services to or on behalf of the partnership may be included in the reasonable compensation allowance of the partnership under this subsection.
1) Paid or Accrued. IITA Section 203(d)(2)(H) limits the subtraction modification for a reasonable allowance for compensation of partners to amounts "paid or accrued" to the partner for services rendered to the partnership. Therefore, the amount allowed under this subsection (c)(1) with respect to any partner may not exceed the increase, if any, in the capital account balance of the partner for the taxable year of the partnership in which the subtraction is claimed, determined under 26 CFR 1.704-1(b) without regard to contributions of money or property by the partner and without regard to distributions of money or property to the partner, but including a guaranteed payment made to the partner.
2) Reasonable Allowance. 26 USC 162(a)(1) limits the deduction for compensation for services to a reasonable allowance. (See 26 CFR 1.162-7(b)(3).) Therefore, the amount computed under this subsection (c)(2) with respect to any service partner may not exceed what is reasonable under all the circumstances. 26 CFR 1.162-7(b)(3) states, "it is, in general, just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances." In addition, in Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (7th Cir. 1999), the court held that "when…the investors in [the] company are obtaining a far higher return than they had any reason to expect, the owner/employee's salary is presumptively reasonable." (Menard, Inc. v. C.I.R., 560 F.3d 620, 623 (7th Cir. 2009)). However, this presumption may be rebutted by other evidence showing the amount claimed as compensation exceeds a reasonable amount. (Menard, Inc., 560 F.3d at 623) Accordingly, when income of the partnership is allocated to partners in amounts that would result in the partners obtaining a far higher return on partnership capital than they had any reason to expect, a rebuttable presumption shall arise that any remaining amount of income allocated to partners for services actually provided to the partnership is a reasonable allowance, and therefore may be included in the amount computed under this subsection (c)(2). The taxpayer shall have the burden of proving that the presumption arises.
d) Examples. The provisions of this Section may be illustrated by the following examples.
EXAMPLE 1: Partnership PB consists of individual partners P and B. The partnership is engaged in a manufacturing business in which capital is a material income-producing factor. The partnership agreement provides that B shall be entitled to a guaranteed payment of $100,000 annually for his services in managing the operations of the partnership. Assume that under IRC section 1348, the amount of the income of PB reasonably attributable to B's services is $30,000. (See Brewster v. C.I.R., 607 F.2d 1369 (D.C. Cir. 1979) and IRS Technical Advice Memorandum 7932010 (1979).) In addition, assume that $100,000 is reasonable compensation, and would be deductible to the partnership under IRC section 162(a)(1) if B rendered his management services as an employee rather than in his capacity as a partner. The partners agree to share all income, gain, losses and deductions equally after taking into account B's guaranteed payment. P does not provide any services to the partnership. For the taxable year, Partnership PB's taxable income, after taking into account B's guaranteed payment, is an ordinary loss of $40,000. Under these facts, Partnership PB is allowed a subtraction modification under this Section equal to the greater of the personal service income of the partnership computed under subsection (b) or a reasonable allowance for compensation for services rendered by partners to the partnership under subsection (c). In this case, the reasonable allowance of $100,000 exceeds the personal service income of the partnership of $0. Therefore, the subtraction modification allowed to PB under this Section is $100,000. Therefore, PB's base income for replacement tax purposes is a loss of $40,000 (i.e., taxable income under IITA Section 203(e)(2)(H) of a loss of $40,000, plus an addition modification of $100,000 under IITA Section 203(d)(2)(C), less a subtraction modification under this Section of $100,000).
EXAMPLE 2: Assume the same facts as in Example 1, except that the partnership agreement does not provide B with a guaranteed payment, and the partnership's taxable income remains an ordinary loss of $40,000. Because PB incurs a loss in its trade or business, it has no personal services income. In addition, because the loss is shared by the partners, there is no increase in B's capital account balance for the taxable year. Therefore, no amount has been paid or accrued to the partners for services rendered to the partnership. This result is not changed even if the partnership makes distributions to the partners during the taxable year. Partnership PB is not allowed a subtraction modification under this Section. Therefore, PB's base income for replacement tax purposes is a loss of $40,000 (i.e., taxable income under IITA Section 203(e)(2)(H)).
EXAMPLE 3: Assume the same facts as in Example 1, except that the partnership's taxable income consists of an ordinary loss of $100,000, and a $200,000 capital gain under IRC section 1231. Because Partnership PB incurs a loss in its trade or business and its only item of income is a section 1231 gain of $200,000, it has no personal services income. (See 26 CFR 1.1348-3(a)(1), which states that the term "earned income" does not include gains treated as capital gains under any provision of chapter 1 of the Internal Revenue Code.) However, the partnership is allowed a subtraction modification for reasonable compensation paid to B for services rendered to the partnership. The amount of the subtraction modification is the $100,000 guaranteed payment to B. Because P has not provided any services to the partnership, none of the income allocated to P is reasonable compensation for services.
EXAMPLE 4: Assume the same facts as in Example 3, except that the partnership agreement does not provide for guaranteed payments. However, B is entitled under the partnership agreement to the first $100,000 of profits, if any, for his services managing the operations of the partnership. As a result, the partnership's taxable income consists solely of a section 1231 gain of $200,000. Because PB does not have income from its trade or business, and its only item of income is a section 1231 gain of $200,000, it has no personal services income. However, it is allowed a subtraction modification for reasonable compensation paid to B for services rendered to the partnership. Under the partnership agreement, $100,000 of gain allocated to B is in exchange for B's services managing the partnership. Provided that amount does not exceed a reasonable allowance for those services, PB is allowed a subtraction modification under this Section of the $100,000 guaranteed payment to B. Since P has not provided any services to the partnership, none of the gain allocated to P is reasonable compensation for services. Therefore, PB's base income for replacement tax purposes is $100,000 (i.e., taxable income under IITA Section 203(e)(2)(H) of $200,000, less a subtraction modification under this Section of $100,000).
EXAMPLE 5: Partnership ABC is an engineering firm. The partnership's only trade or business is the provision of engineering services to clients, and capital is not a material income-producing factor. Partners A and B are individuals who provide all of the services to clients of the partnership. Partner C is a corporation that provides management services to the partnership. Under the partnership agreement, partners A and B have a 45% share of any income or loss of the partnership, and partner C has a 10% share of any income or loss. For its taxable year the partnership has taxable income from its engineering business of $100,000, plus $4,000 of portfolio interest income (net of allocable expenses). Since capital is not a material income-producing factor in the engineering services business, the partnership's personal services income is equal to the sum of A's and B's distributive share of the $100,000 of taxable income. Because C is not an individual, no part of C's distributive share constitutes personal services income. In addition, because IITA Section 203(g) prohibits double deductions, the partnership's subtraction modification under this Section may not include any part of partner C's distributive share of the partnership's income. Because C is a partner subject to replacement tax, C's distributive share of partnership income is allowed as a subtraction modification under IITA Section 203(d)(2)(I). The partnership is allowed a subtraction modification under this Section of $90,000, which is equal to partner A's and partner B's share of the personal services income of the partnership. Because the entire distributive share of A and B constitutes personal service income, and the computation of a reasonable allowance may not exceed the amount "paid or accrued" to A and B for their services, the subtraction modification is equal to the personal service income of the partnership. Therefore, ABC's base income for replacement tax purposes is $3,600 (i.e., taxable income under IITA Section 203(e)(2)(H) of $104,000, less a subtraction modification under Section 203(d)(2)(I) of $10,400, less a subtraction modification under this Section of $90,000).
EXAMPLE 6: Partnership DEF consists of individual partners D, E and F. The partnership is engaged in a rental real estate business. DEF has entered into a management contract with G corporation under which, in exchange for a fixed fee, G corporation agrees to manage the daily rental operations of the partnership. G corporation is not a partner of DEF. The shareholders of G corporation are individuals D, E and F, who actually perform the services required under the management contract between the partnership and G corporation. Individuals D, E and F do not perform any other services except those set forth in the management contract. Partnership DEF is not allowed a subtraction modification under this Section because individuals D, E and F have not rendered any services to the partnership in their capacity as partners. Rather, the services rendered by D, E and F were provided to G corporation in their capacity as employees of G corporation.
EXAMPLE 7: The facts are the same as in Example 6, except that G is a limited liability company (LLC), elects to be taxed as a partnership, and is a general partner of DEF. Individuals D, E and F are limited partners of DEF. The partnership agreement provides that G LLC shall manage the daily rental operations of the partnership. The members of G LLC are individuals D, E and F, who actually perform the services required of G LLC under the partnership agreement. Partnership DEF is not allowed a subtraction modification under this Section because DEF is allowed to subtract G LLC's distributive share of partnership income under IITA Section 203(d)(2)(I), and therefore a subtraction under this Section is disallowed under subsection (a)(3) of this Section, and because individuals D, E and F have not rendered any services to the partnership in their capacity as partners. Rather, the services rendered by D, E and F were provided to G LLC as members of G LLC. Because G LLC is taxed as a partnership, G LLC may be allowed a subtraction modification under this Section in computing its replacement tax liability for services provided to it by individuals D, E, and F.
EXAMPLE 8: The facts are the same as in Example 7, except that the members of G LLC are D and H LLC, which elects to be taxed as a partnership. The members of H LLC are E and F. D, E and F perform the services required of G LLC under the partnership agreement. Partnership DEF is not allowed a subtraction modification under this Section because DEF is allowed to subtract G LLC's distributive share of partnership income under IITA Section 203(d)(2)(I), and therefore subtraction under this Section is disallowed under subsection (a)(3) of this Section, and because individuals D, E and F have not rendered any services to Partnership DEF in their capacity as partners. Rather, the services rendered by D were provided to G LLC as a member of G LLC and by E and F indirectly to G LLC as members of H LLC. Because G LLC is taxed as a partnership, in computing its replacement tax liability it may be allowed a subtraction modification for D's distributive share of G LLC's income to the extent allowed under this Section, and allowed a subtraction modification under IITA Section 203(d)(2)(I) for H LLC's distributive share of G LLC's income. H LLC may be allowed a subtraction modification for E and F's distributive share of H LLC's income to the extent allowed under this Section.
(Source: Added at 43 Ill. Reg. 727, effective December 18, 2018)
SUBPART J: GENERAL RULES OF ALLOCATION AND APPORTIONMENT OF BASE INCOME
Section 100.3000 Terms Used In Article 3 (IITA Section 301)
Article 3 of the Illinois Income Tax Act sets forth the rules for determining that portion of a person's base income which is allocable to Illinois in the computation of net income under IITA Section 202. In the case of a person who is a resident, all items of income or deduction which are taken into account in the computation of base income for the taxable year are allocated to Illinois under IITA Section 301(a) and enter into the computation of such person's net income under IITA Section 202. In the case of persons who are not residents of Illinois, specific allocation and apportionment rules are provided in Article 3 and the regulations thereunder. Certain terms appearing throughout the Article to which such rules relate are defined in 86 Ill. Adm. Code 100.3010 through 100.3210.
Section 100.3010 Business and Nonbusiness Income (IITA Section 301)
a) In general. For purposes of administration of Article 3 of the Illinois Income Tax Act:
1) For transactions and activities occurring prior to July 30, 2004 (the effective date of Public Act 93-0840), business income is income arising from transactions and activity in the regular course of a trade or business and includes income from tangible and intangible property constituting integral parts of a person's regular trade or business operations. (See IITA Section 1501(a)(1), prior to amendment by Public Act 93-0840.) The classification of income by the labels occasionally used, such as manufacturing income, sales income, interest, dividends, rents, royalties, gains, and operating income, is of no aid in determining whether income is business or nonbusiness income. Income of any type or class and from any source is business income if it arises from transactions and activity occurring in the regular course of trade or business operations. Accordingly, the critical element in determining whether income is "business income" or "nonbusiness income" is the identification of the transactions and activity that are the elements of a particular trade or business. In general, all transactions and activity that are dependent upon or contribute to the operations of the economic enterprise as a whole will be transactions and activity arising in the regular course of a trade or business.
2) For transactions or activities occurring on or after July 30, 2004, business income is all income that may be treated as apportionable business income under the Constitution of the United States. (See IITA Section 1501(a)(1), after amendment by Public Act 93-0840.) By adopting this definition, the General Assembly overruled the decisions in the following cases:
A) Blessing/White, Inc. v. Zehnder, 329 Ill. App. 3d 714 (Third Div. 2002) and American States Insurance Co. v. Hamer, 352 Ill. App. 3d 521 (First Div. 2004), which held that the gain on a sale of an entire line of business was nonbusiness income. This "liquidating sale" exclusion from business income was based on the courts' construction of the statutory definition of business income prior to the enactment of Public Act 93-0840, and not on any principle of the Constitution of the United States.
B) Hercules, Inc. v. Zehnder, 324 Ill. App. 3d 329 (First Div. 2001), which held that gain realized on the sale of the taxpayer's stock in a subsidiary corporation that it had received in exchange for the contribution of assets used in its business was not business income. The taxpayer's basis in its stock was determined by its basis in the assets exchanged, so that the gain realized on the sale was attributable, at least in part, to its use of those assets in its business before the exchange. Accordingly, the investment that produced the gain had an operational function related to that business, and is subject to apportionment under Allied-Signal v. Director, 504 US 768 (1992). In addition, the court's holding that the taxpayer was not engaged in a unitary business with the subsidiary was based in part on the fact that the taxpayer did not meet the statutory "common ownership" requirement in IITA Section 1501(a)(27), which provides that a corporation must be owned more than 50% in order to be engaged in a unitary business. There is no such requirement in the Constitution of the United States, and a unitary business may exist with less than 50% common ownership. See In re Panhandle Eastern Pipe Line Co., 39 P.3d 21 (Ks. 2002) and True v. Heitkamp, 470 NW2d 582 (N.D. 1991). Accordingly, a taxpayer may be engaged in a unitary business with a subsidiary in which it holds only a minority interest, so that the gain or loss realized on the sale of its stock in the subsidiary is subject to apportionment under Allied-Signal v. Director, 504 US 768 (1992).
3) For all taxable years:
A) Business income is net of the deductions allocable thereto and does not include compensation or the deductions allocable thereto (IITA Section 1501(a)(1)).
B) Nonbusiness income means all income other than business income or compensation (IITA Section 1501(a)(13)).
C) A person's income is business income unless clearly classifiable as nonbusiness income.
b) Two or more businesses of a single person
1) A person may have more than one "trade or business". In such cases, it is necessary to determine the business income attributable to each separate trade or business. In the case of a person other than a resident, the income of each business is then apportioned by a formula that takes into consideration the instate and outstate factors relating to the trade or business the income of which is being apportioned.
2) Example: The person is a corporation with three operating divisions. One division is engaged in manufacturing aerospace items for the federal government. Another division is engaged in growing tobacco products. The third division produces and distributes motion pictures for theaters and television. Each division operates independently; there is no strong central management. Each division operates in this State as well as in other states. In this case, it is fair to conclude that the corporation is engaged in three separate "trades or businesses". Accordingly, the amount of business income attributable to the corporation's trade or business activities in this State is determined by applying an apportionment formula to the business income of each business.
3) The determination of whether the activities of the person constitute a single trade or business or more than one trade or business will turn on the facts in each case. In general, the activities of the person will be considered a single business if there is evidence to indicate that the segments under consideration are integrated with, dependent upon, or contribute to each other and the operations of the person as a whole. The following factors are considered to be good indicia of a single trade or business, and the presence of any one of these factors creates a strong indication that the activities of the person constitute a single trade or business.
A) Same type of business. A person is generally engaged in a single trade or business when all of its activities are in the same general line. For example, a person that operates a chain of retail grocery stores will almost always be engaged in a single trade or business.
B) Steps in a vertical process. A person is almost always engaged in a single trade or business when its various divisions or segments are engaged in a vertically structured enterprise. For example, a person that explores for and mines copper ores; concentrates, smelts and refines the copper ores; and fabricates the refined copper into consumer products is engaged in a single trade or business, regardless of the fact that the various steps in the process are operated substantially independently of each other with only general supervision from the person's executive offices.
C) Strong centralized management. A person that might otherwise be considered as engaged in more than one trade or business is properly considered as engaged in one trade or business when there is a strong central management, coupled with the existence of centralized departments for functions such as financing, advertising, research or purchasing. Thus, some corporations may properly be considered as engaged in only one trade or business when the central executive officers are normally involved in the operations of the various divisions and there are centralized offices that perform for the divisions the normal matters that a truly independent business would perform for itself, such as accounting, personnel, insurance, legal, purchasing, advertising or financing. Note in this connection that neither the existence of central management authority, nor the exercise of that authority over any particular function (through centralized departments or offices), is determinative in itself; the entire operations of the person must be examined in order to determine whether or not strong centralized management absent other unitary indicia as described in this subsection (b) (i.e., same type of business or steps in a vertical process) justifies a conclusion that the activities of the person constitute a single trade or business. Both elements of strong centralized management, i.e., strong central management authority and the exercise of that authority through centralized departments or offices, must exist in order to justify a conclusion that the operations of seemingly separate divisions are significantly integrated so as to constitute a single trade or business.
c) Items referred to in IITA Section 303 and unspecified items under IITA Section 301(c)(2)
1) In general. IITA Section 303 provides rules for the allocation by persons other than residents of Illinois of any item of capital gain or loss, and any item of income from rents or royalties from real or tangible personal property, interest, dividends, and patent or copyright royalties, and prizes awarded under the Illinois Lottery Law [20 ILCS 1605], together with any item of deduction directly allocable to that income, to the extent the item constitutes nonbusiness income. In addition, IITA Section 301(c)(2) provides rules for the allocation by these persons of unspecified items of nonbusiness income. Any item may, in a given case, constitute either business income or nonbusiness income depending on all the facts and circumstances. The following are rules and examples for determining whether particular income is business or nonbusiness income. (The examples used throughout these regulations are illustrative only and do not purport to set forth all pertinent facts.)
2) Rents from real and tangible personal property. Rental income from real and tangible property is business income if the property with respect to which the rental income was received is used in the person's trade or business or is attendant to it and is includable in the property factor under Section 100.3350.
A) Example A: A corporation operates a multistate car rental business. The income from car rentals is business income.
B) Example B: A corporation is engaged in the heavy construction business in which it uses equipment such as cranes, tractors, and earth moving vehicles. The corporation makes short-term leases of the equipment when particular pieces of equipment are not needed on any particular project. The rental income is business income.
C) Example C: A corporation operates a multistate chain of men's clothing stores. The corporation purchases a five-story office building for use in connection with its trade or business. It uses the street floor as one of its retail stores and the second and third floors for its general corporate headquarters. The remaining two floors are leased to others. The rental of the two floors is attendant to the operation of the corporation's trade or business. The rental income is business income.
D) Example D: A corporation operates a multistate chain of grocery stores. As an investment, it uses surplus funds to purchase an office building in another state, leasing the entire building to others. The rental is not attendant to, but rather is separate from, the operation of the grocery store trade or business. The net rental income is nonbusiness income.
E) Example E: A corporation operates a multistate chain of men's clothing stores. The corporation invests in a 20-story office building and uses the street floor as one of its retail stores and second floor for its general corporate headquarters. The remaining 18 floors are leased to others. The rental of the 18 floors is not attendant to, but rather is separate from, the operation of the corporation's trade or business. The net rental income is nonbusiness income.
F) Example F: A corporation constructed a plant for use in its multistate manufacturing business and 20 years later the plant was closed and put up for sale. The plant was rented for a temporary period from the time it was closed by the corporation until it was sold 18 months later. The rental income is business income and the gain on the sale of the plant is business income.
3) Gains or losses from sales of assets. Gain or loss from the sale, exchange or other disposition of real or tangible personal property constitutes business income if the property, while owned by the person, was used in its trade or business. However, if such property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale, exchange or other disposition, the gain or loss will constitute nonbusiness income. See Section 100.3350.
A) Example A: In conducting its multistate manufacturing business, a corporation systematically replaces automobiles, machines, and other equipment used in the business. The gains or losses resulting from those sales constitute business income.
B) Example B: A corporation constructed a plant for use in its multistate manufacturing business and 20 years later sold the property at a gain while it was in operation by the corporation. The gain is business income.
C) Example C: Same as subsection (c)(3)(B) except that the plant was closed and put up for sale but was not in fact sold until a buyer was found 18 months later. The gain is business income.
D) Example D: Same as subsection (c)(3)(C) except that the plant was rented while being held for sale. The rental income is business income and the gain on the sale of the plant is business income.
4) Interest. Interest income is business income where the intangible with respect to which the interest was received, is held or was created in the regular course of the person's trade or business operations or where the purpose for acquiring or holding the intangible is related or attendant to such trade or business operations.
A) Example A: A corporation operates a multistate chain of department stores, selling for cash and on credit. Service charges, interest, or time-price differentials and the like are received with respect to installment sales and revolving charge accounts. These amounts are business income.
B) Example B: A corporation conducts a multistate manufacturing business. During the year the taxpayer receives a federal income tax refund and collects a judgment against a debtor of the business. Both the tax refund and the judgment bore interest. The interest income is business income.
C) Example C: A corporation is engaged in a multistate manufacturing and wholesaling business. In connection with that business, the corporation maintains special accounts to cover items such as workers' compensation claims, rain and storm damage, machinery replacement, etc. The moneys in those accounts are invested at interest. Similarly, the corporation temporarily invests funds intended for payment of federal, state and local tax obligations. The interest income is business income.
D) Example D: A corporation is engaged in a multistate money order and traveler's check business. In addition to the fees received in connection with the sale of the money orders and traveler's checks, the corporation earns interest income by the investment of the funds pending their redemption. The interest income is business income.
E) Example E: A corporation is engaged in a multistate manufacturing and selling business. The corporation usually has working capital and extra cash totaling $200,000 that it regularly invests in short-term interest bearing securities. The interest income is business income.
5) Dividends. Dividends are business income where the stock with respect to which the dividends are received, is held or was acquired in the regular course of the person's trade or business operations or where the purpose for acquiring or holding the stock is related or attendant to such trade or business operations.
A) Example A: A corporation operates a multistate chain of stock brokerage houses. During the year the corporation receives dividends on stock it owns. The dividends are business income.
B) Example B: A corporation is engaged in a multistate manufacturing and wholesaling business. In connection with that business, the corporation maintains special accounts to cover items such as workers' compensation claims, etc. A portion of the moneys in those accounts is invested in interest-bearing bonds. The remainder is invested in various common stocks listed on national stock exchanges. Both the interest income and any dividends are business income.
C) Example C: Several unrelated corporations own all of the stock of another corporation whose business operations consist solely of acquiring and processing materials for delivery to the corporate owners of its stock. The corporations acquired the stock in order to obtain a source of supply of materials used in their manufacturing businesses. The dividends are business income.
D) Example D: A corporation is engaged in a multistate heavy construction business. Much of its construction work is performed for agencies of the federal government and various state governments. Under state and federal laws applicable to contracts for these agencies, a contractor must have adequate bonding capacity, as measured by the ratio of its current assets (cash and marketable securities) to current liabilities. In order to maintain an adequate bonding capacity, the corporation holds various stocks and interest-bearing securities. Both the interest income and any dividends received are business income.
E) Example E: A corporation receives dividends from the stock of its subsidiary or affiliate that acts as the marketing agency for products manufactured by the corporation. The dividends are business income.
F) Example F: A corporation is engaged in a multistate glass manufacturing business. It also holds a portfolio of stock and interest-bearing securities, the acquisition and holding of which are unrelated to the corporation's trade or business operations. The dividends and interest income received are nonbusiness income.
6) Patent and copyright royalties. Patent and copyright royalties are business income where the patent or copyright with respect to which the royalties were received, is held or was created in the regular course of the person's trade or business operations or where the purpose for acquiring or holding the patent or copyright is related or attendant to such trade or business operations.
A) Example A: A corporation is engaged in the multistate business of manufacturing and selling industrial chemicals. In connection with that business, the corporation obtained patents on some of its products. The corporation licensed the production of the chemicals in foreign countries in return for which the corporation receives royalties. The royalties received by the taxpayer are business income.
B) Example B: A corporation is engaged in the music publishing business and holds copyrights on numerous songs. The corporation acquired the assets of a smaller publishing company, including music copyrights. These acquired copyrights are thereafter used by the corporation in its business. Any royalties received on these copyrights are business income.
C) Example C: Same as Example B, except that the acquired company also held the patent on a type of phonograph needle. The corporation does not manufacture or sell phonographs or phonograph equipment and the holding of the patent is unrelated to its publishing business operations. Any royalties received on the patent would be nonbusiness income.
d) Proration and recapture of deductions
1) Most of a person's allowable deductions will be attributable only to the business income arising from a particular trade or business or to a particular item of nonbusiness income. In some cases, an allowable deduction may be attributable to the business income of more than one trade or business and/or to several items of nonbusiness income.
2) In such cases, the deduction shall be prorated among the trades or businesses and such items of nonbusiness income in a manner that fairly distributes the deduction among the classes of income to which it is attributable. In filing returns with this State, if a person departs from or modifies the manner of prorating any deduction used in returns for prior years, the taxpayer should disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by a person with all states to which the taxpayer reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the attribution or proration of any deduction, the person shall disclose in its return to this State the nature and extent of the variance.
3) If in prior years income from an asset or business has been classified as business income and in a later year is demonstrated to be non-business income, then all expenses, without limitation, deducted in such later year and in the 2 immediately-preceding taxable years related to that asset or business that generated the non-business income shall be added back and recaptured as business income in the year of the disposition of the asset or business. Such amount shall be apportioned to Illinois using the greater of the apportionment fraction computed for the business under IITA Section 304 for the taxable year or the average of the apportionment fractions computed for the business under IITA Section 304 for the taxable year and for the 2 immediately preceding taxable years (IITA Section 203(e)(3)).
e) Definitions
1) The term "allocation" refers to the assignment of nonbusiness income to a particular state.
2) The term "apportionment" refers to the division of business income between states by the use of a formula containing apportionment factors.
3) The term "business activity" refers to the transactions and activity occurring in the regular course of a particular trade or business.
4) The term "person" under IITA Section 1501(a)(18) shall be construed to mean and include an individual, trust, estate, partnership, association, firm, company, corporation or fiduciary.
5) The term "taxpayer" is defined in IITA Section 1501(a)(24) to mean any person subject to the tax imposed by the Act.
6) For a definition of the term "commercial domicile", see Section 100.3210.
7) For a definition of the term "resident", see Section 100.3020.
8) For a definition of the term "state", see Section 100.3110.
9) For a definition of the term "taxable in another state", see Section 100.3200.
(Source: Amended at 32 Ill. Reg. 6055, effective March 25, 2008)
Section 100.3015 Business Income Election (IITA Section 1501)
a) For each taxable year beginning on or after January 1, 2003, a taxpayer may elect to treat all income other than compensation as business income. This election shall be made in accordance with rules adopted by the Department and, once made, shall be irrevocable. (IITA Section 1501(a)(1))
b) The election under this Section shall be made on the original return filed by the person making the election for the taxable year to which the election applies or on a corrected return filed prior to the due date (including extensions) for the return pursuant to Section 100.9400(f)(3) of this Part. An election made on an original return may also be revoked on a timely-filed corrected return. After the extended due date for filing the return has passed, the election may still be made on an original return, but an election that has been made on the original or corrected return may no longer be revoked.
c) In the case of a partnership, estate, trust or Subchapter S corporation, for purposes of IITA Section 305, 307 or 308, respectively, an election made by the pass-through entity to treat all of its income as business income shall be binding on its partners, beneficiaries and shareholders. An election by a partner, beneficiary or shareholder to treat all income as business income shall cause all nonbusiness income received by that partner, beneficiary or shareholder from the pass-through entity to be treated as business income received directly by the partner, beneficiary or shareholder.
d) In the case of a combined group of corporations filing a combined return under Subpart P of this Part, the election shall be made each year by the designated agent of the group and shall apply to all income of the unitary business group required to be shown on the combined return, including income of members who do not join in the filing of the combined return.
(Source: Added at 30 Ill. Reg. 10473, effective May 23, 2006)
Section 100.3020 Resident (IITA Section 301)
a) General definition. The term "resident" is defined in IITA Section 1501(a)(20) to mean:
1) an individual who is in Illinois for other than a temporary or transitory purpose during the taxable year or who is domiciled in Illinois but is absent from Illinois for a temporary or transitory purpose during the taxable year;
2) the estate of a decedent who, at his or her death, was domiciled in Illinois;
3) a trust created by the will of a decedent who, at his or her death, was domiciled in Illinois; and
4) an irrevocable trust, the grantor of which was domiciled in Illinois at the time the trust became irrevocable. For the purpose of this subsection (a)(4), a trust is considered irrevocable to the extent that the grantor is not treated as the owner of the trust under 26 USC 671 through 678.
b) Individuals. The purpose of the general definition is to include in the category of individuals who are taxable on their entire net income, regardless of whether derived from sources within or without Illinois, and all individuals who are physically present in Illinois enjoying the benefit of its government, except those individuals who are here temporarily, and to exclude from this category all individuals who, although domiciled in Illinois, are outside Illinois for other than temporary and transitory purposes and, hence, do not obtain the benefit of Illinois government. If an individual acquires the status of a resident by virtue of being physically present in Illinois for other than temporary or transitory purposes, he or she remains a resident even though temporarily absent from Illinois. If, however, he or she leaves Illinois for other than temporary or transitory purposes, he or she ceases to be a resident. If an individual is domiciled in Illinois, he or she remains a resident unless he or she is outside Illinois for other than temporary or transitory purposes.
c) Temporary or transitory purposes. Whether or not the purpose for which an individual is in Illinois will be considered temporary or transitory in character will depend upon the facts and circumstances of each particular case. It can be stated generally, however, that if an individual is simply passing through Illinois on his or her way to another state, or is here for a brief rest or vacation or to complete a particular transaction, perform a particular contract, or fulfill a particular engagement that will require his or her presence in Illinois for but a short period, he or she is in Illinois for temporary or transitory purposes and will not be a resident by virtue of his or her presence here. If, however, an individual is in Illinois to improve his or her health and his or her illness is of such a character as to require a relatively long or indefinite period to recuperate, or he or she is here for business purposes that will require a long or indefinite period to accomplish, or is employed in a position that may last permanently or indefinitely, or has retired from business and moved to Illinois with no definite intention of leaving shortly thereafter, he or she is in Illinois for other than temporary or transitory purposes and, accordingly, is a resident taxable upon his or her entire net income even though he or she may also maintain an abode in some other state.
1) EXAMPLE 1. X is domiciled in Fairbanks, Alaska, where he had lived for 50 years and had accumulated a large fortune. For medical reasons, X moves to Illinois where he now spends his entire time, except for yearly summer trips of about three or four months duration to Fairbanks. X maintains an abode in Illinois and still maintains, and occupies on visits there, his old abode in Fairbanks. Notwithstanding his abode in Fairbanks, because his yearly sojourn in Illinois is not temporary or transitory, he is a resident of Illinois and is taxable on his entire net income.
AGENCY NOTE: If, in the foregoing example, the facts are reversed so that Illinois is the state of original domicile and Alaska is the state in which the person is present for the indicated periods and purposes, X is not a resident of Illinois within the meaning of the law, because he is absent from Illinois for other than temporary or transitory purposes.
2) EXAMPLE 2. Until the summer of 1969, Y admitted domicile in Illinois. At that time, however, to avoid the Illinois income tax, Y declared himself to be domiciled in Nevada, where he had a summer home. Y moved his bank accounts to banks in Nevada and each year thereafter spent about three or four months in Nevada. He continued to spend six or seven months of each year at his estate in Illinois, which he continued to maintain, and continued his social club and business connections in Illinois. The months not spent in Nevada or Illinois he spent traveling in other states. Y is a resident of Illinois and is taxable on his entire net income, for his sojourns in Illinois are not for temporary or transitory purposes.
AGENCY NOTE: If, in the foregoing example, the facts are reversed so that Nevada is the state of his original domicile and the state in which the person is present for the indicated periods and purposes, Y is not a resident of Illinois within the meaning of the law because he is absent from Illinois for other than temporary or transitory purposes.
3) EXAMPLE 3. B and C, husband and wife, domiciled in Minnesota where they maintain their family home, come to Illinois each November and stay here until the middle of March. Originally they rented an apartment or house for the duration of their stay here but three years ago they purchased a house here. The house is either rented or put in the charge of a caretaker from March to November. B has retired from active control of his Minnesota business but still keeps office space and nominal authority in it. He belongs to clubs in Minnesota, but to none in Illinois. He has no business interests in Illinois. C has little social life in Illinois, more in Minnesota, and has no relatives in Illinois. Neither B nor C is a resident of Illinois. The connection of each to Minnesota, the state of domicile, in each year is closer than it is to Illinois. Their presence here is for temporary or transitory purposes.
AGENCY NOTE: If, in the foregoing example, the facts are reversed so that Illinois is the state of domicile and B and C are visitors to Minnesota, B and C are residents of Illinois.
d) Domicile. Domicile has been defined as the place where an individual has his or her true, fixed, permanent home and principal establishment, the place to which he or she intends to return whenever absent. It is the place in which an individual has voluntarily fixed the habitation of himself or herself and family, not for a mere special or limited purpose, but with the present intention of making a permanent home, until some unexpected event shall occur to induce adoption of some other permanent home. Another definition of "domicile" consistent with this is the place where an individual has fixed his or her habitation and has a permanent residence without any present intention of permanently moving. An individual can at any one time have but one domicile. If an individual has acquired a domicile at one place, he or she retains that domicile until he or she acquires another elsewhere. Thus, if an individual who has acquired a domicile in California, for example, comes to Illinois for a rest or vacation or on business or for some other purpose, but intends either to return to California or to go elsewhere as soon as his or her purpose in Illinois is achieved, he or she retains domicile in California and does not acquire domicile in Illinois. Likewise, an individual who is domiciled in Illinois and leaves the State retains Illinois domicile as long as he or she has the definite intention of returning to Illinois. On the other hand, an individual domiciled in California who comes to Illinois with the intention of remaining indefinitely and with no fixed intention of returning to California loses his or her California domicile and acquires Illinois domicile the moment he or she enters the State. Similarly, an individual domiciled in Illinois loses Illinois domicile:
1) by locating elsewhere with the intention of establishing the new location as his or her domicile; and
2) by abandoning any intention of returning to Illinois.
e) Minors. The domicile of a minor is ordinarily the same as the domicile of his or her parents or guardians. If the father is deceased, the domicile of a minor is ordinarily the same as the domicile of the mother and vice versa. In either case, if the minor's parents are divorced, the domicile of the minor is the same as the domicile of the parent having custody.
f) Presumption of residence. The following create rebuttable presumptions of residence. These presumptions are not conclusive and may be overcome by clear and convincing evidence to the contrary.
1) An individual receiving a homestead exemption (see 35 ILCS 200/15-175) for Illinois property is presumed to be a resident of Illinois.
2) An individual who is an Illinois resident in one year is presumed to be a resident in the following year if he or she is present in Illinois more days than he or she is present in any other state.
g) Proof of residence or nonresidence
1) The type and amount of proof that will be required in all cases to establish residency or nonresidency or to rebut or overcome a presumption of residence cannot be specified by a general regulation, but will depend largely on the circumstances of each particular case. The taxpayer may submit any relevant evidence to the Department for its consideration. The evidence may include, but is not limited to, affidavits and evidence of: location of spouse and dependents; voter registration; automobile registration or driver's license; filing an income tax return as a resident of another state; home ownership or rental agreements; the permanent or temporary nature of work assignments in a state; location of professional licenses; location of medical professionals, other healthcare providers, accountants and attorneys; club and/or organizational memberships and participation; and telephone and/or other utility usage over a duration of time. In appropriate instances, the Department may request any relevant evidence that may assist it in determining the taxpayer's place of residence.
2) The location of any corporation, foundation, organization or institution that is exempt from taxation under IRC section 503(c)(3) to which the taxpayer makes financial contributions, gifts, bequests, donations or pledges in any amount qualifying for a deduction as an IRC section 170(a) charitable contribution or as an IRC section 2055(a) bequest, legacy, devise or transfer is not evidence used to establish domicile or nondomicile, or residence or nonresidence, in any state.
3) If an individual is presumed under this Section to be a resident for any taxable year, he or she should file a return for that year even though he or she believes he or she was a nonresident who, as such, would not incur an Illinois income tax liability because he or she would have no income allocable or apportionable to Illinois. The return will enable the individual to avoid the possible imposition of penalties for failure to file under IITA Section 1001 should it later be determined that he or she was a resident for the taxable year. The return should be marked as a nonresident return, though Schedule NR is not required. The return should exhibit the computation of net income as though the individual were a resident. The line on the return provided for entering the tax liability should have the following notation: "No liability – nonresident". The return should be accompanied by a signed statement indicating which presumption of residence the individual was subject to and setting forth in detail the reasons why the individual believes he or she was a nonresident for the taxable year. The return should also be accompanied by any evidence, such as certificates or affidavits, that the individual is able to obtain showing that he or she was a nonresident for the taxable year. If the Department is not satisfied that the individual was a nonresident, it will so inform the individual and provide him or her with an opportunity to submit additional information supporting his or her contention. If the individual fails to submit additional information, or if the additional information submitted does not, when considered with the information appended to the return, overcome the presumption that the individual was a resident for the taxable year, the Department will issue a notice of deficiency asserting a liability against the individual on the following basis:
A) that the individual is a resident for the taxable year; and
B) that the individual's net income for the taxable year is:
i) the amount reflected, with appropriate mathematical error adjustments under IITA Section 903(a)(1), on the return filed by the individual under this subsection (g)(3)(B)(i); or
ii) whatever other amount the Department has determined by an examination under IITA Section 904.
4) An individual who, for any taxable year, believes himself or herself to be a nonresident, but who is presumed to be a resident under this Section, may file a return (including a Schedule NR) as a nonresident if, as a nonresident, he or she incurs an Illinois income tax liability due to income allocated or apportioned to Illinois as a nonresident. However, the return should be accompanied by a signed statement indicating which presumption of residence the individual is subject to and setting forth in detail the reasons why the individual believes he or she was a nonresident for the taxable year. The return should also be accompanied by any evidence, such as certificates or affidavits, that the individual is able to obtain showing that he or she was a nonresident for the taxable year. If the Department is not satisfied that the individual was a nonresident, it will so inform the individual and provide him or her with an opportunity to submit additional information supporting his or her contention. If the individual fails to submit additional information, or if the additional information submitted does not, when considered with the information appended to the return, overcome the presumption that the individual was a resident for the taxable year, the Department will issue a notice of deficiency asserting a liability against the individual on the following basis:
A) that the individual was a resident for the taxable year;
B) that the individual's net income for the taxable year is:
i) his or her entire base income, as reflected on the return with appropriate mathematical error adjustments under IITA Section 903(a)(1), less the appropriate standard exemption prescribed by IITA Section 204; or
ii) his or her entire base income, as determined by the Department in an examination under IITA Section 904, less the appropriate standard exemption prescribed by IITA Section 204.
h) Military personnel. Under 50 USC App. 571, members of the U.S. Armed Forces (and commissioned officers of the U.S. Public Health Service) will not cease to be domiciled in Illinois solely by reason of their assignment to duty in other states for long periods. Domiciliaries of other states will not become Illinois residents under the Act solely by reason of their presence in Illinois under military orders.
i) Resident: Legal Definition: Usage. The term "resident" is defined differently for different purposes. For example, an individual may be a "resident" for Illinois income tax purposes but not a "resident" eligible to vote (see IITA Section
15-1501(a)(20) with Sections 3-1 through 3-4 of the Election Code [10 ILCS 5/3-1 through 3-4]). Similarly, a person may be a resident of Illinois for Illinois income tax purposes and also a resident of another state for purposes of that state's income tax law (see IITA Section 15-1501(a)(20) with Ky. Rev. Stat. Ann. Section 141.010(17)).
(Source: Amended at 37 Ill. Reg. 5823, effective April 19, 2013)
SUBPART K: COMPENSATION
Section 100.3100 Compensation (IITA Section 302)
a) General Definition
Compensation is defined in IITA Section 1502(a)(3) to mean wages, salaries, commissions and any other form of remuneration paid to employees for personal services. The term is thus comparable to the term "wages" as used in IRC Section 3401(a), except that the exceptions set forth in the Code section are inapplicable for purposes of Article 3 of the Act. (See Section 100.7000 for definition of compensation subject to withholding.)
b) Employee
Compensation is defined as remuneration for personal services performed by an "employee". If the employer-employee relationship does not exist, remuneration for services performed does not constitute "compensation." The term "employee" includes every individual performing services if the relationship between him or her and the person for whom he or she performs the services is the legal relationship of employer and employee. The term has the same meaning under the Illinois Income Tax Act as under IRC Section 3401(c) and 26 CFR 31.3401(c)-l.
c) Types of Compensation
The name by which remuneration for services is designated is immaterial. Thus, salaries, fees, bonuses, commissions on sales or on insurance premiums, and pensions and retired pay are compensation within the meaning of the statute if paid for services performed by an employee for his or her employer.
d) Past Services
Remuneration for personal services constitutes compensation even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them, so long as the relationship existed when the services were rendered.
e) Examples
The standards set forth in this Section may be illustrated, in part, by the following examples:
1) EXAMPLE 1: A is a salesman for B corporation. B conducts a selling contest among its salesmen, first prize being a two-week vacation in Las Vegas. A is the winner of the contest and is awarded the vacation. The fair market value of the trip constitutes compensation.
2) EXAMPLE 2: C is employed by D corporation during the month of January 1970 and is entitled to receive remuneration of $100 for services performed for D during the month. C leaves the employ of D at the close of business on January 31, 1970. On February 15, 1970 (when C is no longer an employee of D), D pays C the remuneration of $100 for services performed in January. The $100 is compensation.
3) EXAMPLE 3: The facts are the same as in Example 2, except that C is discharged by D at the end of January. In addition to the $100 earned by C for services performed in January, D pays C $50 severance pay. The $50 constitutes compensation.
(Source: Amended at 44 Ill. Reg. 10907, effective June 10, 2020)
Section 100.3110 State (IITA Section 302)
The term "state" when applied to a jurisdiction other than Illinois is defined in IITA Section 1501(a)(22) to mean any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any Territory or Possession of the United States, and any foreign country, or any political subdivision of any of the foregoing.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.3120 Allocation of Compensation Paid to Nonresidents (IITA Section 302)
a) Compensation Paid in This State – General Rule
1) In order for items of compensation paid to an individual who is a nonresident of Illinois at the time of payment to be allocated to Illinois, the compensation must constitute "compensation paid in this State". If the test is met, then all items of the compensation, and all items of deduction directly allocable thereto, are allocated to Illinois under IITA Section 302(a) (except items allocated under IITA Section 301(c)(2), as to which see subsection (d)). Compensation paid to a nonresident, which is allocated to Illinois, enters into the computation of the individual's net income under IITA Section 202 and is generally subject to withholding under IITA Section 701 (see Sections 100.7000, 100.7010 and 100.7020). The tests for determining whether compensation is paid in Illinois appear in IITA Section 304(a)(2)(B) and are substantially the same as those used to define "employment" in the Illinois Unemployment Insurance Act [820 ILCS 405] (and similar unemployment compensation acts of other states). Except as provided in this Section, compensation is paid in Illinois if:
A) The individual's service is localized in Illinois because it is performed entirely within Illinois (IITA Section 304(a)(2)(B)(i));
B) The individual's service is localized in Illinois although it is performed both within and without Illinois, because the service performed without Illinois is incidental to the individual's service performed within Illinois (see IITA Section 304(a)(2)(B)(ii)); or
C) For taxable years ending prior to December 31, 2020, the individual's service is not localized in any state under subsections (a)(1)(A) and (B), but some of the service is performed within Illinois and either:
i) the base of operations, or if there is no base of operations, the place from which the service is directed or controlled is within Illinois; or
ii) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in Illinois. (See IITA Section 304(a)(2)(B)(iii).)
D) The rules in subsections (a)(1)(A) through (C) are to be applied in a manner so that, if they were in effect in other states, an item of compensation would constitute compensation "paid in" only one state. Thus, if an item would, under these rules, constitute compensation paid in a state other than Illinois because the individual's service was localized in that other state under subsection (a)(1)(B), it could not also be compensation paid in Illinois.
E) For taxable years ending on or after December 31, 2020, the individual's service is not localized in any state under subsection (a)(1)(A) or (B), but some of the individual's service is performed within this State and the individual's service is performed within this State for more than 30 working days during the taxable year, the amount of compensation paid in this State shall include the portion of the individual's total compensation for services performed on behalf of his or her employer during the taxable year that the number of working days spent within this State during the taxable year bears to the total number of working days spent both within and without this State during the taxable year. (IITA Section 304(a)(2)(B)(iii)) For purposes of this subsection (a)(1)(E):
i) "Working day" means each day during the taxable year in which the individual performs duties on behalf of his or her employer. All days in which the individual performs no duties on behalf of his or her employer (e.g., weekends, vacation days, sick days, and holidays) are not working days. (IITA Section 304(a)(2)(B)(iii)(a))
ii) A working day is "spent within this State" if:
• the individual performs service on behalf of the employer and a greater amount of time on that day is spent by the individual performing duties on behalf of the employer within this State, without regard to time spent traveling, than is spent performing duties on behalf of the employer without this State; or
• the only service the individual performs on behalf of the employer on that day is traveling to a destination within this State, and the individual arrives on that day. (IITA Section 304(a)(2)(B)(iii)(b))
iii) Working days "spent within this State" do not include any day in which the employee is performing services in this State during a disaster period solely in response to a request made to his or her employer by the government of this State, by any political subdivision of this State, or by a person conducting business in this State to perform disaster or emergency-related services in this State. (IITA Section 304(a)(2)(B)(iii)(c)) For purposes of this subsection (a)(1)(E)(iii):
• "Declared State disaster or emergency" means a disaster or emergency event for which a Governor's proclamation of a state of emergency has been issued or for which a Presidential declaration of a federal major disaster or emergency has been issued.
• "Disaster period" means a period that begins 10 days prior to the date of the Governor's proclamation or the President's declaration (whichever is earlier) and extends for a period of 60 calendar days after the end of the declared disaster or emergency period.
• "Disaster or emergency-related services" means repairing, renovating, installing, building, or rendering services or conducting other business activities that relate to infrastructure that has been damaged, impaired, or destroyed by the declared State disaster or emergency.
• "Infrastructure" means property and equipment owned or used by a public utility, communications network, broadband and internet service provider, cable and video service provider, electric or gas distribution system, or water pipeline that provides service to more than one customer or person, including related support facilities. "Infrastructure" includes, but is not limited to, real and personal property such as buildings, offices, power lines, cable lines, poles, communications lines, pipes, structures, and equipment. (IITA Section 304(a)(2)(B)(iii)(c))
2) Localization Tests
A) If compensation is paid in this State because the service is localized in this State under either of the tests set forth in subsection (a)(1)(A) or (B), the factors in subsections (a)(1)(C) and (D) are not considered. In those cases, the place of the base of operations, the place from which the service is directed or controlled, and the number of working days spent in any state are irrelevant.
B) In determining whether an individual's service performed outside of this State is incidental to the service performed within this State for purposes of the test set forth in subsection (a)(1)(B), the term "incidental" means any service that is necessary to, or supportive of, the primary service performed by the employee or that is temporary or transitory in nature or consists of isolated transactions. The incidental service may or may not be similar to the individual's normal occupation so long as it is performed within the same employer-employee relationship. That is, an individual who normally performs all of his or her service in this State may be sent by the employer to another state to perform service that is totally different in nature from his or her usual work, or he or she may be sent to do similar work. So long as the service is temporary or consists merely of isolated transactions, it will be considered to be incidental to the service performed within this State, and the employee's entire compensation will be subject to withholding.
C) In some cases, it may be difficult to determine whether service performed in another state is incidental to service performed within this State. In those cases, the facts (including any contract of employment) should be carefully considered. In many instances, the contract of employment will provide a definite territorial assignment that will be prima facie evidence that the service is localized within that territory. However, the presence or absence of a contract of employment is but one fact to be considered. In every case, the ultimate determination to be made is whether the individual's service was intended to be, and was in fact, principally performed within this State and whether any service that was performed in another state was of a temporary or transitory nature or arose out of special circumstances at infrequent intervals. The amount of time spent or the amount of service performed outside this State should not be regarded as decisive, in itself, in determining whether that service is incidental to service performed within this State. For example, an individual normally performing service within this State might be sent on a special assignment to another state for a period of months. The service in the other state would nevertheless be incidental to service within this State if that special assignment were an isolated transaction.
D) This subsection (a)(2) may be illustrated by the following examples:
i) EXAMPLE 1: A is a resident of State X and a salesman for the B Corporation, located in State X. A's territory covers the northern part of Illinois. Sporadically, A is requested by B corporation to call on particular customers who are located in State X. The compensation for service that A performs in Illinois and State X is paid in Illinois because the service performed in State X is incidental to the service performed in Illinois, since it consists of isolated transactions.
ii) EXAMPLE 2: The facts are the same as in Example 1 except that A's regular territory covers several counties in Illinois and one or two towns in State X. A goes to the State X towns on a regular basis even though more than 95% of A's time spent and sales made are in Illinois. The compensation for service that A performs in Illinois and State X is not localized in Illinois under the provisions of subsection (a)(1)(B) because the service performed in State X is regular and permanent in nature and is not necessary to or supportive of sales made in Illinois.
iii) EXAMPLE 3: A works for B construction company in Chicago. Occasionally the company obtains a construction job in State X that may last from one to several weeks. A is sent by the company to supervise the construction jobs in State X. The compensation for the service A performs in Illinois and State X is paid in Illinois because the service performed in State X, being temporary in nature, is incidental to the service performed in Illinois.
iv) EXAMPLE 4: A is a resident of Illinois and a buyer for a department store located in State X. Regular buying trips by A to Illinois are incidental to the service performed in State X because they are necessary to and supportive of A's primary duties that are localized in State X and not in Illinois. A's compensation is not paid in Illinois under the provisions of subsection (a)(1)(B).
3) Base of Operations
A) For taxable years ending prior to December 31, 2020, if the localization tests in subsection (a)(1)(A) or (B) are not determinative of the issue of whether compensation is paid in this State and the individual's base of operations is within this State, his or her entire compensation is paid in Illinois. However, if his or her base of operations is outside this State, none of his or her compensation is paid in this State. (See IITA Section 304(a)(2)(B)(iii).)
B) The term "base of operations" refers to the place or fixed center from which the individual works. An individual's base of operations may be his or her business office (which may be maintained in the employee's home), or the contract of employment may specify a place at which the employee is to receive directions and instructions. In the absence of more controlling factors, an individual's base of operations may be the place to which the employee has his or her business mail, supplies, and equipment sent or the place where the employee maintains his or her business records. An employee's base of operations may change during a tax year, but only if there is a change in the employee's circumstances that is expected to be permanent. The base of operations does not change when the employee is temporarily assigned to work at a different location.
C) This subsection (a)(3) may be illustrated by the following examples:
i) EXAMPLE 1: A is a salesman for the B corporation located in Chicago. A's territory includes Illinois, State X and State Y. A uses the corporation office in Chicago as a base of operations. The compensation for service performed by A is paid in Illinois because the service is not localized in any of the three states in which it is performed, but part of the service is performed in Illinois and A's base of operations is in Illinois.
ii) EXAMPLE 2: A is a salesman for the B corporation located in Chicago. A lives in State X and A's territory includes State X and part of Cook County, Illinois. A starts his or her sales calls from and returns to his or her home daily. A keeps a catalogue and copies of correspondence from customers at his or her home, and writes his or her sales reports there. About once a week, A reports to B's sales office in Chicago for consultation with and directions from the sales manager. Communications from customers to A are addressed to the Chicago sales office. A's letters to customers are on letterheads bearing the Chicago sales office address and are sometimes typed by A at home and sometimes dictated by him or her to a stenographer when he or she is in the Chicago sales office. Correspondence to A and A's paychecks are sometimes picked up by A in Chicago and otherwise are forwarded by the sales office to A's home. The duties that A performs at home are sufficient to make his or her home the base of operations. A's compensation is therefore not paid in Illinois because A's base of operations is in State X, and part of A's service is performed in that state.
iii) EXAMPLE 3: A, a resident of Illinois, sells products in Illinois, State X and State Y for B corporation, which is located in State Z. A operates from his or her home, where he or she receives instructions from B corporation, communications from customers, etc. Once a year, A goes to State Z for a 10 day sales meeting. All of A's compensation is paid in Illinois because the service is not localized in any state, but part of the service is performed in Illinois and A's base of operations is A's home in Illinois.
iv) EXAMPLE 4: A works for a company whose home office is in State X. A is a regional director working out of a branch office in Illinois. A works mostly in Illinois but spends considerable time in State X. A's base of operations is the branch office in Illinois. Since A performs some service in Illinois and his base of operations is in Illinois, it is immaterial that A's source of direction and control is in State X. All of A's compensation for service is paid in Illinois.
v) EXAMPLE 5: A, a resident of Illinois, is a salesman for the B corporation, which has its main office in State X. A works out of the main office and A's territory is divided equally between State X and Illinois. A's compensation is not paid in Illinois because A's base of operations is in State X, and part of A's service is performed in that State.
vi) EXAMPLE 6: B, an Indiana resident, is a certified public accountant based in her employer's Chicago office. B is regularly sent to perform auditing services at clients' offices outside Illinois, often for periods of weeks or months. Some of her assignments are recurring, requiring her to perform services at the same client's office for some period or periods every year. B's base of operations is in Illinois, and does not change with any of these temporary assignments.
4) Place of Direction or Control
A) For taxable years ending prior to December 31, 2020, if the localization tests in subsection (a)(1)(A) or (B) are not determinative of the issue of whether compensation is paid in this State and the individual has no base of operations or the individual performs no services in the state in which his or her base of operations is located, the permanent place from which an employee's service is directed or controlled is relevant in determining whether the employee's wages are paid in Illinois. In those cases, if the place from which the individual's service is directed or controlled is within this State, and some of the employee's services are performed within this State, then the employee's entire compensation will be paid in Illinois. (See IITA Section 304(a)(2)(B)(iii).) For example, a salesman's territory may be so indefinite and so widespread that the employee will not retain any fixed business office or address but will receive orders or instructions wherever he or she may happen to be. In that case, the location of the permanent place from which direction and control is exercised must be determined, and the employee's compensation will be paid in Illinois if the place of direction and control is in Illinois and the employee performs some services in Illinois.
B) This subsection (a)(4) may be illustrated by the following examples:
i) EXAMPLE 1: A, a resident of State X, is employed as a salesman by B, a corporation with its main office in State Y. B has a permanent branch office and sales supervisor in Cairo, Illinois. A was hired by the branch office and sells merchandise for B in Illinois and other neighboring states as directed by the branch office in telephone calls, but A has no place that is used as a base of operations. All of the compensation for service performed by A for B is paid in Illinois because A's service is not localized in any state and A has no base of operations, but part of A's service is performed in Illinois and the place from which the service is directed is in Illinois.
ii) EXAMPLE 2: A is a salesman residing in State X, who works for a concern whose factory and selling office is in Chicago, Illinois. A's territory covers five states, including Illinois. A does not report, start from, or return to the Chicago office, and does not work from his or her residence in State X. State X is the territory of another salesman. A does not have a base of operations, and his or her compensation is paid in Illinois since part of A's service is performed in Illinois and the place from which the service is directed is in Illinois.
iii) EXAMPLE 3: A, a contractor whose main office is in Illinois, is regularly engaged in road construction work in Illinois and State X. All operations are under direction of a general superintendent whose permanent office is in Illinois. Work in each state is directly supervised by field supervisors working from temporary field offices located in each of the two states. Each field supervisor has the power to hire and fire personnel; however, all requests for manpower must be cleared through the Illinois office. Employees report for work at the field offices. Time cards are sent weekly to the main office in Illinois where the payrolls are prepared. A is hired by a field supervisor in State X and regularly performs service in both Illinois and State X. In this case, neither the localization nor the base-of-operations test would apply, but A's compensation would be paid in Illinois because part of A's service is performed in Illinois and the place of direction or control is in Illinois because the permanent office from which basic direction and control emanates is the Illinois office.
5) When Residence Is Important
A) For taxable years ending prior to December 31, 2020, residence is a factor in determining whether compensation of an employee is paid in Illinois only when the localization tests in subsection (a)(1)(A) or (B) are not determinative of the issue of whether compensation is paid in this State and the individual has no base of operations or the individual performs no services in the state in which his or her base of operations is located, and the employee performs no service in the state from which his or her service is directed or controlled. In these cases, if the individual is a resident of this State, and some of his or her service is performed within this State, the employee's entire compensation will be paid in this State. (See IITA Section 304(a)(2)(B)(iii).)
EXAMPLE: A is a salesman employed by the B company located in State X. A's services are directed and controlled from the State X office and A has no base of operations. A lives in Illinois but A's territory includes State Y and State Z as well as Illinois. For taxable years ending prior to December 31, 2020, all of A's wages are paid in Illinois because no part of his service is performed in the state (State X) in which the place from which A's services are directed is located, but part of A's service is performed in Illinois and A's residence is in Illinois.
B) For all taxable years, residence is also important in determining the Illinois income tax obligations of certain employees of railroads, motor carriers, merchant marine and air carriers. (See Section 100.2590.)
b) Compensation Paid in This State – Nonresident Members of Professional Athletic Teams
1) Notwithstanding the provisions of subsection (a), compensation of a nonresident individual who is a member of a professional athletic team paid in this State includes the portion of the individual's total compensation for services performed as a member of a professional athletic team during the taxable year which the number of duty days spent within this State performing services for the team in any manner during the taxable year bears to the total number of duty days spent both within and without this State during the taxable year. (IITA Section 304(a)(2)(B)(iv)(a))
2) For purposes of this subsection (b):
A) "Professional athletic team" includes, but is not limited to, any professional baseball, basketball, football, soccer, or hockey team. (IITA Section 304(a)(2)(B)(iv)(c)(1))
B) "Member of a professional athletic team" includes those employees who are active players, players on the disabled list, and any other persons required to travel and who travel with, and perform services on behalf of, a professional athletic team on a regular basis. This includes, but is not limited to, coaches, managers, and trainers. (IITA Section 304(a)(2)(B)(iv)(c)(2))
C) "Duty days" means all days during the taxable year from the beginning of the professional athletic team's official pre-season training period through the last game in which the team competes or is scheduled to compete. Duty days are counted for the year in which they occur, including instances in which a team's official pre-season training period through the last game in which the team competes or is scheduled to compete occurs during more than one tax year. (IITA Section 304(a)(2)(B)(iv)(c)(3))
i) "Duty days" includes days on which a member of a professional athletic team performs service for a team on a date that does not fall within the period from the beginning of the professional athletic team's official pre-season training period through the last game in which the team competes or is scheduled to compete (e.g., participation in instructional leagues, the "All Star Game", or promotional "caravans"). Performing a service for a professional athletic team includes conducting training and rehabilitation activities, when those activities are conducted at team facilities. (IITA Section 304(a)(2)(B)(iv)(c)(3)(A))
ii) "Duty days" includes game days, practice days, days spent at team meetings, promotional caravans, preseason training camps, and days served with the team through all post-season games in which the team competes or is scheduled to compete. (IITA Section 304(a)(2)(B)(iv)(c)(3)(B))
iii) "Duty days" for any person who joins a team during the period from the beginning of the professional athletic team's official pre-season training period through the last game in which the team competes, or is scheduled to compete, begins on the day that person joins the team. Conversely, "duty days" for any person who leaves a team during this period ends on the day that person leaves the team. When a person switches teams during a taxable year, a separate duty-day calculation is made for each period the person was with each team. (IITA Section 304(a)(2)(B)(iv)(c)(3)(C)) For purposes of this provision, "team" means the employer, so that if a single employer operates more than one club, a player who is transferred from one of the employer's clubs to another is not leaving or joining a team.
iv) "Duty days" does not include any day for which a member of a professional athletic team is not compensated and is not performing services for the team in any manner, including days when that member has been suspended without pay and prohibited from performing any services for the team. (IITA Section 304(a)(2)(B)(iv)(c)(3)(D))
v) Days for which a member of a professional athletic team is on the disabled list and does not conduct rehabilitation activities at facilities of the team, and is not otherwise performing services for the team in Illinois, are not duty days spent in this State. All days on the disabled list, however, are considered to be included in total duty days spent both within and outside of this State. (IITA Section 304(a)(2)(B)(iv)(c)(3)(E))
vi) Travel days that do not involve either a game, practice, team meeting, or other similar team event are not considered duty days spent in this State. However, travel days are considered in the total duty days spent both within and outside of this State. (IITA Section 304(a)(2)(B)(iv)(b))
D) Total Compensation
i) "Total compensation for services performed as a member of a professional athletic team" means the total compensation received during the taxable year for services performed:
• from the beginning of the official pre-season training period through the last game in which the team competes or is scheduled to compete during that taxable year (IITA Section 304(a)(2)(B)(iv)(c)(4)(A)); and
• during the taxable year on a date that does not fall within the foregoing period (e.g., participation in instructional leagues, the "All Star Game", or promotional caravans). This compensation includes, but is not limited to, salaries, wages, bonuses, and any other type of compensation paid during the taxable year to a member of a professional athletic team for services performed in that year. (IITA Section 304(a)(2)(B)(iv)(c)(4)(B))
ii) For purposes of this subsection (b)(2)(D), compensation does not include strike benefits, severance pay, termination pay, contract or option year buy-out payments, expansion or relocation payments, or any other payments not related to services performed for the team. (IITA Section 304(a)(2)(B)(iv)(c))
iii) For purposes of this subsection (b)(2)(D), "bonuses" included in "total compensation for services performed as a member of a professional athletic team" subject to allocation under this subsection (b)(2)(D) are: bonuses earned as a result of play (e.g., performance bonuses) during the season, including bonuses paid for championship, playoff or "bowl" games played by a team, or for selection to all-star or other honorary positions; and bonuses paid for signing a contract, unless the payment of the signing bonus is not conditional upon the signee playing any games for the team or performing any subsequent services for the team or even making the team, payable separately from the salary and any other compensation, and nonrefundable. (IITA Section 304(a)(2)(B)(iv)(c))
c) Compensation Paid for Past Service
1) A federal law, P.L. 104-95 (4 USC 114), which applies to amounts received after December 31, 1995, limits the power of states to impose income taxation on certain nonresident pension income. This limitation also impacts income received by a nonresident in the form of distributions from many deferred compensation plans. The allocation of distributions to nonresidents from deferred compensation plans which are not governed by that law and which are potentially income taxable in this State is governed by this subsection (c)(1). For the purpose of determining whether and to what extent compensation paid for past service is "paid in" Illinois and is allocated to Illinois under IITA Section 302(a), that compensation is presumed to have been earned ratably over the employee's last 5 years of service with the employer (or any predecessor or successor of the employer or a parent or subsidiary corporation of the employer), in the absence of clear and convincing evidence that the compensation is properly attributable to a different period of employment or that it was not earned ratably over the appropriate period of employment. Compensation earned in each past year will be deemed compensation paid in Illinois if the individual's service in that year met the tests set forth in subsection (a) applicable to that year. Compensation paid for past service includes amounts paid under deferred compensation agreements where the amount of compensation is unrelated to the amount of service being currently rendered. Amounts paid to nonresidents under deferred compensation agreements are allocated to Illinois under IITA Section 302(a) in accordance with this subsection (c)(1) notwithstanding the fact that amounts paid to nonresidents are exempted from withholding under Section 100.7010(g).
2) The standards detailed in this subsection (c)(1) may be illustrated by the following examples:
A) EXAMPLE 1: A is a union member employed by B corporation as a factory worker. During the years 1965-1968, A was employed in B's factory in Illinois; in 1969, A worked in B's factory in State X. In 1970, as a result of union labor contract negotiations, A received a lump-sum payment of $500 in lieu of a retroactive wage increase. A is at all times a resident of State X. Unless A establishes, by clear and convincing evidence, facts to support a different result, $100 is deemed to have been earned in each of the 5 years 1965-1969. Further, $400 is deemed to have been earned by service localized in Illinois and $100 by service localized in State X (see subsection (a)). Therefore, $400 is allocable to Illinois under IITA Section 302(a).
B) EXAMPLE 2: The facts are the same as in Example 1, except that A is able to establish that the $500 constituted a wage increase retroactive to July 1, 1969. In this case, no part of the $500 is allocable to Illinois, since it was earned by service in 1969 localized in State X.
C) EXAMPLE 3: C is a corporate executive. On January 1, 1965, C entered into an agreement with D corporation under which he was to be employed by D in an executive capacity for a period of 5 years. Under the contract C is entitled to a stated annual salary and to additional compensation of $10,000 for each year, the additional compensation to be credited to a bookkeeping reserve account and deferred, accumulated and paid in annual installments of $5,000 on C's retirement beginning January 1, 1970. In the event of C's death prior to exhaustion of the account, the balance is to be paid to C's personal representative. C is required to render consultative services to D when called upon after December 31, 1969. During 1970, C is paid $5,000 while a resident of Florida. The $5,000 is deemed to have been earned at the rate of $1,000 in each of the years 1965-1969, since the amount paid is unrelated to C's current consultative services. Whether the $1,000 earned in each year is allocable to Illinois under IITA Section 302(a) must be determined by applying the tests set forth in subsection (a) to that year.
d) Exceptions to General Allocation Rules
1) While "compensation" may include items of income taken into account by a nonresident employee under the provisions of IRC sections 401 through 425, such as, for example, amounts received by a beneficiary of an employees' trust (taxable to the employee under IRC section 402, whether the trust is exempt or non-exempt from federal income tax), or income resulting from a disqualifying disposition of stock acquired pursuant to the exercise of a qualified stock option (taxable to the employee under IRC section 421(b)), under the express provision of IITA Section 301(c)(2)(A), that compensation is not allocated to Illinois. Consequently, a nonresident claiming the compensation that would otherwise constitute compensation paid in Illinois is not allocated to Illinois under IITA Section 301(c)(2)(A) must establish that the compensation was properly taken into account by the individual under the provisions of IRC sections 401 through 425.
2) Reciprocal Exemptions
In any case in which the Director has entered into an agreement with the taxing authorities of another state which imposes a tax on or measured by income to provide the compensation paid in that state to residents of Illinois is exempt from that state's tax, compensation paid in Illinois to residents of that state will not be allocated to Illinois.
3) Employees Engaged in Interstate Transportation. Federal law affects the authority of the State of Illinois to subject certain employees of railroads, motor carriers, merchant mariners, and air carriers to Illinois income taxation, even though in the absence of specific federal provisions those employees would be subject to Illinois taxation by virtue of IITA Section 302(a). (See Section 100.2590.) Compensation that Illinois may not tax under those provisions is not "paid in this State" under this Section.
4) Military Servicemembers and Spouses of Servicemembers. Pursuant to 50 USC 4001, compensation for military service paid to a nonresident servicemember and compensation paid to a servicemember's spouse, if the spouse is not a resident of Illinois and is in Illinois solely to be with the servicemember serving in compliance with military orders, do not constitute "compensation paid in" Illinois even though it meets the tests set forth in this subsection (d).
(Source: Amended at 44 Ill. Reg. 10907, effective June 10, 2020)
SUBPART L: NON-BUSINESS INCOME OF PERSONS OTHER THAN RESIDENTS
Section 100.3200 Taxability in Other State (IITA Section 303)
a) General definition
1) For purposes of allocation of nonbusiness income and for purposes of the sales factor used in apportioning business income, a taxpayer is taxable in another state if:
A) in that state he or she is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax [35 ILCS 5/303(f)(1)]; or
B) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not subject the taxpayer to such a tax [35 ILCS 5/303(f)(2)].
2) A taxpayer is subject to one of the specified taxes in subsection (a)(1)(A) in a particular state only if the taxpayer is subject to the tax by reason of income-producing activities in that state. For example, a corporation that pays a minimum franchise tax in order to qualify for the privilege of doing business in a state is not subject to tax by that state within the meaning of subsection (a)(1)(A) if the amount of that minimum tax bears no relation to the corporation's activities within that state. Further, a taxpayer claiming to be taxable in another state under the test set forth in subsection (a)(1)(A) must establish not only that under the laws of that state the taxpayer is subject to one of the specified taxes, but that the taxpayer, in fact, pays the tax. If a taxpayer is subject to one of the taxes specified in subsection (a)(1)(A) but does not, in fact, pay the tax, the taxpayer may not claim to be taxable in the state imposing the tax under the test set forth in subsection (a)(1)(A) or (a)(1)(B). (See Dover Corp. v. Dept. of Revenue, 271 Ill. App. 3d 700 (1995).) On the other hand, if a taxpayer is not subject in a given state to any of the taxes specified in subsection (a)(1)(A) but the taxpayer establishes that the taxpayer's activities in that state are such as to give the state jurisdiction to subject the taxpayer to a net income tax, then, under the test set forth in this subsection (a)(2), the taxpayer is taxable in that state, notwithstanding the fact that that state has not enacted legislation subjecting the taxpayer to the tax. For purposes of this Section:
A) A net income tax is a tax for which an individual may claim a deduction under 26 U.S.C. 164(a)(3) or for which a foreign tax credit may be claimed under 26 U.S.C. 901.
B) In the case of any state other than a foreign country or political subdivision of a foreign country, the determination of whether a state has jurisdiction to subject the taxpayer to a net income tax will be determined under the Constitution, statutes and treaties of the United States. Such a state does not have jurisdiction to subject the taxpayer to a net income tax if it is prohibited from imposing that tax by reason of the provisions of Public Law 86-272 (15 U.S.C. Sections 381-385). See 100.9720 of this Part for guidance on nexus standards under the Constitution and statutes of the United States.
C) In the case of any foreign country or political subdivision of a foreign country, the determination of whether a state has jurisdiction to subject the taxpayer to a net income tax will be determined as if the foreign country or political subdivision were a state of the United States or a political subdivision of a U.S. state. For taxable years ending before December 31, 2022, a person who is not required to pay net income tax by a foreign country or political subdivision as the result of a treaty provision exempting certain persons, business activities or sources of income from tax is not subject to net income tax in that jurisdiction. For taxable years ending on or after December 31, 2022, if jurisdiction is otherwise present, due to income-producing activities conducted by the taxpayer, that foreign country or political subdivision is not considered as being without jurisdiction by reason of the provisions of a treaty between that foreign country or political subdivision and the United States.
D) A person is not subject to tax in another state or in a foreign country under subsection (a)(1)(B) if that state or country imposes a tax on net income, unless the taxpayer can show a specific provision of that state's or country's constitution, statutes or regulations, or a holding of that state's or country's courts or taxing authorities, that exempts the person from taxation even though that person could be subject to a net income tax under the Constitution and statutes of the United States.
b) Examples. Section 100.3200 of this Part may be illustrated by the following examples:
1) EXAMPLE 1. A corporation, although subject to the provisions of the net income tax statute imposed by X state, has never filed income tax returns in that jurisdiction and has never paid income tax to X. For purposes of allocation and apportionment of A's income, A is not taxable in X state because it does not meet the test specified in either subsection (a)(1)(A) or (1)(B).
2) EXAMPLE 2. B corporation, an Illinois corporation, is actively engaged in manufacturing farm equipment in Y foreign country. Y does not impose a franchise tax measured by net income or a corporate stock tax. It does impose a franchise tax for the privilege of doing business, but B corporation is not subject to that tax because it applies only to corporations incorporated under Y's laws. Y also imposes a net income tax upon foreign corporations doing business within its boundaries, but B is not subject to that tax because the income tax statute grants tax exemption to corporations manufacturing farm equipment. For purposes of allocation and apportionment of B's income, B is taxable in Y country. B does not meet the test specified in subsection (a)(1)(A), but does meet the test specified in subsection (a)(1)(B), since Y has jurisdiction to impose a net income tax on B.
EXAMPLE 3. C corporation sells large mining equipment to customers in foreign country W in April 2022. The equipment is disassembled before shipping, and employees of C travel to W to re-assemble the equipment. C's activities in W thus exceed the protections of Public Law 86-272. However, due to a bilateral treaty between W and the United States, W will impose a net income tax only upon taxpayers maintaining a permanent establishment in W. C's activities in W do not constitute a permanent establishment. C meets the test specified in subsection (a)(1)(B) because W has jurisdiction to impose a net income tax on C, irrespective of the treaty provision, for tax years ending on or after December 31, 2022.
(Source: Amended at 46 Ill. Reg. 15317, effective August 24, 2022)
Section 100.3210 Commercial Domicile (IITA Section 303)
a) General definition. The term "commercial domicile" is defined in IITA Section 1501(a)(2) to mean the principal place from which the trade or business of the taxpayer is directed or managed. In general, this is the place at which the offices of the principal executives are located. Where executive authority is scattered, the place of daily operational decision making controls. Such determinations must be made on the basis of all the facts and circumstances.
b) Example. Section 100.3210 of this Part may be illustrated by the following example: Company A has a board of directors which meets quarterly, each meeting being held at a different plant in a different state. A's chairman is designated as its chief executive officer and all top policy decisions are made by him. A's president makes the day-to-day decisions involved in management and it is to him that the manufacturing and sales vice presidents report. He reports to the chairman. A's treasurer is the company's top financial officer, reporting directly to the chairman, and being reported to by financial vice presidents and the controller. A's chairman operates largely out of his home in Wisconsin, communicating with other executives by telephone and periodic visits to their offices. A's president has his office at the company office in Chicago. The manufacturing and sales vice presidents also have offices at the company office in Illinois, as do the sales manager and the controller. A's treasurer and financial vice-president have their offices at the company office in New York City. The company's attorneys and accountants are located in Chicago; its investment banker in New York City. On the basis of the foregoing facts, A's commercial domicile would be Illinois, because daily operational decision making occurs principally within Illinois.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.3220 Allocation of Certain Items of Nonbusiness Income by Persons Other Than Residents (IITA Section 303)
a) In General. IITA Section 303 provides rules for the allocation by any person other than a resident of Illinois of any item of capital gain or loss, and any item of income from rents or royalties from real or tangible personal property, interest, dividends, and patent or copyright royalties, together with any item of deduction directly allocable thereto, to the extent the item constitutes nonbusiness income. For the tests as to whether any item constitutes business or nonbusiness income, see Section 100.3010.
b) Capital Gains and Losses
1) Real Property. Capital gains and losses from sales or exchanges of real property are allocated to Illinois if the property is located in Illinois. (IITA Section 303(b)(1)) Economic interests in minerals in place, such as oil or gas, are real property under IITA Section 303. Examples of these interests are royalties, overriding royalties, participating interests, production payments and working interests.
2) Tangible Personal Property. Capital gains and losses from sales or exchanges of tangible personal property are allocated to Illinois, if at the time of the sale or exchange:
A) the property has its situs in Illinois; or
B) the taxpayer has its commercial domicile in Illinois and is not taxable in the state in which the property has its situs. (IITA Section 303(b)(2)) For the tests of taxability in another state and commercial domicile, see Sections 100.3200 and 100.3210.
3) Intangible Personal Property. Capital gains and losses from sales or exchanges of intangible personal property are allocated to Illinois if the taxpayer has its commercial domicile in Illinois at the time of the sale or exchange. (IITA Section 303(b)(3)) For the tests of commercial domicile, see Section 100.3210.
c) Rents and Royalties
1) Real Property. Rents and royalties from real property are allocated to Illinois if the property is located in Illinois. (IITA Section 303(c)(1)) Economic interests in minerals in place, such as oil or gas, are real property under IITA Section 303. Examples of these interests are royalties, overriding royalties, participating interests, production payments and working interests.
2) Tangible Personal Property. Rents and royalties from tangible personal property are allocated to Illinois:
A) if and to the extent that the property is utilized in Illinois; or
B) in their entirety if, at the time rents or royalties are paid or accrued, the taxpayer has its commercial domicile in Illinois and was not organized under the laws of, or is not taxable with respect to the rents or royalties in, the state in which the property is utilized. (IITA Section 303(c)(2)) For the tests of taxability in another state and commercial domicile, see Sections 100.3200 and 100.3210. The extent of utilization of tangible personal property in a state is determined by multiplying the rents or royalties derived from the property by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property is located at the time the rental or royalty payor obtains possession.
3) Examples. Section 100.3220(c) may be illustrated by the following examples:
A) EXAMPLE A. A is a resident of Missouri. A purchases an interest in oil royalty under an oil and gas lease in Illinois. During 1970, A receives $2,000 in royalty payments. Under Section 100.3010(c)(3), the royalty income is presumed to be nonbusiness income. As such it is allocated to Illinois, being derived from real property located in Illinois.
B) EXAMPLE B. B is a resident of Iowa, with a summer home in Illinois. B owns a sailboat that he keeps in Iowa during the winter months and tows to Illinois by trailer for use in the summer. During 1970, B is unable to visit his summer home, and rents his sailboat for the months of July through September to C, the owner of the adjoining property in Illinois. Under Section 100.3010(c)(3), the rent is presumed to be nonbusiness income. C takes the boat from Iowa to Illinois and returns it to B in Iowa on October 1, 1970. Although the boat is physically located in Iowa during the months of January through June and October through December, the rental period is only the months of July through September. During the rental period, the boat is located in Illinois. Hence, it is utilized in Illinois and, accordingly, the rental income is allocated to Illinois.
C) EXAMPLE C. The facts are the same as in Example B, except that B rents the boat through a want ad and does not know C, nor where he uses the boat during the months of July through September. In this case, since C takes possession of the boat in Iowa, it is utilized in Iowa and, accordingly, the rental income is not allocated to Illinois.
d) Patent and Copyright Royalties
1) Allocation. Patent and copyright royalties are allocated to Illinois:
A) if and to the extent that the patent or copyright is utilized by the payor of the royalties in Illinois; or
B) if and to the extent that the patent or copyright is utilized by the payor of the royalties in a state in which the taxpayer is not taxable with respect to the royalties and, at the time the royalties are paid or accrued, the taxpayer has its commercial domicile in Illinois. (IITA Section 303(d)(1)) For the tests of taxability in another state and commercial domicile, see Sections 100.3200 and 100.3210.
2) Utilization
A) Patents. A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures of the royalty payor do not reflect states of utilization, the patent is utilized in Illinois if the taxpayer has its commercial domicile in Illinois. (IITA Section 303(d)(2)(A))
B) Copyrights. A copyright is utilized in a state to the extent that printing or other publication originates in that state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures of the royalty payor do not reflect states of utilization, the copyright is utilized in Illinois if the taxpayer has its commercial domicile in Illinois. (IITA Section 303(d)(2)(B))
3) Example. A, a resident of New York, is not in the business of being an inventor, but owns a patent on a single invention, which he licenses to a manufacturer of automatic garage door openers. Royalties are a percentage of the manufacturer's sales. The manufacturer has plants situated in Missouri, Illinois and Indiana. Under Section 100.3050(c)(6), the royalty income is presumed to be nonbusiness income. If A's royalties can be allocated to Missouri, Illinois and Indiana on the basis of sales from the manufacturer's plants in each of those states, those royalties attributable to sales from the Illinois plant are allocated to Illinois. If, however, the manufacturer's accounting procedures do not reflect sales from the specific plants, but royalties are paid on the basis of total sales not broken down by plant, then, since A is not a resident of Illinois, the patent is not utilized in Illinois and none of the royalties are allocated to Illinois.
e) Taxability in another state. For the test of taxability in another state, see Section 100.3200.
f) Interest and dividends. For allocation of interest and dividends, see Section 100.3300(b)(2).
g) Illinois Lottery Prizes. Prizes awarded under the Illinois Lottery Law [20 ILCS 1605] are allocable to this State. Payments received in taxable years ending on or after December 31, 2013, from the assignment of a prize under Section 13.1 of the Illinois Lottery Law, are allocable to this State. (IITA Section 303(e))
h) Wagering and Gambling Winnings. Payments, received in taxable years ending on or after December 31, 2019, of winnings from pari-mutuel wagering conducted at a wagering facility licensed under the Illinois Horse Racing Act of 1975 [230 ILCS 5] and from gambling games conducted on a riverboat or in a casino or organization gaming facility licensed under the Illinois Gambling Act [230 ILCS 10] are allocable to this State. (IITA Section 303(e-1))
i) Sports Wagering and Winnings. Payments received in taxable years ending on or after December 31, 2021 of winnings from sports wagering conducted in accordance with the Sports Wagering Act [230 ILCS 45] are allocable to this State. (IITA Section 303(e-2))
j) Unemployment Compensation. Unemployment compensation paid by this State is allocated to this State. (See IITA Section 303(e-5))
(Source: Amended at 47 Ill. Reg. 13669, effective September 11, 2023)
SUBPART M: BUSINESS INCOME OF PERSONS OTHER THAN RESIDENTS
Section 100.3300 Allocation and Apportionment of Base Income (IITA Section 304)
a) Residents. All items of income or deduction which are taken into account in the computation of base income for the taxable year by a resident of Illinois are allocated to Illinois under IITA Section 301(a) and enter into the computation of such person's net income under IITA Section 202. For the definition of a resident see IITA Section 1501(a)(20) and Section 100.3020 of this Part.
b) Other persons
1) In general. In order to compute net income under IITA Section 202 of persons other than residents of Illinois, it is necessary to determine that portion of each item of income and deduction taken into account in the computation of base income for the taxable year which is allocable to Illinois. In general, the allocation of items of compensation and of items of deduction directly allocable thereto is governed by IITA Section 302 (see Section 100.3120 of this Part). The allocation of certain specified items of income, to the extent such items constitute nonbusiness income, together with items of deduction directly allocable thereto, is governed by IITA Section 303 (see Section 100.3220 of this Part). The allocation and apportionment of business income is governed by IITA Section 304 (see Sections 100.3310, 100.3350, 100.3360 and 100.3370 of this Part.) An item of income or deduction specifically allocated or apportioned pursuant to one of the foregoing sections is allocated to Illinois and enters into the computation of net income of a person other than a resident only to the extent provided by such allocation or apportionment section. All other items of income and deductions are allocated under IITA Section 301(b)(2).
2) Unspecified items. An item of income or deduction which is taken into account in the computation of base income for the taxable year by a person other than a resident of Illinois, and which is not otherwise specifically allocated or apportioned, in the case of an individual, trust or estate, is not allocated to Illinois. In the case of a corporation, such items are allocated to Illinois if the corporation has its commercial domicile in Illinois at the time such item is paid, incurred or accrued. For the definition of commercial domicile, see IITA Section 1501(a)(2) and Section 100.3210 of this Part. Examples of items of income which (to the extent such items constitute nonbusiness income) are not otherwise specifically allocated or apportioned are interest, dividends, items of income taken into account under the provisions of 26 USC 401 through 425, benefit payments received by a beneficiary of a supplemental unemployment benefit trust which is referred to in 26 USC 501(c)(17) and royalties from intangible personal property (other than patent and copyright royalties).
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.3310 Business Income of Persons Other Than Residents (IITA Section 304) – In General
The business income of a person other than a resident is allocated to Illinois if such person's business income is derived solely from Illinois. Note that any reference to person in this section shall refer to a person other than a resident. Every person who derives business income from Illinois and one or more other states must apportion such business income between Illinois and such other state or states in accordance with the provisions of IITA Section 304. Special apportionment rules are provided for the business income of insurance companies, financial organizations, and persons furnishing transportation services, and for alternative methods of apportionment (and allocation) where the specific statutory provisions do not fairly represent the extent of a person's business activity in Illinois. See IITA Section 304(b),(c),(d) and (e) of the Act.
(Source: Section repealed, new Section adopted at 6 Ill. Reg. 579, effective December 29, 1981; amended at 8 Ill. Reg. 6184, effective May 4, 1984)
Section 100.3320 Business Income of Persons Other Than Residents(IITA Section 304) -- Apportionment (Repealed)
(Source: Amended at 26 Ill. Reg. 13237, effective August 23, 2002)
Section 100.3330 Business Income of Persons Other Than Residents (IITA Section 304 – Allocation
Any person subject to the taxing jurisdiction of this state shall allocate all of its nonbusiness income within or without this state in accordance with IITA Section 303 and 86 Ill. Adm. Code 100.3300.
(Source: Section repealed, new Section adopted at 6 Ill. Reg. 579, effective December 29, 1981; amended at 8 Ill. Reg. 6184, effective May 4, 1984)
Section 100.3340 Business Income of Persons Other Than Residents (IITA Section 304)
In filing returns with this state, if any person departs from or modifies the manner in which income has been classified as business income or nonbusiness income in returns for prior years, such person shall disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by a person for all states to which such person reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the classification of income as business or nonbusiness income, the person shall disclose in its return to this state the nature and extent of the variance.
(Source: Section repealed, new Section adopted at 6 Ill. Reg. 579, effective December 29, 1981; amended at 8 Ill. Reg. 6184, effective May 4, 1984)
Section 100.3350 Property Factor (IITA Section 304)
a) In general. The property factor of the apportionment formula for each trade or business of a person shall include all real and tangible personal property owned or rented by such person and used during the tax period in the regular course of such trade or business. The term "real and tangible personal property" includes land, building, machinery, stocks of goods, equipment, and other real and tangible personal property but does not include coin or currency. Property used in connection with the production of nonbusiness income shall be excluded from the property factor. Property used both in the regular course of a person's trade or business and in the production of nonbusiness income shall be included in the factor only to the extent the property is used in the regular course of the person's trade or business. The method of determining that portion of the value to be included in the factor will depend on the facts of each case. The property factor shall include the average value of property includable in the factor. See subsection (g), below.
b) Property used for the production of business income. Property shall be included in the property factor if it is actually used or is available for or capable of being used during the tax period in the regular course of the trade or business of the person. Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor. For example, a plant temporarily idle or raw material reserves not currently being processed are includable in the factor. Property or equipment under construction during the tax period (except inventoriable goods in process), shall be excluded from the factor until such property is actually used in the regular course of the trade or business of the person. If the property is partially used in the regular course of the trade or business of the person while under construction, the value of the property to the extent used shall be included in the property factor. Property used in the regular course of the trade or business of the person shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its conversion to the production of nonbusiness income, its sale, or the lapse of an extended period of time (normally five years) during which the property is held for sale.
1) Example 1: Corporation A closed its manufacturing plant in State X and held such property for sale. The property remained vacant until its sale one year later. The value of the manufacturing plant is included in the property factor until the plant is sold.
2) Example 2: Same as above except that the property was rented until the plant was sold. The plant is included in the property factor until the plant is sold.
3) Example 3: Corporation A operates a chain of retail grocery stores. The corporation closed Store A, which was then remodeled into three small retail stores, such as a dress shop, dry cleaning, and barber shop, which were leased to unrelated parties. The property is removed from the property factor on the date the remodeling of Store A commenced.
c) Consistency in reporting. In filing returns with this State, if a person departs from or modifies the manner of valuing property, or of excluding or including property in the property factor used in returns for prior years, the person shall disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by the person with all states to which the person reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the valuation of property and in the exclusion or inclusion of property in the property factor, the person shall disclose in its return to this State the nature and extent of the variance.
d) Numerator. The numerator of the property factor shall include the average value of the real and tangible personal property owned or rented by the person and used in this State during the tax period in the regular course of the trade or business of the person. Property in transit between locations of the person to which it belongs shall be considered to be at the destination for purposes of the property factor. Property in transit between a buyer and seller which is included by a person in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination. The value of mobile or movable property such as construction equipment, trucks or leased electronic equipment which are located within and without this State during the tax period, shall be determined for purposes of the numerator of the factor on the basis of total time within the State during the tax period. An automobile assigned to a traveling employee shall be included in the numerator of the factor of the state to which the employee's compensation is assigned under the payroll factor or in the numerator of the state in which the automobile is licensed.
e) Valuation of owned property. Property owned by the person shall be at its original cost. As a general rule "original cost" is the basis of property for federal income tax purposes at the time of acquisition and will not reflect any federal adjustments thereafter for deductions for depreciation, depletion, amortization and the like.
1) In addition, however, the valuation will include the original cost, at acquisition, of any capital improvement as well as partial dispositions of any portion by reason of sale, exchange, abandonment, etc.
2) However, capitalized intangible drilling and development costs shall be included in the property factor whether or not they have been expensed for either federal or state tax purposes. Intangible drilling and development costs include such elements as wages, fuel, repairs, hauling, draining, roadbuilding, surveying, geological works, construction of derricks, tanks, pipelines, and other physical structures necessary for the drilling of wells and their preparation for the production of oil and gas, and supplies incident to and necessary for the drilling of wells and clearing of ground.
3) Example 1: Corporation W acquired a factory building in this State at a cost of $500,000 and 18 months later expended $100,000 for major remodeling of the building. The corporation files its return for the current taxable year on the calendar-year basis. Depreciation deduction in the amount of $22,000 was claimed on the building for its return for the current taxable year. The value of the building includable in the numerator and denominator of the property factor is $600,000 as the depreciation deduction is not taken into account in determining the value of the building for purposes of the factor.
4) Example 2: During the current taxable year, X Corporation merges into Y Corporation in a tax-free reorganization under the Internal Revenue Code. At the time of the merger, X Corporation owns a factory which X built five years earlier at a cost of $1,000,000. X has been depreciating the factory at the rate of two percent per year, and its basis in X's hands at the time of the merger is $900,000. Since the property is acquired by Y in a transaction in which, under the Internal Revenue Code, its basis in Y's hands is the same as its basis in X's, Y includes the property in Y's property factor at X's original cost, without adjustment for depreciation, i.e., $1,000,000.
5) Example 3: Corporation Y acquires the assets of Corporation X in a liquidation by which Y is entitled to use its stock cost as the basis of the X assets under 26 U.S.C. Section 334(b)(2) (i.e. stock possessing 80 percent control is purchased and liquidated within two years). Under these circumstances, Y's cost of the assets is the purchase price of the X stock, prorated over the X assets.
A) If original cost of property is unascertainable, the property is included in the factor at its fair market value as of the date of acquisition by the person.
B) Inventory or stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes.
C) Property acquired by gift or inheritance shall be included in the factor at its basis for determining depreciation for federal income tax purposes.
f) Valuation of rented property.
1) Property rented by the person is valued at eight times the net annual rental rate. The net annual rental rate for any item of rented property is the annual rental rate paid by the person for such property, less the aggregate annual subrental rates paid by subtenants of the person. (See Section 100.3380(a) for special rules where the use of such net annual rental rate produces a negative or clearly inaccurate value or where property is used by the person at no charge or rented at a nominal rental rate.) Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the person when it is producing such income. Accordingly there is no reduction in its value.
A) Example A: Corporation A receives subrents from a bakery concession in a food market operated by it. Since the subrents are business income they are not deducted from the rent paid by Corporation A for the food market.
B) Example B: Corporation B rents a 5-story office building primarily for use in its multistate business, uses three floors for its offices and subleases two floors to various other businesses and persons such as professional people, shops and the like. The rental of the two floors is attendant to the operation of the corporation's trade or business. Since the subrents are business income they are not deducted from the rent paid by the corporation.
C) Example C: Corporation C rents a 20-story office building and uses the lower two stories for its general corporation headquarters. The remaining 18 floors are subleased to others. The rental of the eighteen floors is not attendant to but rather is separate from the operation of the corporation's trade or business. Since the subrents are nonbusiness income they are to be deducted from the rent paid by the corporation.
2) "Annual rental rate" is the amount paid as rental for property for a 12-month period (i.e., the amount of the annual rent). Where property is rented for less than a 12-month period, the rent paid for the actual period of rental shall constitute the "annual rental rate" for the tax period. However, where a corporation has rented property for a term of 12 or more months and the current tax period covers a period of less than 12 months (due, for example, to a reorganization or change of accounting period), the rent paid for the short tax period shall be annualized. If the rental term is for less than 12 months, the rent shall not be annualized beyond its term. Rent shall not be annualized because of the uncertain duration when the rental term is on a month to month basis.
A) Example A: Corporation A which ordinarily files its returns based on a calendar year is merged into Corporation B on April 30. The net rent paid under a lease with 5 years remaining is $2,500 a month. The rent for the tax period January 1 to April 30 is $10,000. After the rent is annualized the net rent is $30,000 ($2,500 X 12).
B) Example B: Same facts as in Example A except that the lease would have terminated August 31. In this case the annualized net rent is $20,000 ($2,500 X 8).
3) "Annual rent" is the actual sum of money or other consideration payable, directly or indirectly, by the person or for its benefit for the use of the property and includes:
A) Any amount payable for the use of real or tangible personal property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.
Example: A corporation pursuant to the terms of a lease, pays a lessor $1,000 per month as a base rental and at the end of the year pays the lessor one percent of its gross sales of $400,000. The annual rent is $16,000 ($12,000 plus one percent of $400,000 or $4,000).
B) Any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are required to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities, janitor services, etc. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and the other items.
i) Example i: A corporation, pursuant to the terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent is $15,000.
ii) Example ii: A corporation stores part of its inventory in a public warehouse. The total charge for the year was $1,000 of which $700 was for the use of storage space and $300 for inventory insurance, handling and shipping charges, and C.O.D. collections. The annual rent is $700.
C) "Annual rent" includes royalties based on extraction of natural resources, whether represented by delivery or purchase. For this purpose, a royalty includes any consideration conveyed or credited to a holder of an interest in property that constitutes a sharing of current or future production of natural resources from such property, irrespective of the method of payment or how such consideration may be characterized, whether as a royalty, advance royalty, rental or otherwise. "Annual rent" does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles, etc.
4) Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the person regardless of whether the person is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor.
g) Averaging property values
1) As a general rule the average value of property owned by the person shall be determined by averaging the values at the beginning and ending of the tax period. However, the Director may require or allow averaging by monthly values if such method of averaging is required to properly reflect the average value of the person's property for the tax period. Averaging by monthly values will generally be applied if substantial fluctuations in the values of the property exist during the tax period or where property is acquired after the beginning of the tax period or disposed of before the end of the tax period.
2) Example: The monthly value of the person's property was as follows:
|
January |
$ 2,000 |
July |
$ 15,000 |
|
February |
2,000 |
August |
17,000 |
|
March |
3,000 |
September |
23,000 |
|
April |
3,500 |
October |
25,000 |
|
May |
4,500 |
November |
13,000 |
|
June |
10,000 |
December |
2,000 |
|
|
|
TOTAL |
$120,000 |
A) The average value of the person's property includable in the property factor for the taxable year is determined as follows: $120,000 divided by 12 = $10,000
B) Averaging with respect to rented property is achieved automatically by the method of determining the net annual rental rate of such property as set forth in subsection(e) above.
(Source: Amended at 26 Ill. Reg. 13237, effective August 23, 2002)
Section 100.3360 Payroll Factor (IITA Section 304)
a) In general
1) The payroll factor of the apportionment formula for each trade or business of an employer shall include the total amount paid by the employer in the regular course of its trade or business for compensation during the tax period.
2) The total amount "paid" to employees is determined upon the basis of the employer's accounting method. If the employer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid. The compensation of any employee on account of activities which are connected with the production of nonbusiness income shall be excluded from the factor.
A) Example A: A corporation uses some of its employees in the construction of a storage building which, upon completion, is used in the regular course of the corporation's trade or business. The wages paid to those employees are treated as a capital expenditure by the corporation. The amount of such wages is included in the payroll factor.
B) Example B: A corporation owns various securities which it holds as an investment separate and apart from its trade or business. The management of the corporation's investment portfolio is the only duty of Mr. X, an employee. The salary paid to Mr. X is excluded from the payroll factor.
3) The term "compensation" is defined in Section 100.3100 of this Part.
4) The term "employee" is defined in Section 100.3100 of this Part.
5) In filing returns with this state, if the employer departs from or modifies the treatment of compensation paid used in returns for prior years, the employer shall disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by the employer with all states to which the employer reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the treatment of compensation paid, the employer shall disclose in its return to this state the nature and extent of the variance.
b) Denominator. The denominator of the payroll factor is the total compensation paid everywhere during the tax period. Accordingly, compensation paid to employees whose services are performed entirely in a state where the employer is immune from taxation, by Public Law 86-272 for example, is included in the denominator of the payroll factor. Example: A corporation has employees in its state of legal domicile (State A) and is taxable in State B. In addition the corporation has other employees whose services are performed entirely in State C where the corporation is immune from taxation by Public Law 86-272. As to these latter employees, the compensation will be assigned to State C where their services are performed (i.e., included in the denominator – but not the numerator – of the payroll factor) even though the corporation is not taxable in State C.
c) Numerator. The numerator of the payroll factor is the total amount paid in this State during the tax period by the employer for compensation. The tests in IITA Section 304(a)(2) to be applied in determining whether compensation is paid in this State are derived from the Model Unemployment Compensation Act.
d) Compensation paid in this State. The term "compensation paid in this State" is explained in Section 100.3120 of this Part.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.3370 Sales Factor (IITA Section 304)
a) In General
1) IITA Section 1501(a)(21) defines the term "sales" to mean all gross receipts of the person not allocated under IITA Sections 301, 302 and 303. Thus, for the purposes of the sales factor of the apportionment formula for each trade or business of the person, the term "sales" means all gross receipts derived by the person from transactions and activity in the regular course of his or her trade or business. The following are rules for determining "sales" in various situations, except in instances in which an alternative method of determining the sales factor is prescribed in Section 100.3380. If the determination prescribed by this Section does not clearly reflect the taxpayer's business activities in Illinois (for taxable years ending before December 31, 2008) or the market for the taxpayer's goods, services or other sources of income in Illinois (for taxable years ending on or after December 31, 2008), the taxpayer may request the use of an alternative method of apportionment under Section 100.3390.
A) In the case of a person engaged in manufacturing and selling or purchasing and reselling goods or products, "sales" includes all gross receipts from the sales of those goods or products (or other property of a kind that would properly be included in the inventory of the person if on hand at the close of the tax period) held by the person primarily for sale to customers in the ordinary course of its trade or business. Gross receipts for this purpose means gross sales less returns and allowances, and includes all interest income, service charges, carrying charges, or time-price differential charges attendant to those sales. Federal and State excise taxes (including sales taxes) shall be included as part of the receipts if the taxes are passed on to the buyer or included as part of the selling price of the product.
B) In the case of cost plus fixed fee contracts, such as the operation of a government-owned plant for a fee, "sales" includes the entire reimbursed cost, plus the fee.
C) In the case of a person engaged in providing services, such as the operation of an advertising agency, or the performance of equipment service contracts, or research and development contracts, "sales" includes the gross receipts from the performance of those services, including fees, commissions and similar items.
D) In the case of a person engaged in renting real or tangible property, "sales" includes the gross receipts from the rental, lease or licensing of the use of the property.
E) In the case of a person engaged in the sale, assignment or licensing of intangible personal property such as patents and copyrights, "sales" includes the gross receipts therefrom.
F) If a person derives receipts from the sale of equipment used in its business, those receipts constitute "sales". For example, a truck express company owns a fleet of trucks and sells its trucks under a regular replacement program. The gross receipts from the sales of the trucks shall be included in the sales factor.
2) The following gross receipts are not included in the sales factor:
A) For taxable years ending on or after December 31, 1995, dividends; amounts included under IRC section 78; and Subpart F income are excluded from the sales factor under IITA Section 304(a)(3)(D).
B) Gross receipts that are excluded from or deducted in the computation of federal taxable income or federal adjusted gross income, and that are not added back in the computation of base income. For example, in years ending prior to December 31, 1995, dividends received from a domestic corporation are excluded from the sales factor to the extent the taxpayer is allowed a deduction under IRC section 243 with respect to those dividends.
C) Gross receipts that are subtracted from federal taxable income or federal adjusted gross income in the computation of base income or that are eliminated in the computation of taxable income in the case of a unitary business group under Section 100.5270(b)(1). Examples of gross receipts excluded from the sales factor under this provision include:
i) Interest on federal obligations subtracted under IITA Section 203(a)(2)(N), (b)(2)(J), (c)(2)(K) or (d)(2)(G).
ii) For taxable years ending prior to December 31, 1995, dividends included in federal taxable income or federal adjusted gross income are excluded from the sales factor if eliminated in combination or to the extent subtracted under IITA Section 203(a)(2)(J), (a)(2)(K), (b)(2)(K), (b)(2)(L), (b)(2)(O), (c)(2)(M), (c)(2)(O), (d)(2)(K) or (d)(2)(M).
D) Gross receipts that are excluded from or deducted in the computation of federal taxable income or federal adjusted gross income, but are added back in the computation of base income, are included in the sales factor unless subtracted or eliminated in combination. For example:
i) Interest on State obligations excluded from federal taxable income or adjusted gross income under IRC section 103 and added back in the computation of base income under IITA Section 203(a)(2)(A), (b)(2)(A), (c)(2)(A) or (d)(2)(A) shall be included in the sales factor except in the case of interest on certain Illinois obligations that is exempt from Illinois Income Tax. (See 86 Ill. Adm. Code 100.2470(f).)
ii) Gross receipts from intercompany transactions between two corporate members of a federal consolidated group, the taxable income on which is deferred under 26 CFR 1.1502-13, shall be included in the sales factor of the recipient unless subtracted under a provision of IITA Section 203 or eliminated in combination of the two corporations as members of a unitary business group.
E) In some cases, certain gross receipts should be disregarded in determining the sales factor in order that the apportionment formula will operate fairly to apportion to this State the income of the person's trade or business. (See 86 Ill. Adm. Code 100.3380(c).)
F) For taxable years ending on or after December 31, 1999, gross receipts from the licensing, sale, or other disposition of a patent, copyright, trademark, or similar item of intangible personal property may be included in the sales factor only if gross receipts from licenses, sales, or other dispositions of these items comprise more than 50% of the taxpayer's total gross receipts included in gross income during the tax year and during each of the 2 immediately preceding tax years; provided that, when a taxpayer is a member of a unitary business group, the determination shall be made on the basis of the gross receipts of the entire unitary business group. (IITA Section 304(a)(3)(B-2)) For purposes of this Section:
i) "Gross receipts from the licensing, sale, or other disposition of a patent, copyright, trademark, or similar item of intangible personal property" includes amounts received as damages or settlements from claims of infringement.
ii) "Gross receipts from the licensing, sale, or other disposition of a patent" includes only amounts received from a person using the patent in the production, fabrication, manufacturing, or other processing of a product or from a person producing, fabricating or manufacturing a product subject to the patent.
iii) "Gross receipts from the licensing, sale, or other disposition of a copyright" includes only amounts received by the taxpayer from a person engaged in printing or other publication of the material protected by the copyright, which are governed by Section 100.3373. The term does not include gross receipts from broadcasting within the meaning of IITA Section 304(a)(3)(B-7) or from publishing or advertising within the meaning of IITA Section 304(a)(3)(C-5)(iv).
iv) If a taxpayer has been in existence less than three taxable years, its gross receipts from the licensing, sale, or other disposition of patents, copyrights, trademarks or similar items of intangible personal property shall be included in its sales factor if those gross receipts comprise more than 50% of its total gross receipts during each taxable year of its existence.
v) "Patent"
means a patent issued under 35 U.S.C. 151.
vi) "Copyright" means a copyright registered or eligible for registration under 17 U.S.C. 408.
vii) "Trademark" means a trademark registered or eligible for registration under 15 U.S.C. 1051.
viii) A "similar item" means an item of intellectual property that is registered or otherwise enforceable under a law equivalent to 35 U.S.C. 151, 17 U.S.C. 408 or 15 U.S.C. 1051 or that is otherwise recognized in the country under whose law the sale or license agreement would be enforced, or under which an infringement claim would be brought.
ix) In the case of a unitary business group, the "total gross receipts and gross receipts from the licensing, sale or other disposition of a patent, copyright, trademark or similar item of intangible personal property in the two years immediately preceding the tax year" includes the gross receipts and gross receipts from the licensing, sale or other disposition of a patent, copyright, trademark or similar item of intangible personal property of all persons who are members of the unitary business group at some time during the taxable year, whether or not those persons were also members of the unitary business group in a preceding tax year, and only of those persons.
3) In filing returns with this State, if the person departs from or modifies the basis for excluding or including gross receipts in the sales factor used in returns for prior years, the person shall disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by the person with all states to which the person reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the inclusion or exclusion of gross receipts, the person shall disclose in its return to this State the nature and extent of the variance.
4) For taxable years ending prior to December 31, 2008, sales of electricity are sales other than sales of tangible personal property sourced under IITA Section 304(a)(3)(C). For taxable years ending on or after December 31, 2008 and prior to July 16, 2009, sales of electricity are sales of service sourced under IITA Section 304(a)(3)(C-5)(iv). For taxable years ending after July 15, 2009, sales of electricity are sales of tangible personal property sourced under IITA Section 304(a)(3)(B). (See Exelon Corp. v. Department of Revenue, 234 Ill 2d 266 (2009)).
b) Denominator. The denominator of the sales factor shall include the total gross receipts derived by the person from transactions and activity in the regular course of its trade or business, except receipts excluded under 86 Ill. Adm. Code 100.3380(c).
c) Numerator. The numerator of the sales factor shall include the gross receipts attributable to this State and derived by the person from transactions and activity in the regular course of its trade or business. All interest income, service charges, carrying charges, or time-price differential charges incidental to those gross receipts shall be included regardless of the place where the accounting records are maintained or the location of the contract or other evidence of indebtedness.
1) Sales of Tangible Personal Property in this State
A) Gross receipts from the sales of tangible personal property (except sales to the United States Government) (see subsection (c)(2)) are in this State:
i) if the property is delivered or shipped to a purchaser within this State regardless of the f.o.b. (free on board) point or other conditions of sale; or
ii) if the property is shipped from an office, store, warehouse, factory or other place of storage in this State and the taxpayer is not taxable in the state of the purchaser. However, premises owned or leased by a person who has independently contracted with the taxpayer for the printing of newspapers, periodicals or books shall not be deemed to be an office, store, warehouse, factory or other place of storage.
B) Property shall be deemed to be delivered or shipped to a purchaser within this State if the recipient is located in this State, even though the property is ordered from outside this State.
EXAMPLE: A corporation, with inventory in State A, sold $100,000 of its products to a purchaser having branch stores in several states including this State. The order for the purchase was placed by the purchaser's central purchasing department located in State B. $25,000 of the purchase order was shipped directly to purchaser's branch store in this State. The branch store in this State is the "purchaser within this State" with respect to $25,000 of the corporation's sales.
C) Property is delivered or shipped to a purchaser within this State if the shipment terminates in this State, even though the property is subsequently transferred by the purchaser to another state.
EXAMPLE: A corporation makes a sale to a purchaser who maintains a central warehouse in this State at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in other states for sale. All of the corporation's products shipped to the purchaser's warehouse in this State is property "delivered or shipped to a purchaser within this State".
D) The term "purchaser within this State" shall include the ultimate recipient of the property if the person in this State, at the designation of the purchaser, delivers to or has the property shipped to the ultimate recipient within this State.
EXAMPLE: A corporation in this State sold merchandise to a purchaser in State A. The corporation directed the manufacturer or supplier of the merchandise in State B to ship the merchandise to the purchaser's customer in this State pursuant to purchaser's instructions. The sale by the corporation is "in this State".
E) When property being shipped by a seller from the state of origin to a consignee in another state is diverted while en route to a purchaser in this State, the sales are in this State.
EXAMPLE: Corporation X, a produce grower in State A, begins shipment of perishable produce to the purchaser's place of business in State B. While en route the produce is diverted to the purchaser's place of business in this State in which state Corporation X is subject to tax. The sale by the corporation is attributed to this State.
F) If the person is not taxable in the state of the purchaser, the sale is attributed to this State if the property is shipped from an office, store, warehouse, factory, or other place of storage in this State (subject to the exception noted in (c)(1)(A)(ii)).
EXAMPLE: A corporation has its head office and factory in State A. It maintains a branch office and inventory in this State. The corporation's only activity in State B is the solicitation of orders by a resident salesman. All orders by the State B salesman are sent to the branch office in this State for approval and are filled by shipment from the inventory in this State. Since the corporation is immune under Public Law 86-272 from tax in State B, all sales of merchandise to purchasers in State B are attributed to this State, the state from which the merchandise was shipped.
2) Sales of tangible personal property to the United States Government in this State. Gross receipts from the sales of tangible personal property to the United States Government are in this State if the property is shipped from an office, store, warehouse, factory, or other place of storage in this State. For the purposes of this regulation, only sales for which the United States Government makes direct payment to the seller pursuant to the terms of the contract constitute sales to the United States Government. Thus, as a general rule, sales by a subcontractor to the prime contractor, the party to the contract with the United States Government, do not constitute sales to the United States Government.
EXAMPLE A: A corporation contracts with General Services Administration to deliver X number of trucks that were paid for by the United States Government. The sale is a sale to the United States Government.
EXAMPLE B: A corporation as a subcontractor to a prime contractor with the National Aeronautics and Space Administration contracts to build a component of a rocket for $1,000,000. The sale by the subcontractor to the prime contractor is not a sale to the United States Government.
3) For taxable years ending on or after December 31, 1999, gross receipts from the licensing, sale, or other disposition of a patent, copyright, trademark, or similar item of intangible personal property that are not excluded from the sales factor under subsection (a)(2)(F) are included in the numerator of the sales factor to the extent the item is utilized in this State during the year the gross receipts are included in gross income. (IITA Section 304(a)(3)(B-1)) For purposes of this subsection (c)(3):
A) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If a patent is utilized in more than one state, the extent to which it is utilized in any one state shall be a fraction equal to the gross receipts of the licensee or purchaser from sales or leases of items produced, fabricated, manufactured, or processed within that state using the patent and of patented items produced within that state, divided by the total of the gross receipts for all states in which the patent is utilized. (IITA Section 304(a)(3)(B-1)(ii)(I))
B) A copyright is utilized in a state to the extent that printing or other publication originates in the state. Printing or other publication originates at the place at which the licensee of the copyright incorporates the copyrighted material into the physical medium by which it will be delivered to the purchaser of the material or, if the copyrighted material is delivered to the purchaser without use of a physical medium, the place at which delivery of the copyrighted material to the person purchasing the material from the licensee originates. If a copyright is utilized in more than one state, the extent to which it is utilized in any one state shall be a fraction equal to the gross receipts from sales or licenses of materials printed or published in that state divided by the total of the gross receipts for all states in which the copyright is utilized. (IITA Section 304(a)(3)(B-1)(ii)(II))
C) Trademarks and other items of intangible personal property governed by this subsection (c)(3) are utilized in the state in which the commercial domicile of the licensee or purchaser is located. (IITA Section 304(a)(3)(B-1)(ii)(III))
D) If the place of utilization of an item of property under subsection (c)(3)(A), (B) or (C) cannot be determined from the taxpayer's books and records or from the books and records of any person related to the taxpayer within the meaning of IRC section 267(b), the gross receipts attributable to that item shall be excluded from both the numerator and the denominator of the sales factor. (IITA Section 304(a)(3)(B-1)(iii))
4) For taxable years ending on or after December 31, 2013, gross receipts from winnings under the Illinois Lottery Law [20 ILCS 1605] and from the assignment of a prize under Section 13-1 of the Illinois Lottery Law are received in this State. (IITA Section 304(a)(3)(B-8))
5) For taxable years ending on or after December 31, 2019, gross receipts from winnings from pari-mutuel wagering conducted at a wagering facility licensed under the Illinois Horse Racing Act of 1975 [230 ILCS 5] or from winnings from gambling games conducted on a riverboat or in a casino or organization gaming facility licensed under the Illinois Gambling Act [230 ILCS 10] are in this State. (IITA Section 304(a)(3)(B-9))
6) For taxable years ending on or after December 31, 2021, gross receipts from winnings from sports wagering conducted in accordance with the Sports Wagering Act [230 ILCS 45] are in this State. (IITA Section 304(a)(3)(B-10))
7) For taxable years ending prior to December 31, 2008, gross receipts from transactions not governed by the provisions of subsection (c)(1), (2), (3) or (4) and, for taxable years ending on or after December 31, 2008, from transactions involving intangible personal property when the taxpayer is not a dealer with respect to the intangible personal property, are attributed to this State if the income producing activity that gave rise to the receipts is performed wholly within this State. Also, gross receipts are attributed to this State if, with respect to a particular item of income, the income producing activity is performed in this State, based on costs of performance.
A) Income Producing Activity Defined. The term "income producing activity" applies to each separate item of income and means the transactions and activity directly engaged in by the person in the regular course of its trade or business for the ultimate purpose of obtaining gains or profit. Income producing activity does not include transactions and activities performed on behalf of a person, such as those conducted on its behalf by an independent contractor. The mere holding of intangible personal property is not, of itself, an income producing activity. Accordingly, the income producing activity includes but is not limited to the following:
i) The rendering of personal services by employees or the utilization of tangible and intangible property by the person in performing a service.
ii) The sale, rental, leasing, licensing or other use of real property.
iii) The rental, leasing, licensing or other use of tangible personal property.
iv) The sale, licensing or other use of intangible personal property.
B) Costs of Performance Defined. The term "costs of performance" means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the person.
C) Application. Receipts sourced under this subsection (c)(7) in respect to a particular income producing activity are in this State if:
i) the income producing activity is performed wholly within this State; or
ii) the income producing activity is performed both in and outside this State and, based on costs of performance, a greater proportion of the income producing activity is performed in this State than without this State (for taxable years ending prior to December 31, 2008) or a greater proportion of the income-producing activity of the taxpayer is performed within this State than in any other state (for taxable years ending on or after December 31, 2008).
D) Special Rules. The following are special rules for determining when receipts from the income producing activities described in this subsection (c)(7)(D) are in this State.
i) Gross receipts from the sale, lease, rental or licensing of real property are in this State if the real property is located in this State.
ii) Gross receipts from the rental, lease, or licensing of tangible personal property are in this State if the property is located in this State. The principal cost of performance in a rental, leasing or licensing transaction is the depreciation or amortization of the tangible personal property, and the depreciation or amortization expense is incurred in the state in which the tangible personal property is located. The rental, lease, licensing or other use of tangible personal property in this State is a separate income producing activity from the rental, lease, licensing or other use of the same property while located in another state; consequently, if property is within and without this State during the rental, lease or licensing period, gross receipts attributable to this State shall be measured by the ratio which the time the property was physically present or was used in this State bears to the total time or use of the property everywhere during that period.
EXAMPLE: Corporation X is the owner of 10 railroad cars. During the year, the total of the days each railroad car was present in this State was 50 days for a total of 500 days. The receipts attributable to the use of each of the railroad cars in this State are a separate item of income. Total receipts attributable to this State shall be determined as follows:
(10 x 50)/3650 x Total Receipts
iii) Gross receipts for the performance of personal services are attributable to this State to the extent those services are performed partly within and partly outside this State. The gross receipts for the performance of those services shall be attributable to this State only if a greater portion of the services were performed in this State, based on costs of performance. When services are performed partly within and partly outside this State and the services performed in each state constitute a separate income producing activity, the gross receipts for the performance of services attributable to this State shall be measured by the ratio that the time spent in performing the services in this State bears to the total time spent in performing the services everywhere. Time spent in performing services includes the amount of time expended in the performance of a contract or other obligation that gives rise to the gross receipts. Personal service not directly connected with the performance of the contract or other obligation, as for example, time expended in negotiating the contract, is excluded from the computations.
EXAMPLE 1: Corporation X, a road show, gave theatrical performances at various locations in State X and in this State during the tax period. All gross receipts from performances given in this State are attributed to this State.
EXAMPLE 2: A public opinion survey corporation conducted a poll by its employees in State X and in this State for the sum of $9,000. The project required 600 man hours to obtain the basic data and prepare the survey report. Two hundred of the 600 man hours were expended in this State. The receipts attributable to this State are $3,000, calculated as follows:
200/600 x $9,000
8) For taxable years ending on or after December 31, 2008, gross receipts from transactions not governed by the provisions of subsection (c)(1), (2), (3), (4), (5), (6) or (7) are in this State if any of the following criteria are met:
A) Sales from the sale or lease of real property are in this State if the property is located in this State. (IITA Section 304(a)(3)(C-5)(i))
B) Sales from the lease or rental of tangible personal property are in this State if the property is located in this State during the rental period. Sales from the lease or rental of tangible personal property that is characteristically moving property, including, but not limited to, motor vehicles, rolling stock, aircraft, vessels, or mobile equipment, are in this State to the extent that the property is used in this State. (IITA Section 304(a)(3)(C-5)(ii))
C) In the case of interest, net gains (but not less than zero) and other items of income from intangible personal property, the sale is in this State if:
i) in the case of a taxpayer who:
• is
a dealer in the item of intangible personal property within the meaning of IRC
section 475, the income or gain is received from a customer in this State. A taxpayer is a dealer with respect to
an item of intangible personal property if the taxpayer is a dealer with
respect to the item under IRC section 475(c)(1), or would be a dealer with
respect to the item under IRC section 475(c)(1) if the item were a security as
defined under IRC section 475(c)(2). For purposes of this subsection (c)(8)(C)(i),
a customer is in this State if the customer is an individual, trust or estate
who is a resident of this State and, for all other customers, if the customer's
commercial domicile is in this State. Unless the dealer has actual knowledge of
the residence or commercial domicile of a customer during a taxable year, the
customer shall be deemed to be a customer in this State if the billing address
of the customer, as shown in the records of the dealer, is in this State. (IITA
Section 304(a)(3)(C-5)(iii)(a)) A dealer shall treat the person with whom it
engages in a transaction as the customer, even when that person is acting on
behalf of a third party, unless the dealer has actual knowledge of the party on
whose behalf the person is acting. If a taxpayer is a dealer with respect to an
item of intangible personal property and recognizes gain or loss with respect
to that item other than in connection with a transaction with a customer (for
example, unrealized gain or loss from marking the item to market under IRC section
475), that gain or loss shall be excluded from the numerator and denominator of
the sales factor; or
• is not a dealer with respect to the item of intangible personal property, if the income-producing activity of the taxpayer is performed in this State or, if the income-producing activity of the taxpayer is performed both within and without this State, if a greater proportion of the income-producing activity of the taxpayer is performed within this State than in any other state, based on performance costs. (IITA Section 304(a)(3)(C-5)(iii)(b)) (See subsection (c)(7) of this Section.)
ii) For purposes of this subsection (c)(8)(C), an item of "intangible personal property" includes only an item that can ordinarily be resold or otherwise reconveyed by the person acquiring the item from the taxpayer, and does not include any obligation of the taxpayer to make any payment, perform any act, or otherwise provide anything of value to another person.
EXAMPLE 1: A ticket to attend a sporting event would not be an item of intangible personal property for the owner of the stadium who issues the ticket and is obliged to grant admission to the holder of the ticket. Rather, the sale of the ticket is a prepayment for a service to be provided. However, the ticket would be an item of intangible personal property in the hands of the original purchaser or any subsequent purchaser of the ticket, and a ticket broker engaged in the business of buying and reselling tickets would be a dealer with respect to the ticket.
EXAMPLE 2: A taxpayer selling canned computer software is selling intangible personal property. (First National Bank of Springfield v. Dept. of Revenue, 85 Ill.2d 84 (1981)) If the taxpayer sells software to customers in the ordinary course of its business, it is a dealer with respect to those sales. In contrast, a taxpayer providing programming or maintenance services to its customers is selling services rather than intangible personal property.
EXAMPLE 3: A taxpayer administers a "rewards program" for a group of unrelated businesses. Under the program, a customer of one business can earn discounts or rebates on products and services provided by any of the businesses. As each customer earns rewards, measured in "units", from one of the businesses, that business pays a specified amount per unit to the taxpayer. When a customer uses units earned in the program to purchase products or services at a discount from a participating business, the taxpayer pays that business a specified amount per unit used by the customer. Rebates may be paid to the customer directly by the taxpayer or by one of the businesses, which is then reimbursed by the taxpayer. To the extent payments made to the taxpayer by businesses awarding units exceed the payments the taxpayer must make for discounts and rebates, the excess is payment for operating the program. The units awarded are obligations of the taxpayer to make payments to the business providing products or services at a discount or to pay rebates. Accordingly, payments received by the taxpayer from the participating businesses for units awarded are not income from sales of intangible personal property by the taxpayer.
D) Sales of services are in this State if the services are received in this State. (IITA Section 304(a)(3)(C-5)(iv))
i) General Rule. Gross receipts from services are assigned to the numerator of the sales factor to the extent that the receipts may be attributed to services received in Illinois.
ii) A contract that involves the provision of a service by the taxpayer and the use of property of the taxpayer by the service recipient shall be treated as a sale of service unless the contract is properly treated as a lease of property under IRC section 7701(e)(1), taking into account all relevant factors, including whether:
• the service recipient is in physical possession of the property;
• the service recipient controls the property;
• the service recipient has a significant economic or possessory interest in the property;
• the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract;
• the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient; and
• the total contract price does not substantially exceed the rental value of the property for the contract period.
EXAMPLE: A taxpayer selling access to an online database or applications software, and who is required to perform regular update services to the database or software, retains control over the contents of the database or software, and provides access to the same database or software to multiple customers is not selling or licensing an item of intangible personal property to its customers, but rather is providing a service.
iii) Services received in this State include, but are not limited to:
• When the subject matter of the service is an item of tangible personal property, the service is received in this State if possession of the property is restored to the recipient of the service under the principles in subsection (c)(1) for determining whether a sale of that property is in this State.
EXAMPLE 1: A customer returns a computer to the manufacturer for repair. The manufacturer performs the repairs in Indiana and ships the computer to the customer's Illinois address. The service is received in this State.
EXAMPLE 2: Individual purchases clothing from Merchant at a store in this State, using a credit card issued by Bank A pursuant to a licensing agreement with Credit Card Company. Credit Card Company is not a financial organization required to apportion its business income under Section 100.3405. Bank A remits the purchase price to Credit Card Company, which deposits the purchase price with Merchant's bank, minus a fee or discount. All fees and discounts earned by Credit Card Company in connection with this purchase are for services received in this State.
• When the subject matter of the service is an item of real property, the service is received in the state in which the real property is located.
EXAMPLE 3: Individual purchases a parcel of land in Illinois and constructs a house on the parcel. Services performed at an architect's office in Wisconsin regarding the design and construction of the house are received in this State.
• When the service is performed on or with respect to the person of an individual (for example, medical treatment services), the service is received in the state in which the individual is located at the time the service is performed.
• Services performed by a taxpayer that are directly connected to or in support of services received in this State are also services received in this State.
EXAMPLE 4: Individual purchases automobile repair services from Automobile Dealership at its facility located in this State, using a credit card issued by Bank A pursuant to a licensing agreement with Credit Card Company. Bank A remits the purchase price to Credit Card Company, which deposits the purchase price with Automobile Dealership's bank, minus a fee or discount. All fees and discounts earned by Credit Card Company in connection with this purchase are for services received in this State.
EXAMPLE 5: Services performed by an investment fund on behalf of an investor are received in this State if the investor resides in this State (in the case of an individual) or has its ordering or billing address in this State (for other investors). In the case of services provided by Taxpayer to or on behalf of the investment fund that are directly connected with services provided separately to the investors, such as preparation of communications and statements to investors, and allocations of earnings and distributions to investors, the service is also received in this State to the extent the investors reside (or have their ordering or billing address) in this State. Accordingly, receipts of Taxpayer for these services are allocated to this State on the basis of the ratio of: the average of the outstanding shares in the fund owned by shareholders, partners or other investors residing (or having their ordering or billing address) within this State at the beginning and end of each taxable year of the taxpayer; and the average of the total number of outstanding shares in the fund at the beginning and end of each year. Residence or ordering or billing address of the shareholder, partner or other investor is determined by the mailing address in the records of the investment fund or the taxpayer. Services provided to an investment fund that are not directly connected to or in support of services provided separately to investors, such as brokerage services or investment advising, are not received by the customer at the location of its investors.
iv) Special Rules
• Under IITA Section 304(a)(3)(C-5)(iv), if the state where the services are received is not readily determinable, the services shall be deemed to be received at the location of the office of the customer from which the services were ordered in the regular course of the customer's trade or business, or, if the ordering office cannot be determined, at the office of the customer to which the services are billed. If the service is provided to an individual who provides a residential address as the place from which the services are ordered or to which the services are billed, rather than an office address, the residential address shall be used. For purposes of this provision, the state where services are received is not readily determinable if the facts necessary to make the determination are not contained in the books and records of the taxpayer or any person related to the taxpayer within the meaning of IRC section 267(b) or if the available facts would allow reasonable persons to reach different determinations of the state in which the services were received.
• Under IITA Section 304(a)(3)(C-5)(iv), if the services are provided to a corporation, partnership, or trust and the services are received in a state in which the corporation, partnership, or trust does not maintain a fixed place of business (as defined in Section 100.3405(b)(1)), the services shall be deemed to be received at the location of the office of the customer from which the services were ordered in the regular course of the customer's trade or business, or, if the ordering office cannot be determined, at the office of the customer to which the services are billed. For purposes of this provision, in the case of services performed by the taxpayer as a subcontractor or as an agent acting on behalf of a principal, if either the contractor or principal has a fixed place of business in the state in which the services are received or the customer of the contractor or principal either is an individual or has a fixed place of business in the state in which the services are received, the service shall be treated as received in a state in which the customer of the taxpayer has a fixed place of business.
• Under IITA Section 304(a)(3)(C-5)(iv), if the taxpayer is not taxable in the state in which the services are received or deemed to be received, the gross receipts attributed to those services must be excluded from both the numerator and denominator of the sales factor. (See Section 100.3200 for guidance on determining when a taxpayer is taxable in another state.)
(Source: Amended at 47 Ill. Reg. 13669, effective September 11, 2023)
Section 100.3371 Sales Factor for Telecommunications Services
a) For taxable years ending on or after December 31, 2008, IITA Section 304(a)(3)(B-5) provides express guidance for determining when gross receipts from the sale of telecommunications service or mobile telecommunications service are in this State for purposes of computing the sales factor in IITA Section 304(a)(3).
b) Definitions. For purposes of this Section, the follow terms have the following meanings:
1) "Ancillary services" means services that are associated with or incidental to the provision of "telecommunications services", including but not limited to "detailed telecommunications billing", "directory assistance", "vertical service", and "voice mail services". (IITA Section 304(a)(3)(B-5)(i))
2) "Air-to-ground radiotelephone service" means a radio service, as that term is defined in 47 CFR 22.99 (2007), in which common carriers are authorized to offer and provide radio telecommunications service for hire to subscribers in aircraft. (IITA Section 304(a)(3)(B-5)(i)) 47 CFR 22.99 defines "air-to-ground ratiotelephone service" to mean a "radio service in which licensees are authorized to offer and provide radio telecommunications service for hire to subscribers in aircraft".
3) "Call-by-call basis" means any method of charging for telecommunications services where the price is measured by individual calls. (IITA Section 304(a)(3)(B-5)(i))
4) "Communications channel" means a physical or virtual path of communications over which signals are transmitted between or among customer channel termination points. (IITA Section 304(a)(3)(B-5)(i))
5) "Conference bridging service" means an ancillary service that links two or more participants of an audio or video conference call and may include the provision of a telephone number. "Conference bridging service" does not include the telecommunications services used to reach the conference bridge. (IITA Section 304(a)(3)(B-5)(i))
6) "Customer channel termination point" means the location where the customer either inputs or receives the communications. (IITA Section 304(a)(3)(B-5)(i))
7) "Detailed telecommunications billing service" means an ancillary service of separately stating information pertaining to individual calls on a customer's billing statement. (IITA Section 304(a)(3)(B-5)(i))
8) "Directory assistance" means an ancillary service of providing telephone number information, and/or address information. (IITA Section 304(a)(3)(B-5)(i))
9) "Home service provider" means the facilities-based carrier or reseller with which the customer contracts for the provision of "mobile telecommunications services". (IITA Section 304(a)(3)(B-5)(i))
10) "Mobile telecommunications service" means commercial mobile radio service, as defined in 47 CFR 20.3 (June 1, 1999). (IITA Section 304(a)(3)(B-5)(i))
A) "Commercial mobile radio service" is defined in 47 CFR 20.3 (June 1, 1999) as "mobile service that is provided for profit, i.e., with the intent of receiving compensation or monetary gain; an interconnected service; and available to the public, or to such classes of eligible users as to be effectively available to a substantial portion of the public; or that is the functional equivalent of such a mobile service."
B) "Interconnected service" is defined in 47 CFR 20.3 (June 1, 1999) as a "service that is interconnected with the public switched network, or interconnected with the public switched network through an interconnected service provider, that gives subscribers the capability to communicate to or receive communication from all other users on the public switched network; or for which a request for such interconnection is pending pursuant to 47 USC 332(c)(1)(B). A mobile service offers interconnected service even if the service allows subscribers to access the public switched network only during specified hours of the day, or if the service provides general access to points on the public switched network but also restricts access in certain limited ways. Interconnected service does not include any interface between a licensee's facilities and the public switched network exclusively for a licensee's internal control purposes."
11) "Place of primary use" means the street address representative of where the customer's use of the telecommunications service primarily occurs, which must be the residential street address or the primary business street address of the customer. In the case of mobile telecommunications services, "place of primary use" must be within the licensed service area of the home service provider. (IITA Section 304(a)(3)(B-5)(i))
12) "Post-paid telecommunication service" means the telecommunications service obtained by making a payment on a call-by-call basis either through the use of a credit card or payment mechanism such as a bank card, travel card, credit card, or debit card, or by charge made to a telephone number which is not associated with the origination or termination of the telecommunications service. A post-paid calling service includes telecommunications service, except a prepaid wireless calling service, that would be a prepaid calling service except it is not exclusively a telecommunication service. (IITA Section 304(a)(3)(B-5)(i))
13) "Prepaid telecommunication service" means the right to access exclusively telecommunications services, which must be paid for in advance and which enables the origination of calls using an access number or authorization code, whether manually or electronically dialed, and that is sold in predetermined units or dollars of which the number declines with use in a known amount. (IITA Section 304(a)(3)(B-5)(i))
14) "Prepaid mobile telecommunication service" means a telecommunications service that provides the right to utilize mobile wireless service as well as other non-telecommunication services, including but not limited to ancillary services, which must be paid for in advance that is sold in predetermined units or dollars of which the number declines with use in a known amount. (IITA Section 304(a)(3)(B-5)(i))
15) "Private communication service" means a telecommunication service that entitles the customer to exclusive or priority use of a communications channel or group of channels between or among termination points, regardless of the manner in which such channel or channels are connected, and includes switching capacity, extension lines, stations, and any other associated services that are provided in connection with the use of such channel or channels. (IITA Section 304(a)(3)(B-5)(i))
16) "Service address" means:
A) The location of the telecommunications equipment to which a customer's call is charged and from which the call originates or terminates, regardless of where the call is billed or paid. (IITA Section 304(a)(3)(B-5)(i))
B) If the location in subsection (b)(16)(A) is not known, service address means the origination point of the signal of the telecommunications services first identified by either the seller's telecommunications system or in information received by the seller from its service provider where the system used to transport such signals is not that of the seller. (IITA Section 304(a)(3)(B-5)(i))
C) If the locations in subsections (b)(16)(A) and (B) are not known, the service address means the location of the customer's place of primary use. (IITA Section 304(a)(3)(B-5)(i))
17) "Telecommunications service" means the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points. The term "telecommunications service" includes such transmission, conveyance, or routing in which computer processing applications are used to act on the form, code or protocol of the content for purposes of transmission, conveyance or routing without regard to whether such service is referred to as voice over Internet protocol services or is classified by the Federal Communications Commission as enhanced or value added. "Telecommunications service" does not include:
A) Data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser when such purchaser's primary purpose for the underlying transaction is the processed data or information;
B) Installation or maintenance of wiring or equipment on a customer's premises;
C) Tangible personal property;
D) Advertising, including but not limited to directory advertising;
E) Billing and collection services provided to third parties;
F) Internet access service;
G) Radio and television audio and video programming services, regardless of the medium, including the furnishing of transmission, conveyance and routing of such services by the programming service provider. Radio and television audio and video programming services shall include but not be limited to cable service as defined in 47 USC 522(6) and audio and video programming services delivered by commercial mobile radio service providers, as defined in 47 CFR 20.3.
i) Under 47 USC 522(6), "cable service" is defined to mean "the one-way transmission to subscribers of video programming or other programming service, and subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service".
ii) For the provisions of 47 CFR 20.3, see subsection (b)(1).
H) "Ancillary services"; or
I) Digital products "delivered electronically", including but not limited to software, music, video, reading materials or ring tones. (IITA Section 304(a)(3)(B-5)(i))
18) "Vertical service" means an "ancillary service" that is offered in connection with one or more "telecommunications services", which offers advanced calling features that allow customers to identify callers and to manage multiple calls and call connections, including "conference bridging services". (IITA Section 304(a)(3)(B-5)(i))
19) "Voice mail service" means an "ancillary service" that enables the customer to store, send or receive recorded messages. "Voice mail service" does not include any "vertical services" that the customer may be required to have in order to utilize the "voice mail service". (IITA Section 304(a)(3)(B-5)(i))
c) Receipts from the sale of telecommunications service sold on an individual call-by-call basis are in this State if either of the following applies:
1) The call both originates and terminates in this State. (IITA Section 304(a)(3)(B-5)(ii)(a))
2) The call either originates or terminates in this State and the service address is located in this State. (IITA Section 304(a)(3)(B-5)(ii)(b))
d) Receipts from the sale of postpaid telecommunications service at retail are in this State if the origination point of the telecommunication signal, as first identified by the service provider's telecommunication system or as identified by information received by the seller from its service provider if the system used to transport telecommunication signals is not the seller's, is located in this State. (IITA Section 304(a)(3)(B-5)(iii))
e) Receipts from the sale of prepaid telecommunications service or prepaid mobile telecommunications service at retail are in this State if the purchaser obtains the prepaid card or similar means of conveyance at a location in this State. Receipts from recharging a prepaid telecommunications service or mobile telecommunications service is in this State if the purchaser's billing information indicates a location in this State. (IITA Section 304(a)(3)(B-5)(iv))
f) Receipts from the sale of private communication services are in this State as follows:
1) One hundred percent of receipts from charges imposed at each channel termination point in this State. (IITA Section 304(a)(3)(B-5)(v)(a))
2) One hundred percent of receipts from charges for the total channel mileage between each channel termination point in this State. (IITA Section 304(a)(3)(B-5)(v)(b))
3) Fifty percent of the total receipts from charges for service segments when those segments are between two customer channel termination points, one of which is located in this State and the other is located outside of this State, which segments are separately charged. (IITA Section 304(a)(3)(B-5)(v)(c))
4) The receipts from charges for service segments with a channel termination point located in this State and in two or more other states, and which segments are not separately billed, are in this State based on a percentage determined by dividing the number of customer channel termination points in this State by the total number of customer channel termination points. (IITA Section 304(a)(3)(B-5)(v)(d))
g) Receipts from charges for ancillary services for telecommunications service sold to customers at retail are in this State if the customer's primary place of use of telecommunications services associated with those ancillary services is in this State. If the seller of those ancillary services cannot determine where the associated telecommunications are located, then the ancillary services shall be based on the location of the purchaser. (IITA Section 304(a)(3)(B-5)(vi))
h) Receipts to access a carrier's network or from the sale of telecommunication services or ancillary services for resale are in this State as follows:
1) one hundred percent of the receipts from access fees attributable to intrastate telecommunications service that both originates and terminates in this State. (IITA Section 304(a)(3)(B-5)(vii)(a))
2) fifty percent of the receipts from access fees attributable to interstate telecommunications service if the interstate call either originates or terminates in this State. (IITA Section 304(a)(3)(B-5)(vii)(b))
3) one hundred percent of the receipts from interstate end user access line charges, if the customer's service address is in this State. As used in this subsection (h)(3), "interstate end user access line charges" includes, but is not limited to, the surcharge approved by the Federal Communications Commission and levied pursuant to 47 CFR 69. (IITA Section 304(a)(3)(B-5)(vii)(c))
4) Gross receipts from sales of telecommunication services or from ancillary services for telecommunications services sold to other telecommunication service providers for resale shall be sourced to this State using the apportionment concepts used for non-resale receipts of telecommunications services if the information is readily available to make that determination. If the information is not readily available, then the taxpayer may use any other reasonable and consistent method. (IITA Section 304(a)(3)(B-5)(vii)(d))
(Source: Added at 33 Ill. Reg. 1195, effective December 31, 2008)
Section 100.3373 Sales Factor for Publishing
a) For taxable years ending on or after December 31, 2008, sales of services (other than sales covered by IITA Section 304(a)(3)(B-1), (B-2) and (B-5)) are in this State if the services are received in this State. The Department may adopt rules prescribing where specific types of service are received, including, but not limited to, broadcast, cable, advertising, publishing, and utility service. (IITA Section 304(a)(3)(C-5)(iv)) This Section provides guidance for determining where publishing services are received and applies only to the gross receipts from publishing services of a taxpayer required to source gross receipts under IITA Section 304(a)(3)(C-5) in computing its sales factor.
b) Definitions. For purposes of this Section, the following terms have the following meanings:
1) "Circulation factor" means, for each individual publication by the taxpayer of published material containing advertising, the ratio that the taxpayer's in-state circulation to purchasers and subscribers of the published material bears to its total circulation of the published material to purchasers and subscribers everywhere. If the geographic location of purchasers and subscribers of a publication is determined by the taxpayer for a business purpose (for example, in determining advertising rates), the circulation factor shall be determined for that publication using the geographic information used by the taxpayer for that purpose. Otherwise, the circulation factor shall be determined from the taxpayer's books and records or, if the books and records of the taxpayer are inadequate to allow the determination of the circulation factor of a publication or if the taxpayer so elects, the circulation factor for a publication shall be determined by reference to the rating statistics as reflected in such sources as Audit Bureau of Circulations, Internet World Stats, or other comparable sources, provided that the source selected is consistently used from year to year for that purpose.
EXAMPLE 1: Company A publishes advertising on the Internet for its customers. In order to calculate its circulation factor, Company A elects to utilize Internet World Stats. Company A determines its circulation factor by multiplying Illinois' population by the Internet penetration percentage of the United States, as reported on Internet World Stats, divided by the combined populations of the jurisdictions in which Company A does business multiplied by their respective Internet penetration percentages as reported on Internet World Stats. Company A must use this method consistently from year to year to compute its circulation factor.
2) "Publication" or "published material" includes, without limitation, the physical embodiment or printed version of any thought or expression, including, without limitation, a play, story, article, column or other literary, commercial, educational, artistic or other written or printed work. The determination of whether an item is or consists of published material shall be made without regard to its content. Published material may take the form of a book, newspaper, magazine, periodical, trade journal or any other form of printed matter and may be contained on any property or medium (including any electronic medium, such as, for example, the internet, but not including any broadcasting medium governed by IITA Section 304(a)(3)(B-7)).
3) "Publishing" or "publishing services" means deriving business income from publishing, selling, licensing (other than licensing to another person for purposes of printing or other publication of the licensed material by that person within the meaning of IITA Section 304(a)(3)(B-1)) or distributing newspapers, magazines, periodicals, trade journals or other published material. "Publishing" or "publishing services" does not include delivery of materials published by a third party, and does not include delivery of materials published by the taxpayer when a separate charge is made for delivery. Fees for delivery services performed by a taxpayer who is not itself the publisher of the materials (such as a newspaper carrier) or that are charged separately by the publisher are sourced under Section 100.3370(c)(5), not under this Section.
4) "Purchaser" and "subscriber" mean the individual, residence, business or other outlet that is the ultimate or final recipient of the published material. Neither term shall mean or include a wholesaler, retailer or other distributor of published material.
c) Sales within this State from publishing include:
1) Gross receipts derived from the sale of published materials in the form of tangible personal property, as provided in Sections 100.3370(c) and 100.3380(c).
2) The portion of gross receipts derived from sales of published materials in a form other than tangible personal property, from advertising and from the sale, rental or other use of the taxpayer's customer lists for a particular publication or any portion thereof attributed to this State using the taxpayer's circulation factor for that publication during the applicable tax period.
d) For the purposes of this Section, other than sales of tangible personal property under subsection (c)(1):
1) Gross receipts from the performance of publishing services provided to a corporation, partnership, or trust may be attributed only to a state where that corporation, partnership, or trust has a fixed place of business, as defined in Section 100.3405(b)(1). (IITA Section 304(a)(3)(C-5)(iv)) When the circulation factor is determined by a method other than the taxpayer's own books and records, this subsection (d)(1) shall not apply.
2) If the state where the publishing services are received is not readily determinable or is a state where the corporation, partnership, or trust receiving the services does not have a fixed place of business, the services shall be deemed to be received at the location of the office of the customer from which the services were ordered in the regular course of the customer's trade or business. (IITA Section 304(a)(3)(C-5)(iv)) When the circulation factor is determined by a method other than the taxpayer's own books and records, this subsection (d)(2) shall not apply.
3) If the ordering office cannot be determined, the publishing services shall be deemed to be received at the office of the customer to which the services are billed. (IITA Section 304(a)(3)(C-5)(iv)) When the circulation factor is determined by a method other than the taxpayer's own books and records, this subsection (d)(3) shall not apply.
4) If the taxpayer is not taxable in the state in which the publishing services are received, the sale must be excluded from both the numerator and the denominator of the sales factor. (IITA Section 304(a)(3)(C-5)(iv)) See Section 100.3200 for guidance on determining when a taxpayer is taxable in a state.
EXAMPLE 2: In computing its circulation factor, Company A from Example 1 must exclude from the denominator the population (weighted by the Internet penetration percentage as reported on Internet World Stats) of any jurisdiction in which Company A is not taxable.
(Source: Added at 36 Ill. Reg. 9247, effective June 5, 2012)
Section 100.3380 Special Rules (IITA Section 304)
a) Determining Business Activity or Market Within Illinois
1) Petition
IITA Section 304(f) provides that, if the allocation and apportionment provisions of Section 304(a) through (e) and (h) do not, for taxable years ending before December 31, 2008, fairly represent the extent of a person's business activity in this State, or do not, for taxable years ending on or after December 31, 2008, fairly represent the market for the person's goods, services, or other sources of business income, the person may petition for, or the Director may require, in respect of all or any part of the person's business activity, if reasonable:
A) Separate accounting;
B) The exclusion of any one or more factors;
C) The inclusion of one or more additional factors that will fairly represent the person's business activities or market in this State; or
D) The employment of any other method to effectuate an equitable allocation and apportionment of the person's business income.
2) Director's Determination
The Director has determined that, in the instances described in this Section, the apportionment provisions provided in IITA Section 304(a) through (e) and (h) do not fairly represent the extent of a person's business activity or market within Illinois. For tax years beginning on or after the effective date of a rulemaking amending this Section to prescribe a specific method of apportioning business income, all nonresident taxpayers shall apportion their business income employing that method in order to properly apportion their business income to Illinois. Taxpayers whose business activity or market within Illinois is not fairly represented by a method prescribed in this Section and who want to use another method for a tax year beginning after the effective date of the rulemaking adopting that method may obtain permission to use that other method by filing a petition under Section 100.3390. For tax years beginning prior to the effective date of the rulemaking adopting a method of apportioning business income, the Department will not require a taxpayer to adopt that method; provided, however, if any taxpayer has used that method for any of those tax years, the taxpayer must continue to use that method for that tax year. Moreover, a taxpayer may file a petition under Section 100.3390 to use a method of apportionment prescribed in this Section for any open tax year beginning prior to the effective date of the rulemaking adopting that method, and that petition shall be granted in the absence of facts showing that that method will not fairly represent the extent of a person's business activity or market in Illinois.
b) Property Factor. The following special rules are established in respect to the property factor in IITA Section 304(a)(1):
1) If the subrents taken into account in determining the net annual rental rate under Section 100.3350(c) produce a negative or clearly inaccurate value for any item of property, another method that will properly reflect the value of rented property may be required by the Director or requested by the person. In no case, however, shall the value be less than an amount that bears the same ratio to the annual rental rate paid by the person for the property as the fair market value of that portion of the property used by the person bears to the total fair market value of the rented property.
EXAMPLE: A corporation rents a 10-story building at an annual rental rate of $1,000,000. The corporation occupies two stories and sublets eight stories for $1,000,000 a year. The net annual rental rate of the taxpayer is at least two-tenths of the corporation annual rental rate for the entire year, or $200,000.
2) If property owned by others is used by the person at no charge or rented by the person for a nominal rate, the net annual rental rate for the property shall be determined on the basis of a reasonable market rental rate for that property.
c) Sales Factor. The following special rules are established in respect to the sales factor in IITA Section 304(a)(3):
1) For taxable years ending before December 31, 2008, in the case of sales in which neither the origin nor the destination of the sale is within this State, and the person is taxable in neither the state of origin nor the state of destination, the sale shall be attributed to this State (and included in the numerator of the sales factor) if the person's activities in this State in connection with the sales are not protected by the provisions of P.L. 86-272, 15 U.S.C. 381-385. Although P.L. 86-272, by its terms covers only sales of tangible personal property, its rules regarding a state's power to impose a net income tax, for purposes of this special rule, will be applied whether or not the sale is of tangible or intangible property. This subsection (c)(1) does not apply in taxable years ending on or after December 31, 2008, because attributing the sale to this State is not required by IITA Section 304(a)(3) and does not fairly represent the market for the person's goods, services, or other sources of business income in this State. Notwithstanding the provisions of subsection (a)(2), taxpayers are not required to file a petition under Section 100.3390 requesting permission to file an original or amended return for any tax year ending on or after December 31, 2008 that does not apply the special rule in this subsection (c)(1).
EXAMPLE: A corporation's salesman operates out of an office in Illinois. He regularly calls on customers both within and without Illinois. Orders are approved by him and transmitted to the corporation's headquarters in State A. For taxable years ending before December 31, 2008, if the property sold by the salesman is shipped from a state in which the corporation is not taxable to a purchaser in a state in which the corporation is not taxable, the sale is attributable to Illinois.
2) When gross receipts arise from an incidental or occasional sale of assets used in the regular course of the person's trade or business, those gross receipts shall be excluded from the sales factor. For example, gross receipts from the sale of a factory or plant shall be excluded. Gross receipts from an incidental or occasional sale of stock in a subsidiary shall also be excluded. Exclusion of these gross receipts from the sales factor is appropriate for several reasons, more than one of which may apply to a particular sale, including:
A) incidental or occasional sales are not made in the market for the person's goods, services or other ordinary sources of business income;
B) to the extent that gains realized on the sale of assets used in a taxpayer's business are comprised of recapture of depreciation deductions, the economic income of the taxpayer was understated in the years in which those deductions were taken. The recapture gains that reflect a correction of that understatement should be allocated using a method approximating the factors that were used in apportioning the deductions. If the business otherwise remains unchanged, including the gross receipts from the sale in the sales factor numerator of the state in which the assets were located would allocate a disproportionate amount of the recapture gains to that state compared to how the deductions being recaptured were allocated;
C) to the extent the gain on the sale is attributable to goodwill or similar intangibles representing the value of customer relationships, including the gross receipts from the sale in the sales factor shall not reflect the market for the taxpayer's goods, services or other ordinary sources of business income to the extent the sourcing of the receipts from that sale differs from the sales factor computed without regard to that sale; and
D) in the case of sales of assets that are made in connection with a partial or complete withdrawal from the market in the state in which the assets are located, including the gross receipts from those sales in the sales factor would increase the business income apportioned to that state when the taxpayer's market in that state has decreased.
3) When the income producing activity relevant to the sourcing of business income from intangible personal property can be readily identified, that income shall be included in the denominator of the sales factor and, if the income producing activity occurs in this State, in the numerator of the sales factor as well. For example, with respect to taxable years ending before December 31, 2008, usually the income producing activity can be readily identified in respect to interest income received on deferred payments on sales of tangible property (see Section 100.3370(a)(1)(A)).
4) When business income from intangible property is sourced according to the income producing activity, and the income cannot readily be attributed to any income producing activity of the person, the income shall not be assigned to the numerator of the sales factor for any state and shall be excluded from the denominator of the sales factor. The following provisions illustrate this concept:
A) Subpart F (IRC sections 951 through 964) income is passive income generated by the mere holding of an intangible. For taxable years ending on or after December 31, 1995, subpart F income is excluded from the sales factor under IITA Section 304(a)(3)(D). For prior taxable years, there is a rebuttable presumption that subpart F income is not includable in either the numerator or the denominator of the sales factor. If a taxpayer wishes to include subpart F income in either the numerator or the denominator of the sales factor, the burden of proof is on the taxpayer to identify the income producing activities and to situs those activities within a particular state; or
B) When business income in the form of dividends received on stock during taxable years ending before December 31, 1995, or interest received on bonds, debentures or government securities results from the mere holding of intangible personal property by the person, those dividends and interest shall be excluded from the denominator of the sales factor.
5) In the case of sales in the regular course of business of intangibles (including, by means of example, without limitation, patents, copyrights, bonds, stocks and other securities), gross receipts shall be disregarded and only the net gain (loss) shall be included in the sales factor, provided that, for taxable years ending on or after December 31, 2008, only net gains shall be included in the sales factor for sales sourced under IITA Section 304(a)(3)(C-5)(iii).
EXAMPLE: In 1990, Corporation A, a calendar year taxpayer, sells stock with an adjusted basis of $98,000,000 for $100,000,000, realizing a federal net capital gain of $2,000,000. Only the net capital gain of $2,000,000 shall be reflected in A's sales factor for the taxable year ending December 31, 1990.
6) Hedging Transactions
A) A "hedging transaction" is a transaction entered into by a taxpayer in the normal course of business primarily to manage interest rate risk or the risk of price or currency fluctuations. (See IRC sections 475(c)(3), 1221(b)(2)(A) and 1256(e)(2).) The purpose of the sales factor in IITA Section 304(a) is to apportion the business income of a taxpayer conducting an interstate business to this State based on this State's relative share of the marketplace for the goods and services sold by the taxpayer in the course of its business. Gains and losses on hedging transactions entered into to manage the risks associated with the acquisition of resources by a taxpayer (for example, price fluctuations in commodities consumed in the taxpayer's business) do not reflect the market for the taxpayer's goods and services and, therefore, shall be excluded from the sales factor. Gains and losses on hedging transactions entered into to manage risks associated with the gross income the taxpayer expects from its sales of goods and services (for example, the effect of foreign currency fluctuations on the dollar amount of gross income the taxpayer will receive from sales to a particular foreign country) are best accounted for in the sales factor as adjustments to the gross receipts from the transactions whose risks are being hedged. Gains and losses on hedging transactions that manage risks associated with both acquisitions and sales of the taxpayer (for example, electricity futures bought or sold by a taxpayer engaged in the business of buying and selling electrical power), or that otherwise cannot be associated with a particular transaction or class of transactions in the computation of the sales factor, should be excluded from the sales factor. Federal income tax law provides a framework for identifying gains and losses from hedging transactions to the transactions or class of transactions being hedged and for keeping records necessary to support the identifications. The federal practice should be followed for State purposes.
B) General Rule. Except as provided in subsection (c)(6)(C), any income, gain or loss from a transaction properly identified as a hedge under IRC section 1221(b)(2)(A), 475(c)(3) or 1256(e)(2) shall be excluded from the numerator and denominator of the sales factor.
C) Special Rule. With respect to any hedging transaction described in subsection (c)(6)(B) as to which identification requirements of subsection (c)(6)(D) are satisfied, any income, gain or loss from the hedging transaction shall be included in the denominator of the sales factor if the gross receipts from the hedged item are included in the denominator. That income, gain or loss shall be included in the numerator of the sales factor if the gross receipts from the hedged item are included in the numerator of the sales factor, and excluded from the numerator of the sales factor if the gross receipts from the hedged item are excluded from the numerator of the sales factor. If the hedging transaction relates to an identified group of hedged items, the income, gain or loss from the hedging transaction shall be included in the numerator of the sales factor in the same proportion that the gross receipts from the group of hedged items are included in the numerator of the sales factor.
D) Identification Required. The identification requirements of this subsection (c)(6)(D) are met if the taxpayer's books and records clearly identify a hedging transaction as managing risk relating to a particular item or items of gross receipts, including anticipated items of gross receipts, that must be included in the sales factor. The identification requirements are met only if identification is made at the time and in the manner required under IRC section 475(c)(3), 26 CFR 1.1221-2(f) and (g), or 26 CFR 1.1256(e)-1 and the taxpayer's books and records include the information necessary to apply subsection (c)(6)(C).
E) This subsection (c)(6) does not apply to any hedging transaction that, for federal income tax purposes, is integrated with the hedged item, such as under 26 CFR 1.988-5 or 1.1275-6. In addition, for purposes of this subsection (c)(6):
i) a transaction entered into by one member of a federal consolidated group identified as a hedge against a risk of another member of the federal consolidated group under the "single-entity approach" in 26 CFR 1.1221-2(e)(1) is not a hedging transaction if the two members of the federal consolidated group are not members of the same unitary business group, because the transaction is not hedging against a risk faced by the taxpayer entering into the transaction; and
ii) a transaction entered into by one member of a unitary business group with another member of the unitary business group is not a hedging transaction, because the risk remains within the group, except in the case of a transaction identified under 26 CFR 1.1221-2(f) or (g) as a hedging transaction between two member of a unitary business group who are also members of a federal consolidated group that has made the "separate entity election" in 26 CFR 1.1221-2(e)(2) with regard to hedging transactions.
F) The provisions of this subsection (c)(6) are illustrated by the following examples:
EXAMPLE 1: Taxpayer expects that, during its next production cycle, it will need 10 tons of commodity Y for its interstate manufacturing business. Commodity Y is a raw material used by Taxpayer in the manufacture of its inventory. In order to hedge against exposure to changes in the price of commodity Y, Taxpayer enters into a forward contract to purchase 10 tons of commodity Y. The forward contract is identified as a hedging transaction under IRC section 1221(b)(2)(A). Under subsection (c)(6)(B), any income, gain or loss recognized with respect to the forward contract shall be excluded from the numerator and denominator of the sales factor.
EXAMPLE 2: On January 1, 2008, Taxpayer owns 10 tons of commodity X, which it holds for sale in the ordinary course of business and expects to sell during its taxable year ending December 31, 2008. To hedge against price fluctuations in commodity X, on January 10, 2008, while Taxpayer still owns commodity X, it sells the equivalent of 10 tons of commodity X futures contracts on a futures exchange. Taxpayer expects to sell commodity X to customers in various states, including Illinois. The futures contract is identified as a hedging transaction under IRC section 1221(b)(2)(A), and Taxpayer properly identifies the futures contract as required under subsection (c)(6)(D) as hedging gross receipts from sales of commodity X. Under subsection (c)(6)(C), any gain or loss taken into account by Taxpayer during its taxable year with respect to the futures contract shall be included in the denominator of the sales factor, and included in the numerator of the sales factor in the same proportion that gross receipts from actual sales of commodity X during the taxable year are included in the numerator of the sales factor. If a loss is recognized on the futures contract, the loss is treated as a reduction (but not below zero) of the gross receipts from the sale of commodity X in computing the sales factor.
EXAMPLE 3: Taxpayer is a corporation on the accrual method of accounting with the U.S. dollar as its functional currency. On January 1, 2008, Taxpayer acquires 1,500 British pounds (£) for $2,250 (£1 = $1.50). The acquisition of £1,500 is properly identified by Taxpayer as a hedging transaction under IRC section 1221(b)(2)(A). On February 5, 2008, when the spot rate is £1 = $1.55, Taxpayer purchases inventory from its supplier by paying £1,500. Accordingly, Taxpayer recognizes $75 exchange gain for federal income tax purposes upon disposition of the British pounds. The $75 exchange gain shall be excluded from both the numerator and denominator of the sales factor under subsection (c)(6)(B).
EXAMPLE 4: Taxpayer is a calendar year corporation with the U.S. dollar as its functional currency. Based on past experience, Taxpayer anticipates making 2009 first quarter sales to customers in New Zealand of 100,000 New Zealand dollars (NZD). In order to hedge against currency fluctuations related to the anticipated first quarter sales, on December 31, 2008, Taxpayer enters into a forward contract to sell 100,000 NZD on March 31, 2009 for $48,000. The forward contract is identified as a hedging transaction under IRC section 1221(b)(2)(A), and the Taxpayer properly identifies the transaction as hedging its anticipated New Zealand sales in accordance with subsection (c)(6)(D). During the first quarter of its 2009 taxable year, Taxpayer makes sales to its New Zealand customers of 90,000 NZD. Under IITA Section 304(a), gross receipts from its New Zealand sales shall be included in the denominator of the Taxpayer's sales factor and excluded from the numerator of the sales factor. Under subsection (c)(6)(C), any gain or loss recognized on the forward contract shall be included in the denominator of the Taxpayer's sales factor and excluded from the numerator of the factor. This treatment is appropriate even though the Taxpayer's sales to New Zealand customers were less than anticipated. Any loss recognized on the forward contract shall be treated as a reduction (but not below zero) of the gross receipts from sales to New Zealand customers that are included in the denominator of the sales factor.
7) Section 988 Transactions
A) Section 988 Transactions. For sales factor purposes, foreign currency gain or loss that shall be computed under IRC section 988, with respect to accrued interest income or expense, gain or loss on a debt instrument, a payable, a receivable or a forward contract payable in a foreign currency described in 26 CFR 1.988-1(a)(2) shall be treated as an adjustment to the income, expense, gain or loss. Accordingly, the foreign currency gain or loss shall be included in the numerator and denominator of the sales factor only to the extent that the income to which the foreign currency gain or loss relates is included in the numerator and denominator of the sales factor. Foreign currency gains and losses with respect to expense shall be excluded from the numerator and denominator of the sales factor. The provisions of this subsection (c)(7)(A) are illustrated by the following examples:
EXAMPLE 1: Taxpayer is a corporation on the accrual method of accounting with the U.S. dollar as its functional currency. On January 1, 2008, Taxpayer converts $13,000 to 10,000 British pounds (₤) at the spot rate of ₤1 = $1.30 and loans the ₤10,000 to Y for 3 years. The terms of the loan provide that Y will make interest payments of ₤1,000 on December 31 of 2008, 2009 and 2010 and will repay Taxpayer's ₤10,000 principal on December 31, 2010. Based on average spot rates for 2008, 2009 and 2010 of ₤1 = $1.32, ₤1 = $1.37 and ₤1 = $1.42, respectively, Taxpayer accrues interest income of $1,320 for 2008, $1,370 for 2009, and $1,420 for 2010. Under IITA Section 304(a), the accrued interest income shall be included in the denominator of Taxpayer's sales factor, but excluded from the numerator of its sales factor. Based on spot rates on December 31, 2008, December 31, 2009 and December 31, 2010 of ₤1 = $1.35, ₤1 = $1.40 and ₤1 = $1.45, respectively, Taxpayer recognizes for federal income tax purposes exchange gain of $30 upon receipt of the interest on December 31 of 2008, 2009 and 2010. In addition, Taxpayer recognizes, for federal income tax purposes, exchange gain of $1,500 upon repayment of the loan principal on December 31, 2010. Under subsection (c)(7)(A), the $30 of exchange gain recognized with respect to the accrued interest for 2008, 2009 and 2010 shall be included in the denominator of Taxpayer's sales factor and excluded from the numerator of its sales factor. The $1,500 of exchange gain with respect to the repayment of principal on December 31, 2010 shall be excluded from both the numerator and denominator of Taxpayer's sales factor because repayment of principal on a loan is not included in the sales factor.
EXAMPLE 2: Taxpayer is a corporation on the accrual method of accounting with the U.S. dollar as its functional currency. On January 15, 2008, Taxpayer sells inventory for 10,000 Canadian dollars (C$). The spot rate on January 15, 2008 is C$1 = U.S. $.55. Under IITA Section 304(a), $5,500 in gross receipts from this sale shall be included in the denominator of Taxpayer's sales factor and excluded from the numerator of the sales factor. On February 23, 2008, when Taxpayer receives payment of the C$10,000, the spot rate is C$1 = U.S. $.50. For federal income tax purposes, Taxpayer recognizes ($500) of exchange loss upon receipt of C$10,000 on February 23, 2008. Under subsection (c)(7)(A), the ($500) exchange loss with respect to the January 15, 2008 sale shall be included in the denominator of the Taxpayer's sales factor and excluded from the numerator of the sales factor. The exchange loss is reflected as a reduction of the denominator of the Taxpayer's sales factor.
B) Section 986(c)(1) Foreign Exchange Gain or Loss on Distributions of Previously Taxed Income. Foreign currency gain or loss recognized pursuant to IRC section 986(c)(1) on distributions of amounts previously taxed to the recipient as subpart F income or as earnings of a qualified electing fund shall be excluded from both the numerator and denominator of the sales factor because those distributions are excluded from federal gross income and, therefore, from the sales factor.
8) Vendor allowances. Retailers often enter into agreements with their vendors regarding the payment of certain allowances to induce sales. These vendor allowances fall into two distinct categories: buying allowances and merchandising allowances.
A) Buying allowances. Rebates and other buying allowances generally are considered reductions to the cost of goods sold and, therefore, are excluded from the sales factor numerator and denominator. These may include, for example, a cash discount for prompt payment, a trade discount for a specified volume of purchase, markdown participation allowances to cover shortfalls in the sales price received by the retailer, defective or damaged merchandise allowances, and sales-based allowances for short-term promotions. The provisions of this subsection (c)(8)(A) are illustrated by the following examples:
EXAMPLE 1: Retailer purchases 1,000 moccasins from vendor, who provides a margin guarantee of $17. The moccasins retail for $25 each. At the end of the season, the 20 remaining moccasins are marked down to $9. Vendor remits $160 to retailer, computed as follows: 20 X ($17-$9). The $160 does not constitute gross receipts includable in the sales factor, as it is a reduction to the cost of the moccasins.
EXAMPLE 2: Retailer runs a promotion offering buy-one-get-one-half-off for Minty Toothpaste. Retailer and Vendor have an arrangement for vendor to provide a $0.75 discount for each item sold at a reduced price. Retailer sells 1,000 tubes of Minty Toothpaste during the promotional period. Vendor provides a $375 discount to Retailer for the items sold at a reduced price, computed as follows: 500 X $0.75. The $375 does not constitute gross receipts includable in the sales factor, as it is a reduction to the cost of Minty Toothpaste.
B) Merchandising allowances.
i) Merchandising allowances are part of the product’s selling price and may be reportable as gross income. Accordingly, merchandising allowances shall be included in the numerator and denominator of the sales factor to the extent that the merchandising allowances promote sales included in the numerator and denominator of the sales factor. The following are types of merchandising allowances:
· Cooperative advertising, which is a sharing arrangement for the costs of advertising depicting the vendor’s products, such as a weekly circular;
· Salary or payroll allowances, which are an incentive to provide more space or staff; and
· Up-front cash payments and long-term agreements that compensate the retailer for a commitment to purchase a targeted volume of goods over a period of time. These are recorded as a liability when received and recognized as income when purchases are made.
ii) The amount includable in the numerator shall be determined in one of the following manners, at the taxpayer’s election, consistently applied:
· The ratio of the number of retail locations in Illinois over the total number of retail locations, or
· The ratio of the gross receipts from retail locations in Illinois over the total gross receipts.
EXAMPLE: Retailer W sells greeting cards for all occasions. Retailer W and Vendor Q have entered into an agreement under which Vendor Q pays Retailer W an allowance of $5 per hour to remove damaged cards and maintain the seasonal greeting card inventory. Retailer W’s employee spends 300 hours monitoring the inventory during the year, and Vendor Q pays Retailer W $1,500 ($5 times 300 hours). This income is considered gross receipts and must be included in the sales factor denominator. Retailer W has 15 stores in Illinois and 5 stores in Wisconsin, so $1,125 ($1,500 times 15/20) would be included in the sales factor numerator.
9) Cost sharing agreements.
A) Payments received pursuant to a cost sharing agreement under Treasury Regulation 1.482-7 in exchange for intercompany services provided to a foreign person who would be a member of the same unitary business group but for the fact the foreign person’s business activity outside the United States is 80% or more of the foreign person’s business activity shall be excluded from both the numerator and denominator of the sales factor because those receipts do not reflect the market for the taxpayer’s goods, services or other ordinary sources of business income and are merely a contra adjustment to the costs of providing those goods and services. In a cost sharing agreement, related parties share the costs and risks of development, e.g. of intangible property, and also share in the reasonably anticipated benefits. A cost sharing agreement may also include a markup over costs, which may be considered receipts from sales of services under IITA section 304(a)(3)(C-5)(iv).
EXAMPLE: Company Software, headquartered in Illinois, has three foreign affiliates: Software France, Software Germany and Software Hungary. They enter into a contract to jointly develop a new tax preparation software package. Company Software will provide the programming and each foreign affiliate will contribute knowledge of the language and tax laws in their country. The total cost of developing the software is $5,000,000. Each affiliate reimburses Company Software for 20% of the costs ($3,000,000 total) plus each affiliate will pay Company Software 2% of the costs as an administrative fee ($60,000 total). When completed, Company Software will own a 60% interest in each country’s version of the software and the foreign affiliate will own a 40% interest. The foreign affiliates are 80/20 companies and are not included in Company Software’s Illinois income tax return. Because Company Software and the affiliates will share in the expected benefits of the agreement, this should be characterized as a cost-sharing agreement with a markup. The reimbursed expenses will be excluded from Company Software’s apportionment factor. The markup is an administrative fee. As such, the markup will be considered receipts from the sale of services and will be included in the apportionment factor.
B) Under a cost-plus service contract, the service provider bears none of the economic costs and risks associated with development, nor does it share in the anticipated benefits. The service provider merely receives a payment for the services rendered, and that payment is considered receipts from the sale of services under IITA section 304(a)(3)(C-5)(iv).
EXAMPLE: Company Pharma, headquartered in Illinois, has a foreign affiliate Pharma Ireland, which owns intellectual property for a drug that it wants to distribute in the United States. Pharma Ireland pays Company Pharma to conduct drug trials for obtaining FDA approval to distribute the drugs. The drug trials are conducted in Illinois. Pharma Ireland reimburses Company Pharma its costs of $100,000 for conducting the trials plus a 5% markup ($105,000 total). The ownership of the intellectual property remains entirely with Pharma Ireland after the drug is approved. Pharma Ireland is an 80/20 company and is not included in Company Pharma’s Illinois income tax return. The contract is a cost-plus service contract because ownership of the intellectual property remains with Pharma Ireland, and Company Pharma will not share in the profits from sales of the drug. Both the reimbursed costs ($100,000) and the markup ($5,000) may be included in the denominator of Company Pharma’s sales factor under 86 Ill. Adm. Code 100.3370(a)(1)(b). Continuing the analysis for determining whether the receipts will be included in the sales factor numerator, the services were received in Illinois where the drug trials were conducted, but Pharma Ireland does not have a place of business in Illinois, so the services will be sourced to the location where the services were ordered. Provided that Company Pharma is subject to tax in Ireland, the $105,000 will be sourced to that country. If Company Pharma is not subject to tax in Ireland, the $105,000 will be excluded from both the numerator and the denominator of the sales factor.
d) Unitary Partners: Inclusion of Shares of Partnership Unitary Business Income and Factors in Combined Unitary Business Income and Factors of Partners
1) IITA Section 304(e) provides that whenever 2 or more persons are engaged in a unitary business as described in IITA Section 1501(a)(27), a part of which is conducted in this State by one or more members of the group, the business income attributable to this State by any member or members shall be apportioned by means of the combined apportionment method. Because partnerships may be members of a unitary business group within the meaning of IITA Section 1501(a)(27), this provision requires a partnership to use combined apportionment when it is engaged in a unitary business with one or more of its partners. However, partners who are not engaged in a unitary business with the partnership shall include their shares of the partnership's business income apportioned to Illinois in their Illinois net incomes under IITA Section 305(a), and those partners' business activities or share of the partnership's market in Illinois would not be represented fairly by their shares of partnership income computed by combining the business income and apportionment factors of the partnership with the business income and apportionment factors of its unitary partners.
2) Accordingly, except in a case in which substantially all of the interests in the partnership (other than a publicly-traded partnership under IRC section 7704) are owned or controlled by members of the same unitary business group, when the business activities of a partnership and any of its partners' business activities constitute a unitary business:
A) The partner's distributive share of the business income and apportionment factors of the partnership shall be included in that partner's business income and apportionment factors. Also, for taxable years ending on or after December 31, 2017, the partner's distributive share of the everywhere sales of the partnership shall be included in the partner's everywhere sales for purposes of applying Section 100.3600. In determining the business income of the partnership, transactions between the unitary partner (or members of its unitary business group) and the partnership shall not be eliminated. However, all transactions between the unitary business group and the partnership shall be eliminated for purposes of computing the apportionment factors of the partner and of any other member of the unitary business group.
EXAMPLE: Partner and Partnership are engaged in a unitary business. Partner owns a 20% interest in Partnership. Partnership has $10,000,000 in sales everywhere, $3,000,000 of which are to Partner, and $4,000,000 in Illinois sales, $1,000,000 of which are to Partner. In computing its apportionment factor, Partner shall include $1,400,000 from Partnership in its everywhere sales (20% of Partnership's $10,000,000 in everywhere sales, after eliminating the $3,000,000 in sales to Partner) and $600,000 from Partnership in its Illinois sales (20% of Partnership's $4,000,000 in Illinois sales, after eliminating the $1,000,000 in sales to Partner). Also, Partner must eliminate any sales it made to Partnership.
B) If a partnership and one of its partners are engaged in a unitary business and the partnership is itself a partner in a second partnership:
i) If the partner is not engaged in a unitary business with the second partnership, the partner's share of the first partnership's share of the business income and apportionment factors of the second partnership shall not be included in the partner's business income and apportionment factors. Instead, the partner's share of the first partnership's share of the base income apportioned to Illinois by the second partnership shall be included in the partner's Illinois net income.
ii) If the partner is engaged in a unitary business with the second partnership, the partner's share of the first partnership's share of the business income and apportionment factors of the second partnership shall be included in the partner's business income and apportionment factors.
C) If, for taxable years ending on or after December 31, 2017, a partner and a partnership engaged in a unitary business apportion their business income using different apportionment formulas under IITA Section 304:
i) The apportionment percentage of the partnership shall computed under Section 100.3600 by treating the partnership as a member of the unitary business group, but using only that partner's distributive share of the partnership's apportionment factors and sales. That partner's apportionment percentage is equal to that partner's apportionment percentage computed under Section 100.3600 plus the partnership's apportionment percentage computed under Section 100.3600.
ii) If a partnership has more than one partner in the same unitary business group, and the partnership uses a different apportionment formula than one or more of the partners, each partner that uses the same apportionment formula as the partnership shall compute its apportionment factor as provided in subsection (d)(2)(A) and each partner that uses a different apportionment formula shall compute its apportionment factor as provided in subsection (d)(2)(C)(i).
3) This subsection (d) does not apply to a partner's shares of business income and apportionment factors from any partnership that cannot be included in a unitary business group with that partner.
A) This subsection (d) does not apply because:
i) for taxable years ending prior to December 31, 2017, the partner and the partnership are required to apportion their business income using different apportionment formulas under IITA Section 304, and therefore cannot be members of a unitary business group under IITA Section 1501(a)(27); or
ii) the business activities of either the partner or the partnership outside the United States are equal to or greater than 80% of the total worldwide business activities of that partner or partnership, as determined under IITA Section 1502(a)(27). In applying this 80/20 test to a taxpayer, no apportionment factors of any partnership shall be included in the apportionment factors of that taxpayer pursuant to this subsection (d).
B) For taxable years ending prior to December 31, 2017, if the partnership is itself a partner in a second partnership, and one of its partners is engaged in a unitary business with the second partnership and is not prohibited from being a member of a unitary business group that includes the second partnership under subsection (d)(3)(A)(i) or (ii), that partner shall include in its business income and apportionment factors its share of the partnership's share of the second partnership's business income and apportionment factors.
4) If substantially all of the interests in a partnership (other than a publicly-traded partnership under IRC section 7704) are owned or controlled by members of the same unitary business group as the partnership, the partnership shall be treated as a member of the unitary business group for all purposes, and, for purposes of applying IITA Section 305(a) to any nonresident partner who is not a member of the same unitary business group, the business income of the partnership apportioned to this State shall be determined using the combined apportionment method prescribed by IITA Section 304(e). For purposes of this subsection (d), substantially all of the interests in a partnership are owned or controlled by members of the same unitary business group if more than 90% of the federal taxable income of the partnership is allocable to one or more of the following persons:
A) any member of the unitary business group;
B) any person who would be a member of the unitary business group if not for the fact that 80% or more of that person's business activities are conducted outside the United States;
C) any person who would be a member of the unitary business group except for the fact that the person and the partnership apportion their business incomes under different subsections of IITA Section 304 and, therefore, for taxable years ending prior to December 31, 2017, would be excluded from a unitary business group in which the partnership is a member; or
D) any person who would be disallowed a deduction for losses by IRC section 267(b), (c) and (f)(1) by virtue of being related to any person described in subsection (d)(4)(A), (B) or (C), as well as any partnership in which a person described in subsection (d)(4)(A), (B) or (C) is a partner.
5) Examples
EXAMPLE 1: Corporation A owns a 50% interest in P-1, a partnership. Corporation A and P-1 are engaged in a unitary business within the meaning of IITA Section 1501(a)(27). P-1 itself conducts no business activities in Illinois, and the Illinois numerator of its apportionment factor is zero. P-1 holds a 50% interest in P-2, a partnership doing business exclusively in Illinois. P-1 has $1.4 million of taxable business income, not including any income from P-2. P-2 has base income of $1 million, all of which is business income, and on a separate-entity basis, all of its business income would be apportioned to Illinois.
EXAMPLE 2: If Corporation A and P-2 are not members of the same unitary business group, Corporation A would compute its business income apportioned to Illinois by including $700,000 (50% of $1.4 million) of P-1's business income in Corporation A's business income, and 50% of P-1's apportionment factors in its apportionment factors. Corporation A also would include in its Illinois net income its 50% share of P-1's 50% share of the base of P-2 apportionable to Illinois, or $250,000 (50% of 50% of $1 million).
EXAMPLE 3: If Corporation A, P-1 and P-2 are members of the same unitary business group, P-1 shall include 50% of P-2's business income and 50% of P-2's apportionment factors in its own business income and apportionment factors. Accordingly, P-1's business income will be $1.9 million (the $1.4 million it earned directly plus its 50% share of P-2's $1 million in business income). Corporation A will then compute its business income apportioned to Illinois by including its 50% share of P-1's business income, or $950,000 (50% of $1.9 million) with its business income and its 50% share of P-1's apportionment factors (which will include P-1's share of P-2's apportionment factors) in its apportionment factors.
EXAMPLE 4: If Corporation A, P-1 and P-2 are unitary, but P-1 is excluded from the unitary business group of Corporation A and P-2 because those entities apportion their business income under IITA Section 304(a) and P-1 is a financial organization that apportions its business income under IITA Section 304(c) and the taxable year ends prior to December 31, 2017, Corporation A shall include in its business income and apportionment factors its 50% share of P-1's 50% share of the business income and apportionment factors of P-2. Also, Corporation A's Illinois net income includes 50% of the business income of P-1 apportioned to Illinois by P-1 using its own apportionment factors. Because, in this example, P-1 is not doing business in Illinois, none of its business income is included in Corporation A's Illinois net income.
EXAMPLE 5: In a taxable year ending December 31, 2017, a combined group is comprised of two corporations: Financial Organization (which apportions its business income using the financial organization formula under IITA Section 304(c)) and Insurance Company (which apportions its business income using the premiums factor under IITA Section 304(b)). Financial Organization is a 20% partner in Partnership, which apportions its business income using the sales factor formula under IITA Section 304(a). Partnership is engaged in a unitary business with the members of the combined group. The apportionment data for the members of the unitary business group are as follows:
|
|
Everywhere Sales |
Respective Section 304 Formula |
||
|
Company |
Numerator |
Denominator |
Percentage |
|
|
|
|
|
|
|
|
Insurance Co. |
$200 |
$9 |
$150 |
6.000% |
|
Financial Org. |
$300 |
$75 |
$250 |
30.000% |
|
Partnership |
$500 |
$100 |
$500 |
|
|
Financial Org.'s Partnership Share |
$100 |
$20 |
$100 |
20.000% |
|
Grand Total |
$600 |
|
|
|
The apportionment percentages of each member of the group are computed as follows:
|
|
A |
B |
C |
D |
E |
|
Company |
Section 304 Apportionment Percentage |
Subgroup Everywhere Sales |
A * B |
Group Everywhere Sales |
C ÷ D |
|
Insurance Co. |
6.000% |
$200 |
$12.00 |
$600 |
2.000% |
|
Financial Org. |
30.000% |
$300 |
$90.00 |
$600 |
15.000% |
|
Financial Org.'s Partnership Share |
20.000% |
$100 |
$20.00 |
$600 |
3.333% |
Financial Organization's apportionment percentage is 18.333% (the 15.000% computed under Section 100.3600 and its 3.333% share of Partnership's apportionment percentage computed under Section 100.3600) and the apportionment percentage of the group is 20.333%.
e) Apportionment of Business Income by Foreign Taxpayers.
1) Under IRC section 882, foreign corporations include only effectively-connected income in their federal taxable income. Foreign taxpayers may exclude other items of income from their federal taxable income if authorized under treaty, as provided in IRC section 894. Using a foreign taxpayer's worldwide apportionment factors to determine how much of its domestic business income shall be apportioned to Illinois would not fairly represent that taxpayer's business activities or market within Illinois. Accordingly, a foreign taxpayer shall use only the apportionment factors related to its domestic business income when apportioning its business income to Illinois. Similarly, in determining whether 80% or more of a foreign taxpayer's total business activity is conducted outside the United States for purposes of IITA Section 1501(a)(27), that taxpayer shall use only the apportionment factors related to the business income included in its federal taxable income (plus addition modifications), rather than use all of its worldwide factors.
2) Foreign Sales Corporations. Under IRC section 921, "exempt foreign trade income" of a foreign sales corporation is treated as foreign source income excluded from gross income. "Exempt foreign trade income" is defined in IRC section 923 to equal the sum of the amounts of income derived from various categories of transaction, with the income from each category multiplied by specific percentages. As a general rule, there is no systematic relationship between transactions qualifying for this treatment and any particular item of property or payroll of a foreign sales corporation. Accordingly, the provisions of subsection (e)(1) shall not apply to a foreign sales corporation and, in apportioning its business income and in determining whether 80% or more of its business activity is conducted outside the United States, a foreign sales corporation uses all of its apportionment factors.
(Source: Amended at 47 Ill. Reg. 6030, effective April 12, 2023)
Section 100.3390 Petitions for Alternative Allocation or Apportionment (IITA Section 304(f))
a) In general. IITA Section 304(f) provides that, if the allocation and apportionment provisions of IITA Section 304(a) through (e) do not, for taxable years ending before December 31, 2008, fairly represent the extent of the person's business activity in this State, or do not, for taxable years ending on or after December 31, 2008, fairly represent the market for the person's goods, services or other sources of business income, the person may petition for or the Director may require, in respect of all or any part of the person's business activity, if reasonable:
1) separate accounting;
2) the exclusion of any one or more of the factors;
3) the inclusion of one or more additional factors which will fairly represent the person's business activity in this State; or
4) the employment of any other method to effectuate an equitable allocation and apportionment of the person's income.
b) The petition procedures provided in this Section are exclusive means by which a taxpayer may petition for an alternative apportionment formula. Any attempt to invoke an alternative apportionment formula by a method or procedure other than as specified in this Section shall not be considered a valid petition under IITA Section 304(f). Pursuant to Section 304(f), the Director has sole and exclusive authority to grant a petition for an alternative apportionment formula.
c) Burden of Proof. A departure from the required apportionment method is allowed only when those methods do not accurately and fairly reflect business activity in Illinois (for taxable years ending before December 31, 2008) or market in Illinois (for taxable years ending on or after December 31, 2008). An alternative apportionment method may not be invoked, either by the Director or by a taxpayer, merely because it reaches a different apportionment percentage than the required statutory formula. However, if the application of the statutory formula will lead to a grossly distorted result in a particular case, a fair and accurate alternative method is appropriate. The party (the Director or the taxpayer) seeking to utilize an alternative apportionment method has the burden or going forward with the evidence and proving by clear and convincing evidence that the statutory formula results in the taxation of extraterritorial values or operates unreasonably and arbitrarily in attributing to Illinois a percentage of income that is out of all proportion to the business transacted in this State (for taxable years ending before December 31, 2008) or the market for the taxpayer's goods, services or other sources of business income in this State (for taxable years ending on or after December 31, 2008). In addition, the party seeking to use an alternative apportionment formula must go forward with the evidence and prove that the proposed alternative apportionment method fairly and accurately apportions income to Illinois based upon business activity in this State (for taxable years ending before December 31, 2008) or the market for the taxpayer's goods, services or other sources of business income in this State (for taxable years ending on or after December 31, 2008).
d) Filing Procedure. A petition for alternative apportionment must be clearly labeled "Petition for Alternative Allocation or Apportionment" and be supported by sufficient facts and information to allow the Director to determine whether the taxpayer has met the burden of proof required under subsection (b). A petition will be summarily rejected if its sole basis for support rests on the fact that an alternative method reaches a different apportionment percentage than the required statutory formula. Petitions must be submitted to:
Illinois Department of Revenue
Legal Services Bureau/Income Tax
101 W. Jefferson Street
Springfield IL 62702
e) Timely Filed Petitions. A taxpayer petition for use of a separate accounting method or any other alternative apportionment method will not be considered by the Director unless that petition has been timely filed. A taxpayer who petitions the Director for an alternative apportionment formula does so subject to the Department's right to verify, by audit of the taxpayer's return and supporting books and records within the applicable statute of limitations, the facts submitted as the basis of the petition. A petition for alternative allocation or apportionment is timely filed if the petition is filed:
1) 120 days prior to the due date of the tax return (including extensions) for which permission to use an alternative method is sought. A taxpayer who does not petition more than 120 days prior to the due date of the original return must file the return and pay tax according to the statutorily approved allocation or apportionment method. If the petition is approved, the Department shall grant permission to use an alternative apportionment method in the form of a private letter ruling issued under 2 Ill. Adm. Code 1200.110.
2) as an attachment to a return amending an original return which was filed using the statutory allocation and apportionment rules. A taxpayer who has not filed a petition for alternative apportionment under subsection (e)(1), or whose subsection (e)(1) petition has been rejected, may thereafter file a petition with an amended return. The explanations section of the amended return should state that the amended return includes a petition for alternative apportionment that should be referred to the Legal Services Bureau/Income Tax, and a copy of the amended return should be mailed to the Legal Services Bureau/Income Tax, at the address in subsection (d). If the amended return results in a claim for refund, the Department will consider the petition, along with any other issues raised in the claim for refund, pursuant to the procedures set forth at Section 100.9400.
3) as part of a protest, an action filed under the State Officers and Employees Money Disposition Act [30 ILCS 230] or a petition to the Illinois Independent Tax Tribunal regarding a notice of deficiency issued as a result of the audit of the taxpayer's return and supporting books and records; provided that the audit adjustments being protested result in the need for the petition for alternative apportionment. Alternative apportionment may not be raised in a protest, a court filing or a petition to the Illinois Independent Tax Tribunal regarding a notice of deficiency unless the taxpayer has requested in writing that the auditor allow the use of alternative apportionment and the request was denied, or the audit disallows an alternative method of apportionment used by the taxpayer on its return. The disallowance of the use of alternative apportionment in an audit may be reviewed by the Informal Conference Board.
f) Consideration of Petitions
1) After consideration of a petition for alternative apportionment under subsections (e)(1) or (e)(2), the Director will issue a ruling letter advising the taxpayer that the petition has been accepted, partially accepted or rejected.
2) If the petition is partially accepted (i.e., when the Director finds that the taxpayer has established that apportionment relief is warranted but disagrees with the taxpayer's proposed alternative apportionment method) the Director shall so notify the taxpayer of the reasons for rejecting the proposed alternative apportionment formula. The taxpayer may then submit a modified alternative apportionment formula for the Director's approval, or protest the Director's rejection of the proposed alternative apportionment formula by requesting an administrative hearing on the matter.
3) If a taxpayer's petition is rejected in its entirety, the Director will state the reasons for the rejection of the petition.
g) Appeal Procedures. A denial of a petition for alternative apportionment submitted under subsection (e)(1) or (e)(2) is not a final administrative decision and may be protested as provided in this subsection (g). If the petition is submitted prior to the filing of the original return under subsection (e)(1), and is denied, the taxpayer must file and pay tax using the statutory formula. A taxpayer who has filed using the statutory formula after denial of a petition for alternative apportionment may file an amended return claiming a refund based upon the original petition. Additional information in support of the taxpayer's petition for alternative apportionment may be submitted for the Director's reconsideration at that time. If the claim for refund is denied, the taxpayer may file a protest pursuant to IITA Section 910 and request an administrative hearing, or file a petition with the Illinois Independent Tax Tribunal, solely on the issue of alternative apportionment or in addition to other issues raised in the claim for refund.
h) Bifurcated Administrative Hearings
1) The taxpayer will have waived the right to raise alternative apportionment as an issue in the administrative hearing or before the Illinois Independent Tax Tribunal if the taxpayer has not complied with procedures set forth in this Section.
2) When a protest to a notice of deficiency or a claim denial raises the issue of alternative apportionment in addition to other issues, the administrative hearing shall proceed in two distinct phases.
A) All issues other than the petition for alternative apportionment, which have properly been raised in the protest to the notice of deficiency or claim denial, shall be considered first. The ALJ shall conduct the hearing and the taxpayer shall present its case. The ALJ shall not accept any evidence with regard to alternative apportionment until the taxpayer and the Department have rested their case with regard to all other issues raised in the protest to the notice of deficiency or claim denial.
B) When the taxpayer and the Department have rested with regard to all other issues raised in the protest of the notice of deficiency or claim denial, the ALJ shall conduct the hearing and the taxpayer shall present its case in support of its petition for alternative apportionment. Evidence allowed into the record with regard to all other issues raised in the protest of the notice of deficiency or claim denial shall be deemed to be allowed into the record with regard to the protest to the Director's denial of alternative apportionment and need not be resubmitted. However, on any issue as to which evidence has already been allowed with regard to the protest of the notice of deficiency or claim denial, the ALJ shall allow submission of additional evidence on the issue of alternative apportionment.
C) In bifurcated hearings, the ALJ shall issue a two-part recommendation to the Director. The first part of the recommendation shall address all other issues raised in the protest of the notice of deficiency or claim denial and the second part of the recommendation shall be a determination of whether the taxpayer has met its burden of proof under subsection (b).
3) Proceedings before the Illinois Independent Tax Tribunal shall be conducted according to the rules of the Illinois Independent Tax Tribunal.
i) Director's Decision after Administrative Hearing
1) The Director will consider the ALJ's recommendation. If the Director agrees that the taxpayer has met his burden of proof under subsection (b) and that the formula proposed by the taxpayer and recommended by the ALJ fairly and accurately apportions income to Illinois based upon the taxpayer's business activity in this State, the Director will accept the recommendation of the ALJ and it will become final.
2) If the Director, after considering the ALJ's decision, agrees that the taxpayer has met its burden of proof under subsection (b), but finds that the proposed alternative apportionment formula does not fairly and accurately apportion income to Illinois based upon the taxpayer's business activity in this State, the Director's decision will so state and will provide an appropriate alternative apportionment formula. The Director's decision will be final for purpose of administrative review.
3) If the Director finds that the taxpayer has not established by clear and convincing evidence that the statutory formula results in the taxation of extraterritorial values, and operates unreasonably and arbitrarily in attributing to Illinois a percentage of income that is out of all proportion to the business transacted in this State, or the market in this State, and also finds that the taxpayer's proposed alternative apportionment formula is not permissible, the Director shall issue his or her decision so stating. The taxpayer may seek administrative review of this final decision of the Director. If the court finds that the taxpayer has met the burden of proof under subsection (b) that an alternative apportionment formula is warranted, but agrees with the Director that the alternative apportionment formula proposed by the taxpayer does not fairly and accurately reflect the taxpayer's business activities in this State, and the case is remanded to the Department, the Director shall provide an appropriate alternative apportionment formula. The designation of a formula by the Director is a final administrative decision of the Department subject to administrative review by the court.
(Source: Amended at 41 Ill. Reg. 10662, effective August 3, 2017)
Section 100.3400 Apportionment of Business Income of Financial Organizations for Taxable Years Ending Prior to December 31, 2008 (IITA Section 304(c))
a) In General. For taxable years ending prior to December 31, 2008, business income of a financial organization shall be apportioned to this State by multiplying such income by a fraction, the numerator of which is its business income from sources within this State, and the denominator of which is its business income from all sources. (IITA Section 304(c)(1))
1) IITA Section 304(c)(1) expressly provides that the adjusted income of an international banking facility is excluded from the amounts sourced to Illinois under its provisions. Adjusted income from an international banking facility is defined in IITA Section 304(c)(2) to mean amounts reported on a Consolidated Report of Condition which is filed with the Federal Deposit Insurance Corporation on Schedule A, lines 2.c., 5.b. or 7.a., or any successor or substitute report required by the Federal Deposit Insurance Corporation, as applicable to the tax year in question. Accordingly, all references in this Section to items sourced to Illinois must be read to exclude items comprising the adjusted income of an international banking facility.
2) Any item of income that is excluded from base income or subtracted in the computation of base income of the financial organization must therefore be excluded from the formula. See Continental Illinois National Bank and Trust Company of Chicago v. Lenckos, 102 Ill.2d 210 (1984). For example, dividends deducted from federal taxable income under 26 USC 243 or subtracted in the computation of base income under IITA Section 203(b)(2)(O) are excluded from the apportionment formula.
3) In determining the amount of business income included in the numerator or the denominator of the apportionment fraction, amounts of business income received during the tax year shall not be reduced by any expenses allocable to the business. The determination of gains or losses included in business income shall take into account the taxpayer's basis in property sold or otherwise disposed of, but in no event shall a loss included in business income reduce the numerator or denominator of the apportionment fraction below zero.
b) Definitions. For purposes of this Section, the following definitions shall apply:
1) Customer. A "customer" is a person for whom the financial organization provides financial services directly or through an agent or other fiduciary of the financial organization. Illustrative examples of this definition include:
A) In the case of a bank participating in a syndicated loan, the borrower is a customer of the bank if the bank is a named party to the original transaction for whom the lead bank is acting as agent. However, if a bank purchases a participation in an existing loan, the borrower is not a customer of the bank because the bank is not providing a financial service to the borrower.
B) In the case of a financial organization financing the accounts receivable of a business, the obligor on the account is a customer of the financial organization only if the financial organization purchases the receivable, thus creating a direct relationship between itself and the obligor.
i) Example 1: If a financial organization makes a loan to a company secured by the company's customer receivables, the company is the customer of that financial organization but the company's customers are not customers of the financial organization because the loan is a financial service provided to the company rather than to the company's customers.
ii) Example 2: If a financial organization purchases a customer account receivable from a company, the company's customer thereby becomes a customer of the financial organization.
C) A financial organization purchases a publicly-traded security of an issuer for whom the organization provides financial services. If the purchase is unrelated to any financial services provided by the financial organization to the issuer, the issuer is not a customer of the financial organization for purposes of sourcing the income derived from the security. If, however, the purchase of the security is made in connection with a financial service provided to the issuer as a customer of the financial organization, the issuer is a customer for sourcing the income derived from the security.
2) Dividend. "Dividend" means any item defined as a dividend under 26 USC 316 and any other item of income characterized or treated as a dividend under the Internal Revenue Code.
3) Fees, Commissions or Other Compensation for Financial Services. "Fees, commissions or other compensation for financial services" means all items of income, other than interest, dividends and gross profit from trading in stocks, bonds or other securities, paid to a financial organization by its customers for the provision of those services characteristic of financial organizations, as defined in Section 100.9710 of this Part. Such items include, to the extent received for services characteristic of a financial organization:
A) Late payment fees or penalties to the extent not properly characterized as interest;
B) Penalties for early withdrawal of deposits or early repayment of debt; and
C) Loan origination fees, charges for credit investigations, filing fees, etc., to the extent not properly characterized as interest.
4) Gross Profits from Trading in Stocks, Bonds or Other Securities. "Gross profits from trading in stocks, bonds or other securities" of a financial organization means the net gain or net loss realized on the sale, exchange or other disposition of a security other than a security representing an interest in or obligation of that financial organization. Gross profits from trading in stocks, bonds or other securities do not include any amount that is properly characterized as a fee or commission of the financial organization for the transaction or as interest or dividends. Gross profits from trading in securities do include any net gain or loss realized on the sale, exchange or other disposition of some or all of a financial organization's interest in a loan or other indebtedness of a customer of the financial organization payable to the financial organization.
5) Illinois Customer. "Illinois customer" means:
A) A customer who is an Illinois resident individual, trust or estate; or
B) A customer other than an individual, trust or estate whose commercial domicile is in Illinois.
Unless a financial organization has actual knowledge that the residence or commercial domicile of a customer during a taxable year is in a state other than the state in which the customer's billing address is located, the customer shall be deemed to be an Illinois customer if the billing address of the customer, as shown in the records of the financial organization relating to the interest income being sourced, is located in Illinois and shall be deemed not to be an Illinois customer if that billing address is located outside Illinois.
6) Interest. "Interest" means "compensation for the use or forbearance of money". See Deputy v. du Pont, 308 U.S. 488, 498 (1940).
A) Interest does not include late payment penalties that are in addition to interest expressly charged on any past-due balance or that are computed without regard to the amount of the past-due balance or the length of time a payment is late.
B) Interest includes the amortization of any discount at which an obligation is purchased and is net of the amortization of any premium at which an obligation is purchased. Any amount in excess of the purchase price received in payment of an obligation purchased at an arm's-length discount shall be rebuttably presumed to be interest.
C) Interest includes any amount received upon the sale, exchange or other disposition of an obligation to the extent that such amount represents the accrual of interest on the unpaid balance of the obligation since the most recent payment made on that obligation.
7) Margin Account. "Margin account" means any extension of credit made by a financial organization for the purchase or carrying of securities by the borrower, within the meaning of 15 USC 78g.
8) Stocks, Bonds or Other Securities. "Stocks, bonds or other securities" means any share of stock in any corporation, certificate of stock, or interest in any corporation, note, bond, debenture, or other evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing, within the meaning of 26 USC 1236(c).
c) Sourcing Rules. For the purposes of this Section, business income (other than the adjusted income of an international banking facility) of a financial organization from sources within this State is the sum of the following amounts:
1) Fees, commissions or other compensation for financial services rendered within this State. (IITA Section 304(c)(1)(A))
A) Scope. This subsection (c)(1) applies to all payments received by a financial organization from its customers for services characteristic of a financial organization, except to the extent the payment is sourced according to subsection (c)(2), (c)(3) or (c)(4) of this Section.
B) Application. Financial services are "rendered within this State" if:
i) The income-producing activity is performed in this State; or
ii) The income-producing activity is performed both within and without this State and a greater proportion of the income-producing activity is performed within this State than without this State, based on performance costs.
If the performance costs of two or more income producing activities cannot readily be allocated among those activities, the gross income resulting from those activities shall be combined and sourced to Illinois using the combined performance costs for all those activities.
2) Gross profits from trading in stocks, bonds or other securities managed within this State. (IITA Section 304(c)(1)(B))
A) Scope. This subsection (c)(2) applies only to net gains or losses realized on the sale or exchange of securities. Dividends received on stocks and interest received on securities are sourced pursuant to subsection (c)(3) of this Section.
B) Application. The trading of a stock, bond or other security is "managed within this State" if:
i) The income producing activity is performed in this State; or
ii) The income producing activity is performed both within and without this State and a greater proportion of the income producing activity is performed within this State than without this State, based on performance costs.
If the performance costs of two or more income producing activities cannot readily be allocated among those activities, the gross income resulting from those activities shall be combined and sourced to Illinois using the combined performance costs for all those activities.
3) Dividends and interest from Illinois customers, which are received within this State. (IITA Section 304(c)(1)(C))
A) Scope. This subsection (c)(3) applies to all dividends included in business income of the financial organization and to all interest (other than interest on margin accounts, which is sourced under the provisions in subsection (b)(4) of this Section) received by the financial organization.
B) Application. Interest is never sourced to Illinois under this subsection (c)(3) unless it is received from an Illinois customer. Interest from an Illinois customer or dividends are "received in this State" if the payment comes within the control of the financial organization or of an agent or other fiduciary of the financial organization at a location within the State of Illinois. If payment of an item of interest income that has been accrued and included in base income for a tax year is not received prior to the date the return for that tax year is filed, the financial organization shall treat the payment as received at the location to which the borrower is directed to send the payment or, if no single location is specified, at the location at which the financial organization reasonably expects to receive the interest. The following examples illustrate the principles for determining when a payment comes within the control of a financial organization:
i) Example 3: A financial organization directs its customers in the Midwest to mail all payments to a lock box located in Detroit. Interest and dividend payments mailed to the Detroit lock box are received in Detroit. Such payments are received in Detroit even if the checks are first deposited by or on behalf of the financial organization in a bank located outside Detroit because the checks come within the control of the financial organization's agent when received at the lock box. Whether the lock box is serviced by the financial organization's own employees or by a company acting as agent for the financial organization is irrelevant, because receipt by either an employee or an agent of the financial organization will give it control.
ii) Example 4: An electronic transfer of funds is received by a financial organization at the location of the bank carrying the account of the financial organization into which the funds are deposited. In the case of a bank with branches in both Illinois and Missouri, whose Federal Reserve Bank account is maintained at the Federal Reserve Bank of St. Louis, an electronic transfer via the Federal Reserve is received by the bank in St. Louis, the location of its account. In the case of a financial organization receiving an electronic transfer via the Federal Reserve through that bank, the payment is received at the branch of the bank in which the financial organization's account is maintained because the payment is not within the financial organization's control until deposited into its account by its bank. The deposit of funds into the account of the bank at the Federal Reserve Bank does not place the funds within the control of the financial organization because the bank, merely by participating in the electronic transfer, is not acting as collection agent for the financial organization.
iii) Example 5: A credit card bank purchases its cardholders' balances from a retailer pursuant to an agreement under which the retailer services the accounts. Payments are received by the credit card bank at the location where the retailer receives the payments on its behalf, not at the location to which the retailer forwards the payments.
iv) Example 6: A bank makes a loan to an Illinois customer secured by the customer's accounts receivable. Pursuant to the loan agreement, the bank's customer directs its customers to send their payments to the bank, which deposits the payments in an account at its Chicago branch in the name of the customer, from which the bank may withdraw loan payments to itself. The funds in the customer's account are not within the control of the bank. Payments withdrawn by the bank from the account at the Chicago branch pursuant to the agreement are received in Illinois regardless of where the payments from the customers are received by the bank. However, if the customer pays the bank by check drawn on the account at the Chicago branch, payment is received by the bank in the state in which it receives the check.
4) Interest charged to customers at places of business maintained within this State for carrying debit balances of margin accounts, without deduction of any costs incurred in carrying such accounts. (IITA Section 304(c)(1)(D))
A) Scope. This subsection (c)(4) applies to all interest on margin accounts.
B) Application. Interest on a margin account is sourced to this State if the financial organization's place of business through which the borrower ordinarily conducts business with the financial organization is located within Illinois.
5) Any other gross income resulting from the operation as a financial organization within this State. (IITA Section 304(c)(1))
A) Scope. This subsection (c)(5) applies to every item of business income of a financial organization that is not governed by subsections (c)(1) through (c)(4) of this Section.
B) Application. Gross income that results from the operation of a taxpayer as a financial organization "within this State" is allocable to this State if:
i) The income producing activity is performed in this State; or
ii) The income producing activity is performed both within and without this State and a greater proportion of the income producing activity is performed within this State than without this State, based on performance costs.
C) If the performance costs of two or more income producing activities cannot readily be allocated among those activities, the gross income resulting from those activities shall be combined and sourced to Illinois using the combined performance costs for all those activities.
(Source: Amended at 33 Ill. Reg. 15044, effective October 26, 2009)
Section 100.3405 Apportionment of Business Income of Financial Organizations for Taxable Years Ending on or after December 31, 2008 (IITA Section 304(c))
a) In General. For taxable years ending on or after December 31, 2008, the business income of a financial organization shall be apportioned to this State by multiplying such income by a fraction, the numerator of which is its gross receipts from sources in this State or otherwise attributable to this State's marketplace and the denominator of which is its gross receipts everywhere during the taxable year. (IITA Section 304(c)(3)) Any gross receipt that is excluded from base income or subtracted in the computation of base income of the financial organization must be excluded from the numerator and denominator of this formula. See Continental Illinois National Bank and Trust Company of Chicago v. Lenckos, 102 Ill.2d 210 (1984). For example, dividends deducted from federal taxable income under 26 USC 243 or subtracted in the computation of base income under IITA Section 203(b)(2)(O) are excluded from the apportionment formula.
b) Definitions. For purposes of this Section, the following definitions shall apply:
1) Fixed Place of Business. The term "fixed place of business" has the same meaning as that term is given in Section 864 of the Internal Revenue Code and the related Treasury regulations. (IITA Section 1501(a)(9.5))
A) As a general rule, a "fixed place of business" is a fixed facility, that is, a place, site, structure or other similar facility, through which the taxpayer engages in a trade or business. (See 26 CFR 1.864-7(b)(1).)
B) A taxpayer is not considered to have a fixed place of business merely because the taxpayer uses another person's fixed place of business, whether or not the other person and the taxpayer are related persons, through which to transact a trade or business, if the trade or business activities of the taxpayer in that fixed place of business are relatively sporadic or infrequent, taking into account the overall needs and conduct of that trade or business. (See 26 CFR 1.864-7(b)(2).)
C) A fixed place of business of an agent of the taxpayer who is not an independent agent is not a fixed place of business of the taxpayer unless the agent has the authority to negotiate and conclude contracts in the name of the taxpayer, and regularly exercises that authority. (See 26 CFR 1.864-7(d)(1)(i).)
D) A fixed place of business of an independent agent of the taxpayer shall not be treated as the office or other fixed place of business of the taxpayer, irrespective of whether the agent has authority to negotiate and conclude contracts in the name of the principal and regularly exercises that authority. (See 26 CFR 1.864-7(d)(2).)
E) For purposes of this subsection (b)(1), "independent agent" means a general commission agent, broker or other agent of an independent status acting in the ordinary course of his or her business in that capacity. (See 26 CFR 1.864-7(d)(3).)
2) Gross Receipts. "Gross receipts" means gross income, including net taxable gain on disposition of assets, including securities and money market instruments, when derived from transactions and activities in the regular course of the financial organization's trade or business. (IITA Section 304(c)(3))
3) State of Residence or Commercial Domicile. Unless a financial organization has actual knowledge that the residence or commercial domicile of a person is in a state other than the state in which the person's billing address is located, the person shall be deemed to be a resident or have its commercial domicile in the state in which the billing address is located.
4) Substantive Contacts. "Substantive contacts" with an investment asset or trading activity means the research, approval and administration activities conducted by employees of the taxpayer in connection with its investments or trading, and are conducted at the fixed place of business at which the employees involved in these activities perform services for the taxpayer.
A) Research. "Research" means the procedures and activities whereby employees of the taxpayer evaluate potential investments or trades.
B) Approval. "Approval" means the procedures whereby employees of the taxpayer make the final determination to invest in or dispose of assets or to engage in a specific trading activity.
C) Administration. "Administration" means the management of investments or trading activities, and includes bookkeeping, collection or making of payments, communications with brokers, customers and other persons with regard to investment or trading activities, and reporting to management on investment or trading activities.
c) Sourcing Rules. For the purposes of this Section, gross receipts from sources in this State or otherwise attributable to this State's marketplace is the sum of the following amounts:
1) Lease and Rental Receipts.
A) Receipts from the lease or rental of real or tangible personal property are in this State if the property is located in this State during the rental period.
B) Receipts from the lease or rental of tangible personal property that is characteristically moving property, including, but not limited to, motor vehicles, rolling stock, aircraft, vessels, or mobile equipment, are from sources in this State to the extent that the property is used in this State. (IITA Section 304(c)(3)(i)) If the property is within and without this State during the rental, lease or licensing period, gross receipts attributable to this State shall be measured by the ratio comparing the time the property was physically present or was used in this State with the total time or use of the property everywhere during that period.
2) Interest income, commissions, fees, gains on disposition, and other receipts from assets in the nature of loans that are secured primarily by real estate or tangible personal property are from sources in this State if the security is located in this State. (IITA Section 304(c)(3)(ii))
A) For tangible personal property, the property is located in this State if the debtor is a resident of this State (in the case of an individual, trust or estate) or has its commercial domicile in this State as of the date the loan is made.
B) In the case of a loan secured by property located within and without this State, the gross receipts from the loan that are from sources within this State equal the total gross receipts times a fraction equal to the value of the real estate and tangible property securing the loan that is located within this State at the time the loan is made, divided by the total value of the real estate and tangible property securing the loan at the time the loan is made.
3) Interest income, commissions, fees, gains on disposition, and other receipts from consumer loans that are not secured by real or tangible personal property are from sources in this State if the debtor is a resident of this State. (IITA Section 304(c)(3)(iii))
4) Interest income, commissions, fees, gains on disposition, and other receipts from commercial loans and installment obligations that are not secured by real or tangible personal property are from sources in this State if the proceeds of the loan are to be applied in this State. If it cannot be determined where the funds are to be applied, the income and receipts are from sources in this State if the office of the borrower from which the loan was negotiated in the regular course of business is located in this State. If the location of this office cannot be determined, the income and receipts shall be excluded from the numerator and denominator of the sales factor. (IITA Section 304(c)(3)(iv))
5) Interest income, fees, gains on disposition, service charges, merchant discount income, and other receipts from credit card receivables are from sources in this State if the card charges are regularly billed to a customer in this State. (IITA Section 304(c)(3)(v))
6) Receipts from the performance of services, including, but not limited to, fiduciary, advisory, and brokerage services, are in this State if the services are received in this State within the meaning of IITA Section 304(a)(3)(C-5)(iv). (IITA Section 304(c)(3)(vi)) See Section 100.3370(c)(6)(D) for more guidance.
7) Receipts from the issuance of travelers checks and money orders are from sources in this State if the checks and money orders are issued from a location within this State. (IITA Section 304(c)(3)(vii))
8) Receipts from investment assets and activities and trading assets and activities are included in the receipts factor as follows:
A) Interest, dividends, net gains (but not less than zero) and other income from investment assets and activities from trading assets and activities shall be included in the receipts factor. Investment assets and activities and trading assets and activities include but are not limited to: investment securities; trading account assets; federal funds; securities purchased and sold under agreements to resell or repurchase; options; futures contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. (IITA Section 304(c)(3)(viii)(1))
i) The receipts factor shall include the amount by which interest from federal funds sold and securities purchased under resale agreements exceeds interest expense on federal funds purchased and securities sold under repurchase agreements. (IITA Section 304(c)(3)(viii)(1)(A))
ii) The receipts factor shall include the amount by which interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book, and foreign currency transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of dividends, and losses from such assets and activities. (IITA Section 304(c)(3)(viii)(1)(B))
B) The numerator of the receipts factor includes interest, dividends, net gains (but not less than zero), and other income from investment assets and activities and from trading assets and activities that are attributable to this State, as follows:
i) The amount of interest, dividends, net gains (but not less than zero), and other income from investment assets and activities in the investment account to be attributed to this State and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the gross income from such assets and activities which are properly assigned to a fixed place of business of the taxpayer within this State, and the denominator of which is the gross income from all such assets and activities. (IITA Section 304(c)(3)(viii)(2)(A))
ii) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this State and included in the numerator is determined by multiplying the total of those items by a fraction, the numerator of which is the gross income from such funds and such securities which are properly assigned to a fixed place of business of the taxpayer within this State and the denominator of which is the gross income from all such funds and such securities. (IITA Section 304(c)(3)(viii)(2)(B))
iii) The amount of interest, dividends, gains, and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions, but excluding amounts described in subsection (c)(8)(B)(i) or (ii), attributable to this State and included in the numerator is determined by multiplying the total of those items by a fraction, the numerator of which is the gross income from such trading assets and activities which are properly assigned to a fixed place of business of the taxpayer within this State, and the denominator of which is the gross income from all such assets and activities. (IITA Section 304(c)(3)(viii)(2)(C))
iv) An investment or trading asset or activity is assigned to the fixed place of business with which it has a preponderance of substantive contacts. An investment or trading asset or activity assigned by the taxpayer to a fixed place of business without the State shall be presumed to have been properly assigned if:
• the taxpayer has assigned, in the regular course of its business, such asset or activity on its records to a fixed place of business consistent with federal or state regulatory requirements; (IITA Section 304(c)(3)(viii)(2)(D)(1))
• such assignment on its records is based upon substantive contacts of the asset or activity to such fixed place of business; and (IITA Section 304(c)(3)(viii)(2)(D)(2))
• the taxpayer uses such records reflecting assignment of such assets or activities for the filing of all state and local tax returns for which an assignment of such assets or activities to a fixed place of business is required. (IITA Section 304(c)(3)(viii)(2)(D)(3))
v) The presumption of proper assignment of an investment or trading asset or activity provided in subsection (c)(8)(B)(iv) may be rebutted upon a showing by the Department, supported by a preponderance of the evidence, that the preponderance of substantive contacts regarding such asset or activity did not occur at the fixed place of business to which it was assigned on the taxpayer's records. If the fixed place of business that has a preponderance of substantive contacts cannot be determined for an investment or trading asset or activity to which the presumption of proper assignment does not apply or with respect to which that presumption has been rebutted, that asset or activity is properly assigned to the state in which the taxpayer's commercial domicile is located. For purposes of this subsection (c)(8)(B)(v), it is presumed, subject to rebuttal, that taxpayer's commercial domicile is in the state of the United States or the District of Columbia to which the greatest number of employees are regularly connected with the management of the investment or trading income or out of which they are working, irrespective of where the services of such employees are performed, as of the last day of the taxable year. (IITA Section 304(c)(3)(viii)(2)(E))
9) Any receipts that are includable in the denominator of the fraction in subsection (a) and that are not governed by subsection (c)(1) through (8) are from sources within this State to the extent the receipts would be characterized as "sales in this State" under IITA Section 304(a)(3) and Sections 100.3370 and 100.3380 of this Part, except that the provisions in IITA Section 304(a)(3)(B-2) (excluding gross receipts from the licensing, sale or other disposition of patents, copyrights, trademarks and similar items from the numerator and denominator of the apportionment factor, unless those items comprise more than 50% of the taxpayer's gross receipts) do not apply.
(Source: Added at 33 Ill. Reg. 15044, effective October 26, 2009)
Section 100.3420 Apportionment of Business Income of Insurance Companies (IITA Section 304(b))
a) In General. Except as otherwise provided in this Section, business income of an insurance company for a taxable year shall be apportioned to this State by multiplying such income by a fraction, the numerator of which is the direct premiums written for insurance upon property or risk in this State, and the denominator of which is the direct premiums written for insurance upon property or risk everywhere. [IITA Section 304(b)(1)]
b) Insurance Company. For purposes of the IITA, an "insurance company" means any taxpayer properly treated as an insurance company for purposes of federal income taxation under subchapter L of the Internal Revenue Code (IRC sections 801 through 848). (See IITA Section 102.) No other taxpayer may be treated as an insurance company for purposes of the IITA.
c) Direct Premiums Written. "Direct premiums written" means the total amount of direct premiums written, assessments and annuity considerations as reported for the taxable year on the annual statement filed by the company with the Illinois Director of Insurance in the form approved by the National Convention of Insurance Commissioners (currently known as the National Association of Insurance Commissioners) or such other form as may be prescribed in lieu of the National Association of Insurance Commissioners form.
1) The apportionment factor shall take into account only those receipts that are included in either "gross premiums written" under IRC section 832(b)(4)(A) or "gross amount of premiums" under IRC section 803(a)(1)(A). Only receipts that are included in federal taxable income of the taxpayer, and that are not subtracted in the computation of base income under a provision of Section 203 of the IITA, may be included in the apportionment factor. (See Continental Illinois National Bank and Trust Company of Chicago v. Lenckos, 102 Ill.2d 210 (1984).)
2) Only direct premiums written for insurance, assessments against mutual policyholders and consideration for annuity contracts that include elements of insurance are included in the apportionment factor. Other receipts are excluded from the apportionment factor, even if included in net income.
3) Examples of receipts that are excluded from the apportionment factor include:
A) Interest, dividends and other income from investments.
B) Gains or losses from the adjustment of reserves, salvage or subrogation.
C) Deposit-type funds. This is due to the fact that deposit-type funds involve no insurance risk and are therefore reported separately from premiums, assessments and annuity considerations on the annual report.
D) Premiums on which State income taxes are prohibited by federal law.
4) Premiums rebated or repaid to policyholders and reported as negative amounts on the annual statement are treated as negative amounts in the computation of the apportionment factor. However, neither the numerator nor the denominator of the apportionment factor may be reduced below zero.
d) Insurance on Property or Risk in this State. A direct premium is written for insurance upon property or risk in this State and included in the numerator of the apportionment factor if it is allocated to this State in the annual statement filed by the insurance company with the Director of Insurance. If an insurance company does not file an annual statement with the Director of Insurance or if any direct premiums written by an insurance company are not allocated to a specific state on its annual statement, that insurance company shall include in the numerator of its apportionment factor the direct premiums written for insurance on property or risk in this State, determined in accordance with the determination of gross taxable premium written under Section 409(1) of the Illinois Insurance Code [215 ILCS 5/409(1)], provided that the determination shall be made without allowing the exceptions in that Section 409(1) for premiums on annuities, premiums on which State premium taxes are prohibited by federal law, premiums paid by the State for Medicaid eligible insureds, premiums paid for health care services included as an element of tuition charges at any university or college owned and operated by the State of Illinois, premiums on group insurance contracts under the State Employees Group Insurance Act of 1971 [5 ILCS 375], or premiums for deferred compensation plans for employees of the State, units of local government or school districts.
e) Reinsurance. If the principal source of premiums written by an insurance company consists of premiums for reinsurance accepted by it, the business income of such company shall be apportioned to this State by multiplying such income by a fraction, the numerator of which is the sum of direct premiums written for insurance upon property or risk in this State, plus premiums written for reinsurance accepted in respect of property or risk in this State, and the denominator of which is the sum of direct premiums written for insurance upon property or risk everywhere, plus premiums written for reinsurance accepted in respect of property or risk everywhere. (IITA Section 304(b)(2))
1) The principal source of premiums written by an insurance company consists of premiums for reinsurance accepted by the taxpayer for a taxable year if the premiums written for reinsurance accepted that would be includable in the denominator of the apportionment fraction for the taxable year under this subsection (e) exceed the direct premiums written for insurance that would be includable in the denominator of the apportionment fraction under this subsection (e).
2) Property or risk in this State. An insurance company may determine the amount of premiums written for reinsurance accepted in respect of property or risk in this State by consideration of each premium written, or the premiums may, at the election of the company, be determined on the basis of:
A) the proportion which premiums written for reinsurance accepted from companies commercially domiciled in Illinois bears to premiums written for reinsurance accepted from all sources; or
B) the proportion which the sum of the direct premiums written for insurance upon property or risk in this State by each ceding company from which reinsurance is accepted bears to the sum of the total direct premiums written by each such ceding company for the taxable year.
3) The election to determine the portion of reinsurance premiums accepted in respect of property or risk in this State for a particular tax year, by consideration of each premium written or by either of the alternative methods outlined in subsection (e)(2), shall be made by using the chosen method on the taxpayer's return for the taxable year. For taxable years ending prior to December 31, 2011, the election may be made or changed at any time. The election made by a company for its first taxable year ending on or after December 31, 2011 is binding for that company for that taxable year and for all subsequent taxable years, and may be altered only with the written permission of the Department, which shall not be unreasonably withheld. (IITA Section 304(b)(2))
A) A request for permission to alter an election shall be submitted to the Department as a request for a private letter ruling under 2 Ill. Adm. Code 1200.110, and permission to alter an election shall be granted by private letter ruling. Requests may be made for the change to take effect for a taxable year ending prior to the date the request is filed, provided that the request shall be granted only if the statute of limitations for assessment of additional tax is open for that taxable year and every subsequent taxable year as of the date the Department responds to the request. The taxpayer and the Department may agree in writing to extend the statute of limitations under IITA Section 905(f) in order to allow the Department time to process the request.
B) If permission to alter an election is denied, the taxpayer may challenge the denial by filing its return for each taxable year to which the requested alteration was to apply and for which a return has not been filed, using the previously-elected method, and:
i) paying the excess of its tax liability shown on the return over the liability that would be shown using the requested method under protest pursuant to Section 2a.1 of the State Officers and Employees Money Disposition Act [30 ILCS 230/2a.1] and filing a complaint as provided in that Act; or
ii) by filing a refund claim for that taxable year and any subsequent year for which a return has been filed, using the method requested and filing a protest with the Department or a petition with the Illinois Independent Tax Tribunal in response to a denial of the claim.
(Source: Amended at 42 Ill. Reg. 17852, effective September 24, 2018)
Section 100.3450 Apportionment of Business Income of Transportation Companies (IITA Section 304(d))
a) In General
1) For taxable years ending prior to December 31, 2008, business income of a transportation company shall be apportioned to this State by multiplying that income by a fraction, the numerator of which is the revenue miles of the person in this State, and the denominator of which is the revenue miles of the person everywhere. (IITA Section 304(d)(1))
2) For taxable years ending on or after December 31, 2008:
A) Business income derived from providing transportation services other than airline services shall be apportioned to this State by using a fraction:
i) the numerator of which shall be:
• all receipts from any movement or shipment of people, goods, mail, oil, gas, or any other substance (other than by airline) that both originates and terminates in this State, plus
• that portion of the person's gross receipts from movements or shipments of people, goods, mail, oil, gas, or any other substance (other than by airline) that originates in one state or jurisdiction and terminates in another state or jurisdiction, that is determined by the ratio that the miles traveled in this State bears to total miles everywhere; and
ii) the denominator of which shall be all revenue derived from the movement or shipment of people, goods, mail, oil, gas, or any other substance (other than by airline) (IITA Section 304(d)(3)); and
B) Business income derived from furnishing airline transportation services shall be apportioned to this State by multiplying that income by a fraction, the numerator of which is the revenue miles of the person in this State, and the denominator of which is the revenue miles of the person everywhere. (IITA Section 304(d)(4))
b) Definitions
1) Miles Transported or Traveled. For purposes of determining the distance transported or traveled relative to the movement or shipment of people, goods, oil, gas or any other substance:
A) In the case of transportation by land, unless the taxpayer maintains specific records of miles or routes actually traveled by a vehicle in a particular trip, the miles transported or traveled is the standard distance in miles between the points of pickup and delivery. Distances may be rounded to the nearest mile.
B) In the case of transportation by water, unless the taxpayer maintains specific records of miles or routes actually traveled by a vessel in a particular trip, the miles transported or traveled is the standard distance in miles between the points of pickup and delivery. Distances may be rounded to the nearest mile.
C) In the case of transportation by pipeline, distances may be rounded to the nearest mile.
D) In the case of transportation by air, the miles transported in a flight is the air distance in miles on the most common route between the airports. Distances may be rounded to the nearest mile or tens of miles.
2) Revenue Mile. A "revenue mile" is:
A) the transportation of one net ton of freight the distance of one mile for consideration;
B) the transportation of one passenger the distance of one mile for consideration;
C) the transportation by pipeline of one barrel of oil the distance of one mile for consideration;
D) the transportation by pipeline of 1,000 cubic feet of gas the distance of one mile for consideration; or
E) the transportation by pipeline of any specified quantity of a substance other than oil or gas the distance of one mile for consideration. (IITA Section 304(d)(1) and (4))
3) In this State. A revenue mile or a mile traveled is "in this State" whenever the transportation occurs within the geographic boundaries of the State of Illinois.
A) In the case of interstate transportation by land, the revenue miles or miles traveled in this State are the miles determined under subsection (b)(1)(A) between the point or points where the route used in determining those miles intersect the Illinois border and the point, if any, in Illinois where the route begins or ends.
B) In the absence of evidence to the contrary, the number of miles of transportation within this State by a vessel operating on water that is not wholly within or without this State shall be 50% of the total number of transportation miles on that water.
C) In the case of interstate transportation by airline, the revenue miles in this State are the miles determined under subsection (b)(1)(D) between the point where the route used in determining those miles intersects the Illinois border and the airport in Illinois where the flight begins or terminates. Revenue miles in a flight that neither begins nor terminates in Illinois ("flyover miles") may not be included in the numerator. (Northwest Airlines, Inc. v. Department of Revenue, 295 Ill. App. 3d 889, 692 N.E.2d 1264 (1998), appeal denied, 179 Ill. 2d 589, 705 N.E. 2d 440.)
4) Gross Receipts from Furnishing Transportation Services by Airline and by Other Means. For taxable years ending on or after December 31, 2008, in a transaction in which the taxpayer transports a passenger or freight both by airline and by any other mode of transportation, the gross receipts from furnishing airline transportation services in the transaction shall equal the total gross receipts from the transaction times a fraction equal to the miles traveled by airline in the transaction divided by the total miles traveled in the transaction and the gross receipts from furnishing transportation services (other than by airline) shall equal the remaining gross receipts from the transaction; provided that:
A) the taxpayer may use any other reasonable method supported by its books and records for allocating gross receipts from the transaction between airline transportation and the other modes of transportation; and
B) if the miles traveled by airline equal more than 95% of the total miles traveled, the entire transaction is deemed to be transportation by airline.
5) Freight. "Freight" means any item, other than an individual passenger, that is transported for consideration.
c) Computation of Apportionment Factor of a Transportation Company, other than for Furnishing Transportation Services by Airline, for Taxable Years Ending on or after December 31, 2008. For each taxable year ending on or after December 31, 2008, the business income of a transportation company shall be apportioned to Illinois by multiplying the company's business income by an apportionment factor equal to:
1) the sum of:
A) the gross receipts from the provision of transportation services (other than transportation by airline) when the transportation service both originates and terminates in Illinois; and
B) the gross receipts from the provision of transportation services (other than transportation by airline) when the transportation service originates in one state or jurisdiction and terminates in a different state or jurisdiction, multiplied by the quotient of:
i) the miles traveled in this State in providing transportation services that originated in one state or jurisdiction and terminated in a different state or jurisdiction, divided by
ii) the total miles traveled in providing transportation services that originated in one state or jurisdiction and terminated in a different state or jurisdiction;
2) divided by the taxpayer's total gross receipts from the provision of transportation services (other than transportation by airline). (IITA Section 304(d)(3))
EXAMPLE A: During its taxable year ending December 31, 2008, Transportation Company made the following trips transporting goods on behalf of its customers:
|
|
Miles Traveled |
|
||
|
Trip: |
Outside Illinois |
Within Illinois |
Total |
Gross Receipts |
|
|
|
|
|
|
|
Iowa to Minnesota |
600 |
0 |
600 |
$700 |
|
Iowa to Wisconsin |
400 |
0 |
400 |
300 |
|
Iowa to Illinois |
50 |
140 |
190 |
400 |
|
Iowa to Indiana |
50 |
300 |
350 |
600 |
|
Iowa Intrastate |
220 |
0 |
220 |
320 |
|
Illinois Intrastate |
0 |
200 |
200 |
400 |
|
TOTALS |
1,320 |
640 |
1,960 |
$2,720 |
|
|
|
|
|
|
|
Less IA Intrastate |
(220) |
0 |
(220) |
($320) |
|
Less IL Intrastate |
0 |
(200) |
(200) |
($400) |
|
Interstate Totals |
1,100 |
440 |
1,540 |
$2,000 |
Based on the foregoing, Transportation Company's apportionment factor is 35.6985%, computed as follows:
|
ILLINOIS NUMERATOR |
||||||||
|
|
Miles Traveled |
|
||||||
|
Trip: |
Outside Illinois |
Within Illinois |
Total |
Gross Receipts |
||||
|
|
|
|
|
|
||||
|
Totals |
1,320 |
640 |
1,960 |
$2,720 |
||||
|
Less Iowa Intrastate |
(220) |
0 |
(220) |
(320) |
||||
|
Less Illinois Intrastate |
0 |
(200) |
(200) |
(400) |
||||
|
Interstate |
1,100 |
440 |
1,540 |
$2,000 |
|
|||
|
|
|
|
|
|
||||
|
Illinois Intrastate Receipts |
|
|
$400 |
|||||
|
Illinois Interstate Miles |
440 |
|
|
|||||
|
Everywhere Interstate Miles |
1,540 |
|
|
|||||
|
Fraction IL/Everywhere Miles |
28.5714% |
|
|
|||||
|
Interstate Receipts |
$2,000 |
|
|
|||||
|
Illinois Share of Interstate Receipts |
|
|
$571 |
|||||
|
Numerator |
|
|
|
$971 |
||||
|
|
|
|
|
|
||||
|
DENOMINATOR |
||||||||
|
Total Receipts |
|
|
|
$2,720 |
||||
|
|
|
|
|
|
||||
|
FACTOR |
||||||||
|
Numerator/Denominator |
|
35.6985% |
||||||
The numerator is:
$400 in gross receipts from the trip that both originated and terminated in Illinois, plus
$571 Illinois portion of gross receipts from interstate trips. The $571 Illinois portion of gross receipts from interstate trips is computed by multiplying the $2,000 in total gross receipts from those trips by a fraction equal to the 440 miles traveled in Illinois in those trips divided by the 1,540 in total miles traveled during those trips. The 35.6985% factor is the $971 numerator divided by the $2,720 in gross receipts for all trips.
d) Transportation Companies Providing Transportation Services that use Different Measures for Apportioning Income. For all taxable years, in cases in which a transportation company transports both passengers and freight or transports by pipeline and by other means, and in taxable years ending on or after December 31, 2008, in cases in which a transportation company provides transportation services by airline and by any other means, the company's apportionment fraction shall be determined by computing a separate apportionment fraction under subsection (a)(1), (a)(2)(A) or (a)(2)(B), whichever is applicable, for its air and surface transportation services, and for its passenger and freight transportation services within each type, and combining those separate fractions, weighted by:
1) in the case of transportation by railroad, the transportation company's operating income from transportation of passengers and from transportation of freight, as reported to the Interstate Commerce Commission or the Surface Transportation Board; and
2) in all other cases, by the gross receipts derived from the transportation services related to each separate fraction. (IITA Section 304(d)(1)(A) and (B) and (2)(A) and (B))
EXAMPLE A: Taxpayer transports freight and passengers by railroad with total income of $100. Taxpayer derived $60 in operating income from transporting freight, $30 in operating income from transporting passengers and $10 in income from nontransportation activities. Taxpayer's apportionment fraction for its freight transportation business is 15% and its apportionment fraction for passenger transportation is 45%. Taxpayer's apportionment factor is 25%, computed as follows: 15% times ($60/$90) plus 45% times ($30/$90).
|
|
Col A |
Col B |
Col C |
Col D |
Col E |
|
Example: |
Income |
Operating Income |
Apportionment Fraction |
Weighting |
IL Factor C times D |
|
Transporting freight |
$60 |
$60 |
15.00% |
(60/90) |
10.00% |
|
Transporting passenger |
$30 |
$30 |
45.00% |
(30/90) |
15.00% |
|
Nontransportation receipts |
$10 |
$0 |
0.00% |
0 |
0.00% |
|
Subtotals |
$100 |
$90 |
~~ |
~~ |
25.00% |
EXAMPLE B: Taxpayer transports freight by air and ground service for its taxable year ending June 30, 2009. Taxpayer uses trucks to provide its ground transportation services. Taxpayer has total gross receipts of $1,600. Taxpayer derived $600 from transporting freight by truck and $1,000 from transporting freight by air. Using the gross receipts methodology set forth in subsections (a)(2)(A) and (c), Taxpayer's apportionment factor for its ground transportation services is 12%. Using the revenue miles methodology in subsection (a)(2)(B), Taxpayer's apportionment factor for its air transportation service is 22%. Taxpayer's apportionment factor is 18.25%, computed as follows: 12% times ($600/$1600) plus 22% times ($1000/$1600).
|
|
Col A |
Col B |
Col C |
Col D |
Col E |
|
|
Gross Receipts |
Transportation Receipts |
Apportionment Fraction |
Weighting |
IL Factor C times D |
||
|
Example: |
||||||
|
|
|
|
|
|
|
|
|
Transporting ground |
$600 |
$600 |
12.00% |
(600/1600) |
4.50% |
|
|
Transporting air |
$1000 |
$1000 |
22.00% |
(1000/1600) |
13.75% |
|
|
Nontransportation receipts |
$100 |
$0 |
0.00% |
0 |
0.00% |
|
|
Subtotals |
$1700 |
$1600 |
~~ |
~~ |
18.25% |
(Source: Added at 39 Ill. Reg. 15594, effective November 18, 2015)
Section 100.3500 Allocation and Apportionment of Base Income by Nonresident Partners
a) In General.
1) This Section provides guidance for allocation and apportionment of base income by nonresidents. All base income of a resident is allocated to Illinois pursuant to IITA Section 301(a).
2) Part-year residents. Under IRC section 706(a), the income from a partnership for a given taxable year is included in the gross income of a partner in the taxable year of the partner in which the partnership's taxable year ends. Accordingly, this Section shall apply to the income of a part-year resident from any partnership whose taxable year ends during the period in which the partner was a nonresident. Income from a partnership whose taxable year ends during the period in which the partner is a resident will be allocated entirely to Illinois.
3) Unitary partners. This Section shall not apply to the apportionment of business income of a nonresident partner who is engaged in a unitary business with the partnership. Such partners shall apportion their unitary business income derived from the partnership in accordance with IITA Section 304(e) and Section 100.3380(d) of this Part.
4) Except as provided in this subsection (a), all items of base income of a partner that are derived from the partnership shall be allocated or apportioned pursuant to this Section, including all items required to be separately stated to the partner under IRC section 703(a)(1), all guaranteed payments under IRC section 707(c), and all addition and subtraction modifications, but excluding items described in IRC section 707(a).
b) Business Income. The respective shares of partners other than residents in so much of the business income of the partnership as is apportioned to this State in the possession of the partnership shall be taken into account by such partners pro rata in accordance with their respective distributive shares of such partnership income for the partnership's taxable year and allocated to this State. (IITA Section 305(a))
1) For purposes of this subsection (b), the determination of whether an item of base income is business income or nonbusiness income shall be based on the facts and circumstances of the partnership itself. Trade or business activities of a partner or of any related party are irrelevant.
2) Business income of the partnership shall be apportioned to this State pursuant to IITA Section 304, in the same manner as it is allocated or apportioned for any other nonresident. (IITA Section 305(c))
3) Lower-tier partnerships. In the case of a partnership that is itself a partner in a second partnership, a partner in the first partnership shall include in net income its partnership share of the first partnership's share of the items of business income of the second partnership, as apportioned to Illinois by that second partnership. If the second partnership is itself a partner in a third partnership, a partner in the first partnership shall include in net income its partnership share of the first partnership's share of the items of business income of the third partnership as determined under the preceding sentence, and so on through all partnerships that are themselves partners in other partnerships.
c) Nonbusiness Income. The respective shares of partners other than residents in the items of partnership income and deduction not taken into account in computing the business income of a partnership shall be taken into account by such partners pro rata in accordance with their respective distributive shares of such partnership income for the partnership's taxable year, and allocated as if such items had been paid, incurred or accrued directly to such partners in their separate capacities. (IITA Section 305(b))
d) Investment Partnerships. For taxable years ending on or after July 30, 2004 (the effective date of Public Act 93-840), in the case of an investment partnership, as defined in Section 100.9730 of this Part:
1) Except as provided in subsection (d)(2), taxable income that is distributable to a nonresident partner shall be treated as nonbusiness income and shall be allocated to the partner's state of residence (in the case of an individual) or commercial domicile (in the case of any other person). (IITA Section 305(c-5)) IITA Section 203(e)(3) shall not require recapture of business expenses if the income from an investment partnership was treated as business income in years prior to July 30, 2004 (the effective date of Public Act 93-840) and is treated as nonbusiness income under this subsection (d).
2) Any income distributable to a nonresident partner shall be treated as business income and apportioned as if such income had been received directly by the partner if the partner has made an election under Section 1501(a)(1) of the IITA to treat all income as business income or if such income is from investment activity:
A) that is directly or integrally related to any other business activity conducted in this State by the nonresident partner (or any member of that partner's unitary business group) (IITA Section 305(c-5)(1));
B) that serves an operational function to any other business activity of the nonresident partner (or any member of that partner's unitary business group) in this State (IITA Section 305(c-5)(2)); or
C) where assets of the investment partnership were acquired with working capital from a trade or business activity conducted in this State in which the nonresident partner (or any member of that partner's unitary business group) owns an interest (IITA Section 305(c-5)(3)).
3) Income treated as business income received directly by a partner under subsection (d)(2) shall be apportioned using the apportionment factors of the partner, without regard to any factors of the partnership.
(Source: Amended at 32 Ill. Reg. 13223, effective July 24, 2008)
Section 100.3600 Combined Apportionment for Taxpayers Using Different Apportionment Formulas (IITA Section 1501(a)(27))
a) IITA Section 1501(a)(27) provides that, in no event, for taxable years ending prior to December 31, 2017, may any unitary business group include members that are ordinarily required to apportion business income under different subsections of IITA Section 304.
b) For taxable years ending on or after December 31, 2017, the business income of a unitary business group that includes members who apportion their business income under different subsections of IITA Section 304 shall be apportioned using the average of the apportionment percentages of each subgroup of members using the same apportionment formula (computed as if that subgroup were a separate unitary business group) weighted by the everywhere sales of the members of each subgroup (as determined under Sections 100.3370 and 100.3380). The apportionment percentage of each member of the unitary business group is the apportionment percentage that member would compute if the subgroup of members using the same apportionment formula of that member were a separate unitary business group, multiplied by a fraction equal to the everywhere sales of that subgroup divided by the everywhere sales of the unitary business group.
1) The apportionment percentage of each member shall be equal to a fraction in which:
A) the numerator for each member shall be:
i) the total sales everywhere, as determined under Sections 100.3370 and 100.3380, for all members of the group that apportion business income under the same subsection of IITA Section 304 as that member,
ii) multiplied by a fraction equal to:
● that member's Illinois numerator of the apportionment factor determined under the subsection of IITA Section 304 used by that member to apportion its business income,
● divided by the total denominators of that apportionment factor of all members required to apportion business income under the same subsection of IITA Section 304; and
B) the denominator shall be the sum of the everywhere sales of all members of the unitary business group, as determined under Sections 100.3370 and 100.3380(d).
2) For unitary business groups that include one or more partnerships and one or more partners, see Section 100.3380(d).
c) EXAMPLE: A combined group is composed of 6 members: Corporations A and B (who apportion their business income using the sales factor under IITA Section 304(a), so that the numerator and denominator of the Respective Section 304 Formula columns are their Illinois and everywhere sales, respectively), Insurance Companies A and B (who apportion their business income using the premiums factor under IITA Section 304(b), so that the numerator and denominator of the Respective Section 304 Formula columns are their Illinois and everywhere premiums, respectively), and Transportation Companies A and B (who apportion their business income using the transportation company formula under IITA Section 304(d), so that the numerator and denominator of the Respective Section 304 Formula columns are their Illinois and everywhere transportation receipts and revenue miles, respectively). The apportionment data for the members of the group are as follows:
|
|
Everywhere Sales |
Respective Section 304 Formula |
||
|
Company |
Numerator |
Denominator |
Percentage |
|
|
Corporation A |
$100 |
$10 |
$100 |
3.333% |
|
Corporation B |
$200 |
$25 |
$200 |
8.333% |
|
Subgroup Total |
$300 |
$35 |
$300 |
|
|
Insurance A |
$250 |
$3 |
$50 |
2.000% |
|
Insurance B |
$450 |
$6 |
$100 |
4.000% |
|
Subgroup Total |
$700 |
$9 |
$150 |
|
|
Transportation A |
$300 |
$5 |
$25 |
2.500% |
|
Transportation B |
$700 |
$7.5 |
$175 |
3.750% |
|
Subgroup Total |
$1,000 |
$12.5 |
$200 |
|
|
Grand Total |
$2,000 |
|
|
|
Note that the everywhere sales of the insurance and transportation companies exceed the denominators of those companies' apportionment formulas because the denominators of insurance and transportation companies include only premiums and income from transportation services, respectively, while the everywhere sales of those companies include all gross business receipts of those companies, except amounts specifically excluded from the sales factor under Sections 100.3370 and 100.3380. For example, interest, gross rental income and net gains or losses on sales of intangibles in the regular course of business are included in the sales factor, but not in the apportionment formulas used by insurance or transportation companies, and so would cause the everywhere sales of an insurance or transportation company to exceed the denominator of its apportionment formula. The apportionment fraction of each member of the group and for the group is computed as follows:
|
|
A |
B |
C |
D |
E |
|
|
Section 304 Apportionment Percentage |
Subgroup Everywhere Sales |
A * B |
Group Everywhere Sales |
C ÷ D |
|
Corporation A |
3.333% |
$300 |
$10.00 |
$2,000 |
0.500% |
|
Corporation B |
8.333% |
$300 |
$25.00 |
$2,000 |
1.250% |
|
Insurance A |
2.000% |
$700 |
$14.00 |
$2,000 |
0.700% |
|
Insurance B |
4.000% |
$700 |
$28.00 |
$2,000 |
1.400% |
|
Transportation A |
2.500% |
$1,000 |
$25.00 |
$2,000 |
1.250% |
|
Transportation B |
3.750% |
$1,000 |
$37.50 |
$2,000 |
1.875% |
|
Total |
|
|
|
|
6.975% |
(Source: Added at 43 Ill. Reg. 10124, effective August 27, 2019)
SUBPART N: ACCOUNTING
Section 100.4100 Taxable Years (IITA Section 401)
a) The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the base income is computed under the IITA. "Taxable year" means, in the case of a return made for a fractional part of a year under the provisions of the IITA, the period for which that return is made. [IITA Section 1501(a)(23)]
b) Except as provided in this Section, for all purposes of the IITA, the taxable year of a person is the same as the taxable year used by that person for federal income tax purposes. [IITA Section 401(a)]
1) The taxable year of any person required to file a return under the IITA but not under the Internal Revenue Code is the taxpayer's annual accounting period if it is a fiscal or calendar year, and in all other cases, is the calendar year. [IITA Section 401(a)] The taxable year of a taxpayer that keeps no books or that does not have an annual accounting period is the calendar year.
2) If the taxable year of a person is changed for federal income tax purposes, the taxable year of that person for purposes of the IITA is also changed. [IITA Section 401(b)]
c) Short Taxable Years
1) In the case of a taxable year for a period of less than 12 months, the standard exemption allowed under IITA Section 204 is prorated on the basis of the number of days in that year to 365. [IITA Section 401(b)]
2) Change in the Taxpayer's Membership in a Unitary Business Group. If a taxpayer becomes a member of a unitary business group during the taxpayer's taxable year, or if a member of a unitary business group ceases to be a member during the taxpayer's taxable year, and the taxpayer's taxable year does not terminate at the time of the change for federal income tax purposes, the taxpayer's taxable year that includes the change is not a short taxable year. However, for that taxable year, the taxpayer determines its income, deductions, apportionment factors, and other tax items separately for the portions of that taxable year before and after the change, so that these tax items may properly be reported for each portion of that taxable year.
A) If the taxpayer is a member of a combined group before the change and of a different combined group after the change, the tax items for each portion of the taxable year are combined with the tax items of the appropriate combined group for each portion. (See Section 100.5265(f).)
B) If a taxpayer is a member of a combined group for only one portion of the taxable year, the tax items for that portion of the taxable year are combined with the tax items of the combined group as provided in Section 100.5265(f) and the tax items for the other portion are reported on a separate return of the taxpayer for the taxable year.
C) If the taxpayer is not a member of a combined group for either portion of the taxable year, the tax items for the entire taxable year are reported on a single return of the taxpayer for the taxable year, but the business income for each portion of that taxable year is apportioned according to the taxpayer's separate or unitary status for that portion of the year.
d) 52-53 Week Taxable Years
1) 26 USC 441(f)(1) permits a taxpayer to elect to use a 52-53 week taxable year; that is, an annual period that varies from 52 to 53 weeks and ends always on the same day of the week and ends always:
A) on whatever date that same day of the week last occurs in a calendar month; or
B) on whatever date that same day of the week falls that is nearest to the last day of a calendar month.
2) In any case in which the effective date or the applicability of any provision of the IITA or a regulation under this Part is expressed in terms of taxable years beginning, including, or ending with reference to a specified date that is the first or last day of a month, then, for purposes of that provision, a 52-53 week taxable year is treated:
A) as beginning with the first day of the calendar month beginning nearest to the first day of that taxable year; or
B) as ending with the last day of the calendar month ending nearest to the last day of that taxable year, as the case may be. (See 26 USC 441(f)(2)(A).)
(Source: Added at 44 Ill. Reg. 2363, effective January 17, 2020)
Section 100.4500 Carryovers of Tax Attributes (IITA Section 405)
a) In general. Except as expressly provided by statute, carryovers of net loss deductions and credits are only allowed to be claimed by the taxpayer that incurred the loss or earned the credit. See, e.g., New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934).
1) A corporation that acquires the business of another corporation that has incurred net losses may not carry forward the losses incurred by the old corporation. See New Colonial Ice Co.
2) One exception to this general rule occurs in cases where, as the result of a statutory merger, a corporation is treated as the same taxable entity as the corporations merged into it. Even then, carryovers are allowed only to the extent there is a continuity of business enterprise between the pre- and post-merger entities. See Libson Shops, Inc. v. Koehler, 354 U.S. 382 (1957); Newmarket Manufacturing Co. v. U.S., 233 F.2d 493 (1st Cir. 1956).
3) In other situations that are not covered by an express provision of the IITA, net loss deductions incurred and credits earned by one entity may be carried back or forward for use only by that same entity, and cannot be used by a different entity. This rule applies to prevent the carryover of items when an entity is deemed to be a new entity for purposes of the Internal Revenue Code and the IITA despite its continued legal existence. For example:
A) Company, a limited liability company wholly owned by Corporation A, has made an election under Treas. Reg. Section 301.7701(a) to be disregarded as a separate entity and to be treated as a division of Corporation A. On January 1, 2000, Company elects to be treated as a corporation. On that same date, Corporation A sells its interest in Company. Before January 1, 2000, Company and Corporation A are treated as a single corporation. See Section 100.9750(b)(1) of this Part. After the election, Company is treated as a new corporation to which Corporation A has contributed assets in exchange for stock. See Section 100.9750(b)(2)(A) of this Part. Because Company is treated as a new corporation separate and distinct from Corporation A, net losses incurred and credits earned by Company and Corporation A before January 1, 2000 cannot be carried forward and used by Company after that date, and losses incurred by Company on or after January 1, 2000 cannot be carried back and used by Corporation A or Company in years prior to that date.
B) The stock of Corporation B is sold in a transaction for which an IRC Section 338 election is made. Corporation B is treated as a new corporation that purchased all of the assets of Corporation B. Because Corporation B is treated as two separate and distinct corporations before and after the election, net losses incurred and credits earned by "old" Corporation B before the election may not be carried forward, and losses incurred by "new" Corporation B after the election may not be carried back. See Section 100.9750(b)(2)(B) of this Part.
b) Carryovers after corporate acquisitions. IITA Section 405(a) provides that, when a corporation acquires the assets of another corporation in a transaction described in IRC Section 381(a), the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, all Article 2 credits and net losses under Section 207 of the corporation from which the assets were acquired. IRC Section 381(a) provides that, after certain specified transactions in which one corporation acquires the assets of another corporation, the acquiring corporation shall succeed to many of the tax attributes of the acquired corporation, including the right to carry forward net operating losses incurred and credits earned by the acquired corporation. Pursuant to IITA Section 405(a), any corporation that succeeds to the federal income tax attributes of another corporation under IRC Section 381(a) automatically succeeds to that corporation's IITA credit and net loss carryforwards.
c) Carryovers after partnership acquisitions. In the case of the acquisition of assets of a partnership by another partnership in a transaction in which the acquiring partnership is considered to be a continuation of the partnership from which the assets were acquired under the provisions of Section 708 of the Internal Revenue Code and any regulations promulgated under that Section, the acquiring partnership shall succeed to and take into account, as of the close of the day of distribution or transfer, all Article 2 credits and net losses under Section 207 of the partnership from which the assets were acquired. (IITA Section 405(b))
1) Under Treas. Reg. Section 1.708-1(b)(2)(i), if two or more partnerships merge into one partnership, the resulting partnership is deemed the continuation of one of the merged partnerships if the partners of that merged partnership own interests totaling more than 50% of the capital and profits of the resulting partnership. In this situation, the resulting partnership will succeed to the credits and net losses of the merged partnership that is deemed to continue, if any, but not to the credits and net losses of any other of the merged partnerships. Similarly, any net loss incurred by the resulting partnership may be carried back to offset income of the merged partnership, if any, that is deemed to continue, because the two partnerships are treated as a single, continuing entity.
2) Under Treas. Reg. Section 1.708-1(b)(2)(ii), if a partnership is divided into 2 or more partnerships, and the partners of one of the resulting partnerships owned an interest of more than 50% in the capital and profits of the divided partnership, that partnership is deemed to be a continuation of the divided partnership. In such cases, the partnership, if any, that is deemed to be the continuation of the divided partnership shall succeed to the credit and net loss carryforwards of the divided partnership, and the other partnerships will not succeed to any of such credit or net loss carryforwards. Also, any net losses incurred by the partnership that is deemed be the continuation of the divided partnership may be carried back and deducted by the divided partnership.
d) Limitations on carryovers. IRC Section 382 and the separate return limitation year consolidated return regulations under IRC Section 1502 limit the net loss and credit carryforwards available to certain corporations after a change in ownership. IITA Section 405 expressly provides that no similar limitations apply to the carryforward of Illinois net losses and credits allowed under that Section.
e) Effective date and transition rule. Pursuant to IITA Section 405(c), the provisions of IITA Section 405 apply to all acquisitions occurring in taxable years ending on or after December 31, 1986. However, IITA Section 405(c)(1) provides that, if a taxpayer's Illinois income tax liability for any taxable year, as assessed under Section 903 prior to January 1, 1999, was computed without taking into account all of the Article 2 credits and net losses under Section 207 as allowed by this Section, no refund shall be payable to the taxpayer for that taxable year as the result of allowing any portion of such credits or net losses that were not taken into account in computing the tax assessed prior to January 1, 1999. However, IITA Section 405(c)(2) allows the taxpayer to use such credits and net losses to reduce any unpaid deficiency for those years. Further, IITA Section 405(c)(3) provides that any credit or net loss that, as a result of the operations of these provisions, could not be taken into account either in computing the tax assessed prior to January 1, 1999 for a taxable year or in reducing a deficiency for that taxable year under paragraph (2) of subsection (c), the allowance of such credit or loss in any other taxable year shall not be denied on the grounds that such credit or loss should properly have been claimed in that taxable year under subsection (a) or (b). The effect of these provisions is to preserve the status quo with respect to taxes assessed prior to January 1, 1999, when the Department was asserting that carryforwards were limited pursuant to IRC Section 382, and to permit use of credit and net loss carry forwards against taxes proposed or assessed after that date without regard to any such limitations. The operation of these effective date and transition rules can be illustrated as follows:
Example 1: On December 31, 1994, Corporation X acquired the assets of Target Corporation in a reorganization described in IRC Section 368(a)(1)(C), which is a transaction described in IRC Section 381(a). As of the acquisition date, Target Corporation had net losses under IITA Section 207 of $500 available to carry forward and research and development credits under IITA Section 201(k) of $200 available to carry forward. In its taxable year ending December 31, 1995, Corporation X deducted all $500 of the net losses of Target Corporation and claimed a credit for all $200 of research and development credits of Target Corporation. The Department conducted an audit of Corporation X's 1995 return. At that time, the Department interpreted IITA Section 207 as incorporating the limitations on carryovers contained in IRC Section 382. Consistent with this interpretation of the IITA, the Department determined that Corporation X could deduct no more than $100 per year of the net losses incurred by Target Corporation, and disallowed $400 of the deduction claimed by Corporation X on its 1995 return. For the same reason, the Department also disallowed all $200 of the research and development credits claimed by Corporation X on its 1995 return.
Corporation X paid the resulting deficiency in 1998, and immediately filed a claim for refund of the deficiency. The claim had not been granted as of August 13, 1999, the effective date of Public Act 91-541 that enacted IITA Section 405. No other adjustments to the Illinois income tax liability of Corporation X have occurred since it made the payment in 1998, and the refund claim has not been granted.
Analysis of Example 1: IITA Section 405(c)(1) prohibits Corporation X from receiving a refund of taxes assessed prior to January 1, 1999 as the result of the application of IRC Section 382 limitations to the net losses of Target Corporation or of the denial of the carryforward of the research and development credits of Target Corporation. Thus, even though Corporation X had timely filed a refund claim for the deficiency it paid with respect to 1995, the claim must be denied. However, IITA Section 405(c)(3) permits Corporation X to claim the $400 in losses and $200 in research and development credits disallowed under IITA Section 405(c)(1) in subsequent years, including 1996 and 1997. Again, IITA Section 405(c)(1) would prohibit a refund of any taxes reported on Corporation X's timely-filed returns for 1996 and 1997, because those taxes were assessed when the returns were filed prior to January 1, 1999. Accordingly, Corporation X may claim the $400 net loss and the $200 credit carryforwards for 1998, the first year for which claiming these items would not result in a refund barred under IITA Section 405(c)(1) without regard to IRC Section 382 limitations. Such use is subject to all other statutes of limitations on the use of these items that apply.
Example 2: The facts are the same as in Example 1, except that Corporation X did not file a claim for refund of the 1995 deficiency. Instead, Corporation X acquiesced in the Department's position regarding IRC Section 382 limitations and claimed $100 in net loss deductions in amended returns for 1996 and 1997. No other adjustments to tax of Corporation X have occurred since it made the payment in 1998.
Analysis of Example 2: With respect to the research and development credit earned by Target Corporation, the analysis is the same as in Example 1.
With respect to the net loss carryovers, if the refund claims for 1996 and 1997 have not been granted as of the effective date of Public Law 91-541, the analysis is the same as in Example 1. The claims for 1996 and 1997 must be disallowed pursuant to IITA Section 405(c)(1), but IITA Section 405(c)(3) allows the losses to be claimed for 1998.
If the refund claims were granted prior to the effective date of Public Law 91-541, the $100 net loss deductions claimed in 1996 and 1997 remain valid, and Corporation X may claim the remaining $200 in net losses in 1998, subject to all other limitations on the use of these losses.
Example 3: The facts are the same as in Example 2, except that in 2000, the Internal Revenue Service concludes an audit of Corporation X. Corporation X agrees to the audit determinations. As a result of those determinations, its Illinois net income for 1997 is increased by $150. Pursuant to IITA Section 405(c)(2), Corporation X may use its pre-1995 net loss to offset the $150 increase in its 1997 net income and, pursuant to IITA Section 405(c)(3), the remaining $50 of net losses unused as of the end of 1997 may be used to offset income in 1998.
AGENCY NOTE: IITA Section 405(c)(3) does not reopen any statute of limitations that is otherwise closed. Accordingly, if the taxpayer in Example 1, 2 or 3 above fails to file a refund claim for any year before the statute of limitations for that year expires, the claim cannot be allowed despite the provisions of IITA Section 405(c)(3).
(Source: Added at 26 Ill. Reg. 1274, effective January 15, 2002)
SUBPART O: TIME AND PLACE FOR FILING RETURNS
Section 100.5000 Time for Filing Returns (IITA Section 505)
a) Unless an extension of time for filing a return is granted, returns shall be filed on or before the due dates specified below.
1) Individuals
Under IITA Section 505(a)(2), the annual return of an individual or married couple is required to be filed on or before the 15th day of the fourth month following the close of the individual's or married couple's taxable year. The final return of a decedent shall be filed at the time (extensions included) that it would have been due had the decedent not died.
2) Corporations (Including Subchapter S Corporations)
Under IITA Section 505(a)(1), except as provided by subsection (a)(6) of this Section, the annual return of a corporation is required to be filed on or before the 15th day of the third month following the close of the corporation's taxable year unless the income or loss of a taxpayer is reported for federal purposes on a return with a due date later than the 15th day of the third month following the close of the taxable year, in which case the same due date shall apply to the corresponding Illinois return.
3) Cooperatives
The annual return of a cooperative is required to be filed on or before the 15th day of the ninth month following the close of the cooperative's taxable year. For purposes of this subsection (a)(3), a cooperative is any taxpayer that derives its base income under IITA Section 203(e)(2)(F) from federal taxable income determined in accordance with IRC sections 1381 through 1388.
4) Partnerships
Under IITA Section 505(a)(2), the annual return of a partnership is required to be filed on or before the 15th day of the fourth month following the close of the partnership's taxable year.
5) Estates and Trusts
Under IITA Section 505(a)(2), the annual return of an estate or trust is required to be filed on or before the 15th day of the fourth month following the close of taxable year of the estate or trust.
6) Exempt Organizations
Under IITA Section 505(a)(3), the annual return of an organization that is exempt from the federal income tax pursuant to IRC section 501(a) (other than an employees' trust described in IRC section 401(a)) is required to be filed on or before the 15th day of the fifth month following the close of the taxable year of the exempt organization.
b) Due Date that Falls on Saturday, Sunday or a Holiday
IRC section 7503 provides that, when the last day for filing a return falls on Saturday, Sunday or a legal holiday, the return is considered timely if it is filed on the next succeeding day that is not a Saturday, Sunday or legal holiday. This provision is incorporated into the meaning of "due date" for purposes of the IITA under IITA Section 102.
(Source: Amended at 38 Ill. Reg. 18568, effective August 20, 2014)
Section 100.5010 Place for Filing Returns: All Taxpayers (IITA Section 505)
IITA Section 505(a) authorizes the Department by regulations to prescribe the place at which returns shall be filed. IITA Section 1501(a)(19) defines the term "regulations" as including rules promulgated and forms prescribed by the Department. The place for filing returns is stated in the instructions (which should be consulted) for the various income tax return forms which the Department has prescribed.
Section 100.5020 Extensions of Time for Filing Returns: All Taxpayers (IITA Section 505)
a) Tentative Payments. An extension of time to file a return permitted under this Section is not to be construed as an extension by the Department of the time for payment of tax due on that return.
b) Automatic Illinois Extensions. For tax years ending before December 31, 2021, the Department will grant an automatic extension of 6 months to taxpayers whose returns are due on the fifteenth day of the fourth month after the end of the taxable year and 7 months for all other taxpayers to file any Illinois income tax return except returns due under Article 7 of the IITA. For tax years ending on or after December 31, 2021, the Department will grant an automatic extension of 6 months to taxpayers other than corporations and 7 months for corporations (8 months for fiscal year June 30th filers eligible for an automatic 7-month extension federally) to file any Illinois income tax return except returns due under Article 7 of the IITA. No application form need be filed by a taxpayer to obtain this extension. If a balance of tentative tax is due, the taxpayer should transmit the payment with the appropriate form by the original filing due date in order to avoid the penalty for underpayment of tax (IITA Section 1005) and statutory interest (IITA Section 1003).
c) Additional Extensions Beyond the Automatic Extension Period. The Department will approve an additional extension if an extension is granted by the Internal Revenue Service beyond the date of the automatic extension in subsection (b). For corporations, the additional Illinois extension will be one month beyond any approved federal extension. For all other taxpayers, the additional extension will be for the length of time approved by the Internal Revenue Service. All taxpayers must attach a copy of the approved federal extension to their return when it is filed.
d) Penalty and Interest on Underpayment of Tax
1) IITA Section 1005 Penalty
A penalty of 6% per annum on any tax underpayment shall be assessed if the amount of tax required to be shown on a return is not paid on or before the date required for filing the return (determined without regard to any extension of time to file) for returns due prior to January 1, 1994. For returns due on and after January 1, 1994, without regard to extensions, the penalty shall be determined in the manner and at the rate prescribed by the UPIA.
2) IITA Section 1003 Interest
Interest at the rate of 9% per annum (or at the adjusted rate established under IRC section 6621(b)) will be assessed for the period from the due date of the return to the date of payment for any amount of tax not paid on or before the due date (determined without regard to any extension) for returns due before January 1, 1994. For returns due on and after January 1, 1994, without regard to extensions, the penalty shall be determined in the manner and at the rate prescribed by the UPIA.
e) Late Filing Penalty
1) The Department will not assess an IITA Section 1001 late filing penalty for the period of any extension provided by the IITA and this Section.
2) For returns due prior to January 1, 1994, in case of failure to file any tax return required under this Act on the date prescribed therefor (determined with regard to any extensions of time for filing), unless it is shown that such failure is due to reasonable cause (as defined in IRC section 6651) there shall be added as a penalty to the amount required to be shown as tax on such return 7.5% of the amount of such tax if the failure is not for more than one month, with an additional 7.5% for each additional month or fraction thereof during which such failure continues, not exceeding 37.5% in the aggregate. (Section 1001 of the IITA, effective until January 1, 1994)
3) For returns due on and after January 1, 1994, without regard to extensions, in case of failure to file any tax return required under the IITA on the date prescribed therefor, (determined with regard to any extensions of time for filing) there shall be added as a penalty the amount prescribed by Section 3-3 of the UPIA. (Section 1001 of the IITA, effective January 1, 1994)
4) No penalty is imposed if there was reasonable cause for the taxpayer's failure to timely file the return. (See IITA Section 1001 (as in effect prior to January 1, 1994) and UPIA Section 3-8.) If the due date for filing of any federal income tax return is extended for any reason (for example, as the result of another state's holiday, such as the Emancipation Day holiday observed in Washington, D.C., or because of natural disaster under IRC Section 7508A), a taxpayer who files his or her Illinois return after it is due under the IITA, but on or before the extended due date of the equivalent federal return, is deemed to have reasonable cause for the late filing.
(Source: Amended at 46 Ill. Reg. 18102, effective October 26, 2022)
Section 100.5030 Taxpayer's Notification to the Department of Certain Federal Changes Arising in Federal Consolidated Return Years, and Arising in Certain Loss Carryback Years (IITA Section 506)
a) In general. A corporation that is a member of an affiliated group filing a consolidated federal return for a particular taxable year must compute its separate federal taxable income equivalent for Illinois income tax purposes in accordance with IITA Section 203(e)(2)(E). Such a corporation must, however, also calculate its "separate taxable income" for purposes of the federal consolidated return and its supporting statements in accordance with Treasury Reg. Section 1.1502-12. Such a calculation for federal purposes involves certain positive and negative modifications to what the corporation's federal taxable income would be were it not a member of an affiliated group filing a consolidated federal income tax return. Therefore, although the computation of "separate taxable income" under Treasury Reg. Section 1.1502-12 does not exactly equate with the computation of "federal taxable income" and IITA Section 203(e)(2)(E), it should nevertheless be possible to reconcile the "separate taxable income" of the consolidated return (as reflected on supporting statements to the consolidated return) with the "federal taxable income" of the pro forma U.S. 1120 required for Illinois purposes by reversing the positive and negative modifications of Treasury Reg. Section 1.1502-12 and by executing the mandated elections of IITA Section 203(e)(2)(E). Consequently, if the federal consolidated return of an affiliated group is later adjusted for federal purposes with the meaning of Section 403(b) of the Act, and if the federal adjustment alters the computation of "separate taxable income" of any member under Treasury Reg. Section 1.1502-12, then such an adjustment shall require notification to the Illinois Department of Revenue pursuant to IITA Section 506(b) to the extent such adjustment enters into the computation of such taxpayer's base income under the Act.
b) Certain adjustments in loss carryback years. In certain limited instances, it is possible that a member of an affiliated group will have a pro forma federal change for Illinois purposes to its federal taxable income of a prior year (as reported to Illinois under whatever paragraph of IITA Section 203(e) applied in the prior year). This would result from the pro forma federal carryback of a net operating loss or capital loss for Illinois purposes which was not identically carried back for federal purposes by reason of the fact that it originated in a year (under IITA Section 203(e)(2)(E), carryback of net operating losses on a separate return basis by members of affiliated groups is allowed for Illinois purposes only from loss years ending before September 12, 1977 and ending from November 7, 1978 to December 30, 1980) for which the corporation participated in the filing of a consolidated return and in which consolidated return year the loss was partly or wholly absorbed for federal purposes by income of other members of the affiliated group. In such instances, any claim for refund of Illinois income tax must be filed not later than 3 years and 20 days after the last day of the taxable year in which the loss occurred which generated the pro forma change, or two years and 20 days from the date the amount of loss as reflected on the consolidated return and supporting statements of the loss year is finally determined for federal purposes (within the meaning of IITA Section 403(b)) whichever is later.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.5040 Innocent Spouses
a) Spouses who file a joint return for a taxable year are each liable for the entire tax liability of the couple, regardless of which spouse earned the income reportable on the return. (See IITA Section 502(c).) However, spouses may be entitled to relief from some or all of a joint return liability under the Innocent Spouse provision in IITA Section 502(c)(4). An election under this Section to obtain such relief applies to every year for which a joint return was filed involving the same two individuals listed in the election.
b) For tax liabilities arising and paid prior to August 13, 1999, a spouse shall, with respect to any taxable year to which the election applies, be relieved from liability for any Illinois tax, penalties, additions to tax, interest, or other amounts, to the same extent as the relief provided by the Internal Revenue Service under a Section 6013(e) determination. If there is no federal income tax liability at issue, a spouse shall be relieved from liability for any Illinois tax, penalties, additions to tax, interest, or other amounts, if:
1) a joint return was filed for such taxable year;
2) the amount of understatement of tax exceeds $500 and is attributable to an omission by such person's spouse;
3) the spouse did not know of, and had no reason to know of, such omission at the time of signing the return; and
4) it is unfair to hold the spouse liable for the deficiency in tax for such omission.
c) For tax liabilities arising after August 13, 1999, or which arose prior to but remain unpaid as of August 13, 1999, any individual who makes an election under this Section shall be liable only for the amount of Illinois income tax that does not exceed the individual's separate return amount for that taxable year and the individual's liability for any deficiency assessed for that taxable year shall not exceed the portion of the deficiency properly allocable to the individual. (IITA Section 502(c)(4)(B)) If any portion of a liability for a tax year (including any portion of any interest or penalty) arising prior to August 13, 1999 remains unpaid as of that date, innocent spouse relief for that entire liability shall be determined pursuant to this subsection (c). (See Flores v. United States, 88 A.F.T.R.2d 2001-7020 (Ct. Fed. Cl. 2001).)
d) Making the Election. There are two ways that an individual may elect the protection of the innocent spouse provision according to IITA Section 502(c)(4):
1) An individual who submits proof of an election made pursuant to Section 6015 of the Internal Revenue Code (by sending a copy of Form 8857 to the Department) automatically elects the innocent spouse provision (i.e., IITA 502(c)(4)). Any determination made under Section 6015 with respect to the validity of the innocent spouse election and/or the individual's separate return amount or portion of any deficiency attributable to the individual is conclusively presumed to be correct.
2) If no election has been made under Internal Revenue Code Section 6015, an innocent spouse must file Form IL-8857 and meet the following conditions:
A) a joint return was filed for the taxable year; and
B) the spouse seeking relief under this Section either has been assessed an amount of Illinois income tax for the taxable year in excess of his or her separate return amount or has had a deficiency asserted against him or her (whether or not assessed) that is properly allocable to the other spouse; and
C) no assets have been transferred between the spouses as part of a scheme by such individuals to avoid payment of Illinois income tax.
e) Limitations on the Innocent Spouses Election. An innocent spouse election shall qualify as a claim for refund of any overpayment that results from the granting of innocent spouse relief. There is no limitations period for making an innocent spouse election. However, no refund of taxes paid by a spouse making the election will be made unless the election is filed within the applicable period for filing a claim for refund of income taxes.
f) Notice to Joint Return Spouse. At the written request of the spouse making the election, the Department shall send a notice to the other spouse listed on the joint return for the tax years at issue, stating that a request for innocent spouse relief has been filed and inviting submission of any documentation or other information that may assist the Department in making a determination. Notice will be sent by regular mail to the joint return spouse's last known address. The notice shall state that it does not give the notified spouse any right to participate in the proceedings and that, although the notified spouse may provide documentation or other information at any time, the Department is not obligated to consider any submission made more than 60 days after the date of the notice. Another notice shall be sent after the determination is final stating the effects of the proceedings on the joint return spouse's liability.
g) Burden of Proof. The individual seeking relief has the burden of proof with respect to all matters, except that the Department has the burden of proof with respect to disputes regarding a spouse's knowledge of an erroneous item or the existence of a scheme to avoid payment of tax under subsection (d)(2)(C) of this Section.
h) Collection Action. Receipt by the Department of proof of an election under the Internal Revenue Code section 6015 or the filing of Form IL-8857 will only terminate Department collection activity against the spouse seeking relief; assessments will continue against both spouses. Collection activity will cease until a notice is sent to the electing spouse:
1) stating that the election is invalid; or
2) identifying the portion of tax liability or deficiency that has been allocated to the electing spouse.
i) Written Protests. An electing spouse who receives a notice stating either that the election is invalid or that the relief granted is less than the relief the electing spouse believes is warranted may file a written protest to the notice within 60 days (or 150 days if outside the United States) from the date of the notice. If a written protest is filed, the electing spouse will be granted a hearing according to IITA Section 908. Further administrative review shall be allowed in accordance with IITA Section 1201. Once the Department is in receipt of a written protest that is properly filed, no collection action shall be taken by the Department until the decision regarding the protest becomes final under Section 908(d), or if administrative review of the Department's decision is requested under Section 1201, until the decision of the court becomes final. Assessment is not affected by the filing of a written protest.
j) Claims in Addition to the Innocent Spouse Provision. Alternative grounds for the individual's claim of reduced liability or no liability shall be consolidated, if possible, with the election of the innocent spouse provision and any outstanding Notice of Deficiencies in order to enhance administrative efficiency.
k) Definitions.
1) "Separate return amount" means an amount equal to the excess (if any) of:
A) the tax liability of the individual based on the items shown on the joint return for the taxable year if the individual had filed a separate return, over
B) the aggregate payments of such tax properly allocable to such individual, net of any refund or credit allowed for any overpayment of tax for the taxable year.
In determining the tax liability that the individual would have incurred had he or she filed a separate return, any item of income, deduction, exemption credit, or payment that is not clearly allocable to either spouse shall be divided equally between the spouses. In determining the payments of tax allocable to an individual for a taxable year, any payment of estimated tax made on behalf of both spouses, any credit allowed on a return for an overpayment reported on the preceding taxable year's joint return by the same spouses, and any refund or credit allowed for an overpayment shown on the return for the taxable year will be allocated in proportion to the separate return amount of each spouse for the taxable year, as determined without regard to such estimated tax payment, credit or overpayment refunded or credited.
Example 1. Interest earned on a joint bank account, the exemptions allowed for dependent children, the credit for property taxes paid with respect to the spouses' principal residence, and any payment of estimated tax made from a joint bank account will be divided equally between the spouses in the absence of evidence that such amounts should be allocated in a different manner.
Example 2. Husband and Wife file a 1999 Illinois income tax return, reporting an overpayment of $500 that they elect to have credited against their joint estimated tax liability for 2000. They make joint estimated tax payments of $200 in 2000 and file a joint return for 2000, and Wife subsequently requests innocent spouse relief. For 2000, Husband's separate return amount, as determined without regard to the $500 credit or the $200 in estimated tax payments, is $2,000. The tax on Wife's separate return items is less than the amount of Illinois income tax withheld from her wages by her employer. Accordingly, the entire $700 in credit and estimated tax payments are allocable to Husband. If Wife's separate return amount, determined without regard to the credit or the estimated tax payments, were $1,000, one-third of the $700 would be allocable to her and two-thirds would be allocable to Husband.
2) For purposes of this Section, "deficiency" means the difference between the total amount of tax that should have been shown on the return and the amount of tax that was actually shown on the return. The portion of a deficiency properly allocable to an individual will be determined by allocating the erroneous items of income, deduction or credit whose correction generates the deficiency between the spouses in the same manner as would be used to allocate such items between the spouses for purposes of determining the separate return amounts for the spouses; provided that the amount of any deficiency resulting from an erroneous item shall be allocated to each spouse who had actual knowledge of the erroneous item.
Example 3. Husband and Wife file a joint return for 2000 that omits $5,000 in compensation earned by Husband from a temporary job. Wife knew that the $5,000 was improperly omitted at the time she signed the return. In determining the deficiency allocable to Husband, the $5,000 will be allocated to him because it is his income. However, in determining the deficiency allocable to Wife, the $5,000 will be allocated to her because it is an erroneous item of which she had actual knowledge. Note that the Department has the burden of proof to show that Wife had actual knowledge of the erroneous item.
3) "Erroneous items" means any unreported income and any deductions or credits reported incorrectly on a return.
(Source: Amended at 32 Ill. Reg. 10170, effective June 30, 2008)
Section 100.5050 Frivolous Returns
a) In addition to any other penalty provided by the IITA, there is imposed a penalty of $500 upon any individual who files a purported return that does not contain information from which the substantial correctness of the stated tax liability can be determined or contains information indicating that the stated tax liability is substantially incorrect and such conduct is due to a desire to delay or impede the administration of the IITA or is due to a position that is frivolous. (IITA Section 1006)
b) The penalty imposed by IITA Section 1006 applies only to individual return filers. It does not apply to an individual acting as a return preparer for another taxpayer or to an individual filing or signing a return of any taxpayer other than that individual.
c) The penalty imposed by IITA Section 1006 applies to purported returns. Accordingly, the penalty may be imposed even though the filing is not a processable return within the meaning of UPIA Section 3-2(d), is not filed on the form prescribed by the Department under IITA Section 1401(a), or is insufficient to avoid imposition of the penalty for failure to file a return under IITA Section 1001.
d) A purported return does not contain information from which the substantial correctness of the stated tax liability can be determined if it does not contain or is not verified by a signed, written declaration that it is made under penalties of perjury, as required by IITA Section 504, and such purported return is due to a desire to delay or impede the administration of the IITA and is therefore subject to penalty if:
1) the declaration on the form prescribed by the Department is altered or qualified in any way, or the filing is not made on the form prescribed by the Department and its verification is not identical to the verification contained in the form prescribed by the Department; or
2) it indicates on its face in any manner that the filer has intentionally failed to sign the verification. For example, a statement on or attached to a form, saying that the filer has not signed the verification because signing the verification would violate his or her rights under the United States Constitution or the Constitution of the State of Illinois against self-incrimination, against unreasonable searches and seizures or to due process, or because signing the verification would constitute perjury or would violate religious principles of the filer, would cause the filing to be frivolous and subject to penalty.
e) A purported return contains information indicating that the stated tax liability is incorrect due to a frivolous position if it contains an assertion that no federal or Illinois income tax liability is due because of one or more of the following positions, or because of a position substantially similar to any of the following:
1) an income tax is prohibited or not allowed by the United States Constitution or the Illinois Constitution;
2) individuals in general are not subject to income taxation by the United States or this State;
3) no provision of the Internal Revenue Code or of the IITA requires filing of a return or payment of tax by individuals having net income;
4) filing of income tax returns or payment of income taxes is voluntary;
5) income taxes are or may be imposed only on certain business activities or the exercise of a privilege (other than the privilege of earning or receiving income in or as a resident of Illinois), and the filer has not engaged in any such business or privileged activity;
6) wages, salary and other forms of compensation for personal services are not income or otherwise are not subject to income tax;
7) only government employees, nonresident aliens, citizens or residents of the District of Columbia or other federal areas, or persons other than residents or citizens of the United States are or may be made subject to an income tax imposed by the United States or this State;
8) income tax may be imposed only by contractual arrangement or under a contractual or other consensual relationship between the filer and either the United States or this State;
9) regulations necessary to implement the Internal Revenue Code or the IITA in general, or to implement the provisions in those statutes requiring filing of returns or payment of taxes, have not been promulgated;
10) the filer has not received a specific notice of his or her obligation to maintain records, file returns or pay taxes;
11) the filer has not received income from any source of income expressly identified in the Internal Revenue Code or the IITA as being from United States sources or subject to income tax;
12) the filer has no income because the federal reserve notes, checks or other medium in which the filer is paid do not constitute "money", "currency" or any other taxable medium;
13) the filer has no liability or no obligation to file a return because no liability has been properly assessed;
14) payments received in federal reserve notes or obligations of the federal government are exempt from State income taxation;
15) a pure trust, contractual trust or statutory trust has no return filing or tax payment obligations; or
16) any position that the United States Supreme Court or a federal circuit court of appeals has held to be frivolous for purposes of imposing a frivolous return penalty under IRC Section 6702.
f) The penalty imposed under IITA Section 1006 shall be paid upon notice and demand and shall be assessed, collected and paid in the same manner as the Illinois income tax.
(Source: Added at 28 Ill. Reg. 5694, effective March 17, 2004)
Section 100.5060 Reportable Transactions (IITA Section 501(b))
a) Requirement to Disclose Participation in Reportable Transactions
1) In general. For each taxable year in which a taxpayer is required to make a disclosure statement under Treasury Regulations Section 1.6011-4 (26 CFR 1.6011.4 (2004)) with respect to a reportable transaction in which the taxpayer participated in a taxable year for which a return is required under IITA Section 502, the taxpayer shall file a copy of such disclosure with the Department. (IITA Section 501(b)) A copy of such disclosure shall be filed at the time and in the manner provided under subsection (b).
2) Definitions. For purposes of this Section:
A) Reportable Transaction. A "reportable transaction" is any transaction that must be disclosed under Treasury Regulations Section 1.6011-4 and shall include any listed transaction that is required to be disclosed under Treasury Regulation Section 1.6011-4T or 1.6011-4 as of the earlier of the date disclosure is required under subsection (b)(1) or the date the taxpayer files its return to which such disclosure would need to be attached.
B) Listed Transaction. A "listed transaction" is any transaction entered into after February 28, 2000 that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a listed transaction and that is required to be disclosed under Treasury Regulation Section 1.6011-4T or 1.6011-4.
b) Time and Manner for Making Disclosure
1) Time for Making Disclosure. Disclosure under this Section must be made by the due date (including extensions) of the return to which the disclosure statement must be attached as provided in this subsection (b), unless the date in which disclosure is required for federal income tax purposes for the same transaction is later, in which case disclosure must be made no later than the date in which disclosure is required for federal income tax purposes.
2) General Manner for Making Disclosure
A) Taxable years ending before December 31, 2004. In the case of a reportable transaction as to which disclosure is required for federal income tax purposes on a return filed for a taxable year ending before December 31, 2004:
i) In general. A copy of the federal income tax disclosure shall be attached to the return required under IITA Section 502 for the first taxable year for which a return is due (without regard to extensions) on or after July 30, 2004. The taxpayer may elect to attach a copy of the disclosure to the return for an earlier taxable year. In addition, a second copy of the federal income tax disclosure must be sent to the Department at an address designated by the Department for this purpose at the same time that disclosure is filed as required in this Section. In any case where disclosure is attached to a return and the disclosure relates to a transaction disclosed for federal income tax purposes for a taxable year other than the taxable year for which the Illinois return is made, the taxpayer must indicate on the disclosure the taxable year for which the disclosure was made for federal income tax purposes.
ii) When No Return is Due on or after July 30, 2004. If no return is required to be filed under IITA Section 502 on or after July 30, 2004, the taxpayer shall file a copy of the federal income tax disclosure no later than the due date (including extensions) for the first return it would have been required to file (without regard to extensions) on or after July 30, 2004, had it continued to be required to file returns and continued using the same taxable year it used when it was last required to file an Illinois return. In addition, a second copy of the federal income tax disclosure must be sent to the Department at an address designated by the Department for this purpose at the same time that disclosure is filed as required in this Section.
EXAMPLE: Corporation A was required under Treasury Regulations Section 1.6011-4 to disclose reportable transactions by attaching Form 8886 and Schedule M-3 to its federal income tax return for its taxable year ending March 31, 2003. Corporation A may elect to attach copies of the Form 8886 and the Schedule M-3 to its Illinois income tax return for its taxable year ending March 31, 2004 and send a second copy of the Form 8886 and Schedule M-3 to the address designated by the Department. If it does not make this election, Corporation A is required to attach copies of the Form 8886 and the Schedule M-3 to its Illinois income tax return for the taxable year ending March 31, 2005, which is the first return for which the unextended due date falls on or after July 30, 2004. At the same time, Corporation A must send a second copy of the Form 8886 and Schedule M-3 to the address designated by the Department. In either case, Corporation A must indicate that the Form 8886 and the Schedule M-3 relate to its March 31, 2003 taxable year.
If Corporation A is not required to file an Illinois income tax return due on or after July 30, 2004, then it must file copies of its Form 8886 and Schedule M-3 with the Department by the due date (including extensions) that its March 31, 2005 return would have been required to be filed. Corporation A should indicate that the Form 8886 and Schedule M-3 relate to its March 31, 2003 taxable year.
B) Taxable years ending on and after December 31, 2004. In the case of a reportable transaction as to which disclosure is required for federal income tax purposes on a return filed for a taxable year ending on and after December 31, 2004, a copy of that disclosure shall be attached to the taxpayer's return required under IITA Section 502 for the same taxable year. In addition, a second copy of the federal income tax disclosure must be sent to the Department at an address designated by the Department for this purpose at the same time that disclosure is filed as required in this Section.
3) Special Rules for Making Disclosure of Certain Listed Transactions
A) If a return is not required under IITA Section 502 for a taxable year in which a disclosure statement is required to be attached to a return pursuant to the special rule for listed transactions under Treasury Regulations Section 1.6011-4(e)(2), the taxpayer must file a copy of the disclosure with the Department if disclosure would have been required under IITA Section 501(b) and this Section if the transaction had been listed at the time the taxpayer filed its return reflecting either the tax consequences or a tax strategy described in the published guidance listing the transaction (or a tax benefit derived from tax consequences or a tax strategy described in the published guidance listing the transaction). A copy of the disclosure must be filed no later than the due date (including extensions) for the first return the taxpayer would have been required to file (without regard to extensions) on or after the date the transaction became a listed transaction, had the taxpayer continued to be required to file returns and continued using the same taxable year it used when it was last required to file an Illinois return.
B) If a return is not required under Section 502 for a taxable year in which a disclosure statement is required to be attached to a return pursuant to Treasury Regulations Section 1.6011-4T with respect to a transaction that becomes a listed transaction on or after the date the taxpayer has filed its return for the first taxable year for which the transaction affected the taxpayer's or a partner's or a shareholder's Federal income tax liability, the taxpayer must file a copy of the disclosure with the Department if disclosure would have been required under IITA Section 501(b) and this Section if the transaction had been listed at the time the taxpayer filed its return for a taxable year for which the transaction affected the taxpayer's or a partner's or shareholder's Federal income tax liability. A copy of the disclosure must be filed no later than the due date (including extensions) for the first return the taxpayer would have been required to file (without regard to extensions) on or after the date the transaction became a listed transaction, had the taxpayer continued to be required to file returns and continued using the same taxable year it used when it was last required to file an Illinois return.
4) Making Disclosure of Items Disclosed under Treasury Regulations Section 1.6011-4(f)(1). If the Internal Revenue Service determines that a taxpayer's submission of a request for ruling under Treasury Regulations Section 1.6011-4(f)(1) satisfies the disclosure rules, the submission shall also satisfy the requirements of IITA Section 501(b) if the taxpayer provides the Department with a copy of the Internal Revenue Service ruling by the later of the date on which disclosure is otherwise required under this Section or 60 days after the date the ruling is issued.
c) Special Rules for Certain Taxpayers
1) Members of a Combined Group. Whenever a disclosure statement is required to be made by any member of a combined group under Treasury Regulations Section 1.6011-4T or Section 1.6011-4 and this Section with respect to any taxable year of the member that is taken into account in computing the group's combined net income for the common taxable year under IITA Section 502(e) and Subpart P of this Part, a copy of the disclosure shall be filed as required under this Section for each common taxable year. If a member of a combined group is required to file a disclosure statement under subsection (b)(2)(A) or (b)(3) with respect to a taxable year during which it was not a member of the combined group, a copy of the disclosure shall be filed with the combined return. The designated agent should indicate that the statement relates to a separate return year of the member and indicate the taxable year to which the disclosure relates.
2) Members of a Consolidated Group. In the case of a taxpayer that is a member of an affiliated group of corporations filing a consolidated income tax return for the taxable year for federal income tax purposes and that is required to make a disclosure statement under Treasury Regulations Section 1.6011-4T or Section 1.6011-4 and this Section, a copy of the disclosure shall be filed as required under this Section if, taking into account the rule of IITA Section 203(e)(2)(E), the taxpayer would be considered to have participated in the transaction for federal income tax purposes.
3) Members of a Unitary Business Group. Regardless of whether or not a disclosure statement is otherwise required of a taxpayer under this Section, any taxpayer that is a member of a unitary business group that includes another member that is required to make a disclosure statement under Treasury Regulations Section 1.6011-4T or Section 1.6011-4, with respect to any taxable year of any other member that is taken into account by the taxpayer in computing its Illinois net income under IITA Sections 202 and 304(e), must file a copy of the disclosure statement with the return for each taxable year.
4) Partners and Subchapter S Corporation Shareholders. If a taxpayer is required to make a disclosure under this Section with respect to a transaction engaged in during the taxable year by a partnership or Subchapter S corporation in which the taxpayer is a partner or shareholder, the taxpayer's obligation to make disclosure with respect to the transaction shall be met if the disclosure is made by the partnership or Subchapter S corporation on a timely composite return that includes the taxpayer or, for taxable years ending after December 31, 2014, on the Illinois replacement tax return filed by the partnership or subchapter S corporation.
d) Exceptions. No disclosure is required with respect to a reportable transaction to the extent provided in this subsection (d).
1) A reportable transaction entered into after February 28, 2000 and before January 1, 2005 is not required to be disclosed if, before the time in which disclosure is otherwise required under IITA Section 501(b) and this Section, the taxpayer has filed an amended Illinois income tax return reporting Illinois net income and tax liability computed without the tax benefits of the reportable transaction.
2) A reportable transaction entered into after February 28, 2000 and before January 1, 2005 is not required to be disclosed if, as a result of a federal audit, the Internal Revenue Service has made a determination with respect to the tax benefits of the reportable transaction and, before the time in which disclosure is otherwise required under IITA Section 501(b) and this Section, the taxpayer has filed an amended Illinois income tax return reporting Illinois net income and tax liability computed without the tax benefits of the reportable transaction other than the benefits determined to be allowable by the Internal Revenue Service.
3) A reportable transaction is not required to be disclosed if, prior to the time in which disclosure is otherwise required under IITA Section 501(b) and this Section, the taxpayer has properly filed an application with the Internal Revenue Service for a change in method of accounting pursuant to a determination by the Internal Revenue Service that the change is necessary to reflect the proper tax treatment of the transaction.
4) A reportable transaction is not required to be disclosed under this Section on the basis that the transaction is a listed transaction if, prior to the time in which disclosure is otherwise required under IITA Section 501(b) and this Section, the Internal Revenue Service has removed the identification of transactions that are the same as or substantially similar to the transaction as listed transactions.
5) A reportable transaction is not required to be disclosed if, before the time in which disclosure is otherwise required under IITA Section 501(b) and this Section, the Department makes a determination by published guidance that a particular transaction or type of transaction is not required to be disclosed, notwithstanding that disclosure is required for the same transaction or type of transaction under Treasury Regulations Section 1.6011-4T or Section 1.6011-4.
6) Disclosure is not required under IITA Section 501(b) and this Section with respect to any transaction in which the requirements of Treasury Regulations Section 1.6011-4 are deemed satisfied pursuant to Treasury Regulations Section 1.6011-4(f)(3).
e) Protective Disclosure. If a taxpayer participates in a reportable transaction with respect to a taxable year in which a return is not filed under IITA Section 502, the taxpayer may disclose the transaction in accordance with the provisions of this Section and indicate on the disclosure statement the taxpayer's position that a return is not required for the taxable year and that disclosure is being made on a protective basis. Disclosure made under this subsection (e) shall be deemed to meet the requirements of Section 501(b).
(Source: Amended at 40 Ill. Reg. 15575, effective November 2, 2016)
Section 100.5070 List of Investors in Potentially Abusive Tax Shelters and Reportable Transactions
a) Requirement to Furnish List of Investors in Potentially Abusive Tax Shelters
1) In General. For the period beginning July 30, 2004 and ending October 22, 2004, under IITA Section 1405.6(a), any person required to maintain a list with respect to a "potentially abusive tax shelter" in accordance with 26 USC 6112 and 26 CFR 301.6112-1 (2007) and who is required to furnish the list to the Internal Revenue Service shall furnish the list to the Department at the time and in the manner provided under subsection (b) of this Section. 26 USC 6111 and 6112 were amended by Public Law 108-357 to delete any reference to "tax shelter". Accordingly, this subsection (a)(1) does not apply after October 22, 2004, the effective date of Public Law 108-357.
2) Special Rule for Listed Transactions. For the period beginning July 30, 2004 and ending January 10, 2008, under IITA Section 1405.6(b), any person required for federal income tax purposes to maintain a list with respect to a transaction entered into on or after February 28, 2000 that becomes a listed transaction at any time shall furnish the list to the Department, regardless of whether the list is furnished to the Internal Revenue Service, at the time and in the manner provided under subsection (b) of this Section. IITA Section 1405.6(b) was repealed by Public Act 95-707. Accordingly, this subsection (a)(2) does not apply after January 10, 2008, the effective date of Public Act 95-707.
3) Nexus with this State. Furnishing an investor list with respect to the periods specified in this subsection (a) is required only if the potentially abusive tax shelter or the listed transaction has nexus with this State as determined under this subsection (a)(3).
A) Potentially Abusive Tax Shelters
i) Prior to January 11, 2008, IITA Section 1405.6(d) provided that, if the transaction with respect to which list maintenance is required is a tax shelter (other than a listed transaction) as defined in 26 USC 6111, then the provisions of IITA Section 1405.6(a) and subsection (a) of this Section do not apply unless the tax shelter is:
• Organized in Illinois,
• Doing Business in Illinois, or
• Deriving income from sources within Illinois.
ii) The requirements of this subsection (a)(3)(A) apply only to "tax shelters" and so apply only to potentially abusive tax shelters under IITA Section 1405.6(a) and subsection (a)(1), and not to listed transactions under IITA Section 1405.6(b) or subsection (a)(2). As noted in subsection (a)(1), subsection (a)(1) has no application after October 22, 2004.
B) Listed Transactions. A listed transaction has sufficient nexus with Illinois to be subject to the requirement to furnish investor lists if, at the time the transaction is entered into, the transaction has one or more investors that is an Illinois taxpayer.
4) The term "listed transaction" shall have the same meaning as defined in Section 100.5060 of Subpart N of this Part.
b) Time and Manner for Furnishing List. The provisions of this subsection (b) set forth the time and manner for furnishing investor lists with respect to the periods specified in subsection (a) of this Section.
1) Transactions (Other Than Listed Transactions)
A) Any list that must be furnished to the Department with respect to the period specified in subsection (a)(1) of this Section shall be furnished to the Department by the later of:
i) The date on which the list is required to be furnished to the Internal Revenue Service, or
ii) February 10, 2008.
B) The list shall include all of the same information required to be included for federal income tax purposes (including any statement regarding claims of privilege), plus any additional information required by the Department by published guidance. As noted in subsection (a)(1), subsection (a)(1) has no application after October 22, 2004.
2) Listed Transactions
A) Any list that must be furnished to the Department with respect to the period specified in subsection (a)(2) that includes a listed transaction having nexus with Illinois shall be furnished as provided in this Section, regardless of whether the list is furnished to the Internal Revenue Service, by the later of:
i) 60 days after entering into the transaction having nexus with Illinois,
ii) 60 days after the transaction having nexus with Illinois becomes a listed transaction, or
iii) February 10, 2008.
B) The list shall include all of the same information required to be included for federal income tax purposes (including any statement regarding claims of privilege) as of the date the investor list is required to be furnished to the Department, plus any additional information required by the Department by published guidance. If, after the date in which a list is required to be furnished to the Department under this subsection (b)(2), a transaction having Illinois nexus is entered into that is required for federal income tax purposes to be included on a list previously furnished the Department, then the previously furnished list must be supplemented no later than 60 days after the transaction is entered into. The supplement must include, with respect to the transaction, all of the same information required to be included on the list for federal income tax purposes. In the event that the requirement to maintain a list with respect to a transaction described in this subsection (b)(2) is suspended under federal law on account of a ruling request at the time disclosure is otherwise required under this Section, the list shall be furnished by the date the federal suspension period terminates.
3) Special Rule. The provisions of this subsection (b)(3) apply to lists that must be furnished to the Department with respect to the period specified in subsection (a)(2). IITA Section 1007(c) allows the Director to rescind all or any portion of the penalty imposed for failure to comply with the requirements of IITA Section 1405.6 when, among other circumstances, imposing the penalty would be against equity and good conscience, or when rescinding the penalty would promote compliance with the requirements of the IITA and effective tax administration. Pursuant to IITA Section 1007(c), with respect to any transaction entered into prior to the time the transaction becomes a listed transaction, no penalty shall be imposed under Section 1007 if the person properly furnishes the list required under this Section not later than 120 days after the transaction becomes a listed transaction. Failure to furnish the list within the time required in this subsection (b)(3) does not preclude rescission of the penalty in accordance with IITA Section 1007(c).
4) Dissolution or Liquidation of Material Advisor. In any case in which a list subject to subsection (a) of this Section is furnished to the Office of Tax Shelter Analysis pursuant to 26 CFR 301.6112-1(f) (2007), the list shall also be furnished to the Department by the date on which the list is required to be furnished to the Internal Revenue Service. The list shall include all of the same information required to be included for federal income tax purposes (including any statement regarding claims of privilege), plus any additional information required by the Department by published guidance.
c) Exceptions. A list otherwise required to be furnished under subsection (a) of this Section is not required if:
1) At the time a list is otherwise required to be furnished to the Department under this Section on the basis that the transaction is a listed transaction, the Internal Revenue Service has removed the identification of transactions that are the same as or substantially similar to the transaction as listed transactions;
2) Before the time in which the list is otherwise required to be furnished to the Department under this Section, the Department makes a determination by published guidance that a list is not required to be furnished with respect to a particular transaction or type of transaction; or
3) With respect to a listed transaction for which, at the time the list is required to be furnished to the Internal Revenue Service, the same list had previously been furnished the Department pursuant to this Section, provided the list furnished the Internal Revenue Service does not contain additional information.
d) Material Advisors of Reportable Transactions
1) On and after January 11, 2008, any person required to maintain a list under IRC section 6112 shall furnish a duplicate of that list to the Department not later than the time the list is required to be furnished to the Internal Revenue Service, or, if earlier, the date of written request by the Department. [35 ILCS 5/1405.6(a)]
2) Reportable Transactions Subject to this Section. A copy of the list required to be maintained by a person under IRC section 6112 and 26 CFR 301.6112-1 shall be subject to the requirements of this subsection (d) if the person is a material advisor with respect to a transaction having nexus with Illinois. A person is a material advisor with respect to a transaction having nexus with Illinois if:
A) The person is a material advisor with respect to the transaction under IRC section 6112 and 26 CFR 301.6112-1; and
B) The person is a material advisor with respect to the transaction as described in Section 100.5080(c)(2) of this Subpart N.
3) Furnishing of Lists. Each person who is a material advisor, as described in subsection (d)(2), with respect to a transaction having nexus with Illinois as described in subsection (d)(2) must furnish a copy of the list to the Department not later than:
A) The date the list (or a component of the list) is required to be furnished to the Internal Revenue Service under 26 CFR 301.6112-1;
B) The date the list (or component of the list) is required to be furnished to the Internal Revenue Service on behalf of a person by another material advisor pursuant to a designation agreement under 26 CFR 301.6112-1(f); or
C) If earlier than the date specified in subsections (d)(3)(A) and (B), the date specified in a written request issued by the Department.
4) Designation Agreements. If the obligation under IRC section 6112 and 26 CFR 301.6112-1 of a material advisor with respect to a transaction having nexus with Illinois is satisfied pursuant to a designation agreement under 26 CFR 301.6112-1(f) by a person that is not a material advisor with respect to a transaction having nexus with Illinois, the material advisor with respect to a transaction having nexus with Illinois must furnish the list at the time required under this subsection (d). The list may be filed on the material advisor's behalf by the person designated under the designation agreement.
e) Protective Filing. If a person required to furnish a list under this Section believes in good faith that the State lacks jurisdiction to require the person to comply with this Section, the person may file a statement with the Department setting forth the basis of any claim of lack of jurisdiction. If the statement contains a detailed description of the transaction that describes both the tax structure and its expected tax treatment, discloses the number of investors the person is required to include on the list, and includes an explanation of the basis for believing that disclosure is not required, then the filing of the statement shall abate the penalty otherwise imposed under IITA Section 1007 for failing to furnish a list. However, failure to furnish the statement does not preclude rescission of the penalty in accordance with IITA Section 1007(c).
f) Place for Filing. Lists required to be furnished to the Department under this Section shall be sent to:
Illinois Department of Revenue
P.O. Box 19029
Springfield IL 62794-9029
(Source: Amended at 33 Ill. Reg. 2306, effective January 23, 2009)
Section 100.5080 Registration of Tax Shelters (IITA Section 1405.5)
a) Requirement to Register Tax Shelters and Listed Transactions.
1) For the period beginning July 30, 2004 and ending October 22, 2004, under IITA Section 1405.5(a), any tax shelter organizer required to register a "tax shelter" under 26 USC 6111 is required to register that tax shelter with the Department. 26 USC 6111 was amended by Public Law 108-357 to delete any reference to "tax shelter". Accordingly IITA Section 1405.5(a) has no application after October 22, 2004, the effective date of Public Law 108-357.
2) For the period beginning July 30, 2004 and ending January 10, 2008, under IITA Section 1405.5(b), registration in the form and manner prescribed by the Department is required for any transactions entered into after February 28, 2000 that become listed transactions (as defined in Section 100.5060 of Subpart N of this Part) at any time. Transactions requiring registration under this provision are those transactions for which a list is required to be furnished to the Department pursuant to IITA Section 1405.6(b) and Section 100.5070(a)(2) of this Part.
b) Time and Manner for Making Registration. Registration under IITA Section 1405.5(b) and subsection (a)(2) of this Section shall be required only of the person required to furnish the investor list with respect to the transaction under Section 100.5070 of this Part. Registration will be due at the time the investor list is required to be furnished to the Department, and properly furnishing the investor list for a transaction (including the name, address, and taxpayer identification number of the person required to furnish the list) shall be deemed to be registration of the transaction for purposes of IITA Section 1405.5(b) and subsection (a)(2) of this Section.
c) Disclosure of Reportable Transaction by Material Advisor.
1) In General. On and after January 11, 2008, any material advisor required to file a return under 26 USC 6111 and 26 CFR 301.6111-3 with respect to a reportable transaction subject to this Section shall file a copy of the return not later than the day on which the return is required to be filed under federal law.
2) Reportable Transactions Subject to this Section.
A) A copy of the return required to be filed by a person under 26 USC 6111 and 26 CFR 301.6111-3 is required to be filed under this Section if that person is a material advisor with respect to a transaction having nexus with Illinois. A person is a material advisor with respect to a transaction having nexus with Illinois if:
i) The person is a material advisor with respect to the transaction;
ii) The person makes or provides a tax statement to or for the benefit of an Illinois taxpayer, or the person makes or provides a tax statement to or for the benefit of another material advisor who makes or provides a tax statement to or for the benefit of an Illinois taxpayer; and
iii) The transaction is entered into by an Illinois taxpayer.
B) Material advisors, including those who cease providing services before the time the transaction is entered into by an Illinois taxpayer, must make reasonable and good faith efforts to determine whether the transaction has been entered into by an Illinois taxpayer.
3) Time for Filing Return.
A) In General. The return required to be filed under this Section (including an amended return required to be filed under 26 CFR 301.6111-3(d)(1)) must be filed not later than the time the same return is required to be filed under 26 CFR 301.6111-3.
B) Special Rule. If, at the time a material advisor is required to file a return with respect to a reportable transaction under 26 USC 6111 and 26 CFR 301.6111-3, no return is required under this subsection (c) because the events described in subsections (c)(2)(B) and (C) have not occurred, but those events subsequently do occur, then a copy of the return required to be filed under the federal law shall be filed with the Department by the last day of the month that follows the end of the calendar quarter in which the events occur.
C) Designation Agreements. If the obligation under 26 USC 6111 and 26 CFR 301.6111-3 of a material advisor with respect to a transaction having nexus with Illinois is to be satisfied pursuant to a designation agreement under 26 CFR 301.6111-3(f) by a person who is not required to file a return under this subsection (c), the material advisor with respect to that transaction having nexus with Illinois must file a copy of the return filed pursuant to the designation agreement not later than the time the return must be filed under the federal law. The copy may be filed on the material advisor's behalf by the person designated under the designation agreement.
4) Protective Disclosure. If the obligation under 26 USC 6111 and 26 CFR 301.6111-3 of a material advisor with respect to a transaction having nexus with Illinois is satisfied by the filing of a protective disclosure under 26 CFR 301.6111-3(g), then the filing of a copy of the protective disclosure with the Department shall satisfy the obligation under IITA Section 1405.5 and this subsection (c).
5) Ruling Request. If the obligation under 26 USC 6111 and 26 CFR 301.6111-3 of a material advisor with respect to a transaction having nexus with Illinois is satisfied by the filing of a ruling request under 26 CFR 301.6111-3(h), then the filing of a copy of the submission that is deemed to satisfy the federal return requirement by the last day of the month following the end of the calendar quarter in which the Internal Revenue Service notified the material advisor that the submission satisfies the federal return requirement shall satisfy the obligation under IITA Section 1505.5 and this subsection (c).
6) Definitions. For purposes of this subsection (c), the following definitions apply:
A) Material Advisor. The term material advisor with respect to a reportable transaction means a person who is a material advisor with respect to the transaction defined under 26 USC 6111(b)(1) and 26 CFR 301.6111-3(b).
B) Reportable Transaction. The term reportable transaction has the same meaning as prescribed in 26 CFR 301.6111-3(c)(1).
C) Tax Statement. The term tax statement has the same meaning as prescribed in 26 CFR 301.6111-3(b)(2)(ii).
D) Illinois Taxpayer. The term Illinois taxpayer means, with respect to a reportable transaction, any person whose base income allocable or apportionable to Illinois is affected by the reportable transaction. In the case of a group of corporations required to file a combined return under IITA Section 502(e), the term Illinois taxpayer refers to the combined group.
7) Place for Filing. Returns required to be furnished to the Department under this Section shall be sent to:
Illinois Department of Revenue
P.O. Box 19029
Springfield IL 62794-9029
(Source: Amended at 33 Ill. Reg. 2306, effective January 23, 2009)
SUBPART P: COMPOSITE RETURNS
Section 100.5100 Composite Returns: Eligibility (IITA Section 502(f))
a) In General. A composite return may be filed on behalf of nonresident individuals, trusts, and estates who derive income from Illinois and who are partners, or subchapter S corporation shareholders, or who transact insurance business under a Lloyds plan of operation (for a definition of an "subchapter S corporation" see IITA Section 1501(a)(28); for a definition of a "Lloyd's plan of operation" see Section 100.5170). The respective partnership, subchapter S corporation or insurance business shall file the composite return and shall make composite income tax payments. The composite return may include income and tax of Illinois residents if the petition described in subsection (c) is granted. The right to file a composite return is applicable to taxable years ending on or after December 31, 1987 and prior to December 31, 2014, except for Lloyd's plans of operation, which may file composite returns for any tax year ending on or after December 31, 1999. (See IITA Section 502(f).) Also, partnerships and subchapter S corporations may continue to report changes to the Illinois income tax liabilities of their partners and shareholders, and pay any additional tax owed by the partners or shareholders for any tax year ending on or after December 31, 2008, as provided in Section 100.5180(b).
b) Eligibility. The right to be included in a composite return is limited to nonresident and resident individuals, trusts and estates who are partners of the same partnership, shareholders of the same subchapter S corporation, and to resident or nonresident taxpayers transacting an insurance business in Illinois under a Lloyd's plan of operation. The eligibility of resident individuals, trusts and estates who are not transacting an insurance business under a Lloyd's plan of operation is conditioned upon compliance with subsection (c).
EXAMPLE: The Acme partnership consists of a general partner and 50 limited partners. The general partner is a regular corporation, and the limited partners consist of 26 nonresident individuals, 20 resident individuals, a subchapter S corporation, a partnership, a nonresident trust and an estate. The 26 nonresident individuals, the nonresident trust and the nonresident estate are automatically eligible to be included in a composite return. The 20 resident individuals may be included in the composite return with the nonresidents if the Department grants their petition. None of the other entities may be included in the composite return.
c) Petition for Residents. Individuals, trusts and estates that are residents of Illinois may be included in a composite return if the authorized agent files a petition with the Department of Revenue and the petition is granted. The Department shall grant the petition if the authorized agent clearly demonstrates that no other method of filing would achieve the same degree of compliance and administrative ease for both the Department and the taxpayers. Factors to be considered in granting the petition include: the quantity of partners or shareholders involved; the inability of the authorized agent to file the composite return except in this manner; and the availability of a reliable method for claiming credit on the separate returns pursuant to Section 100.5160. The petition must be filed prior to the end of the authorized agent's taxable year, and the petition must be granted or denied prior to the due date of the return without regard to extensions. Petitions should be mailed to:
Illinois Department of Revenue
Attn: Document Perfection Section
Post Office Box 19014
Springfield, Illinois 62794-9014
d) Inclusion of Eligible Members. A composite return does not have to include all of the individuals who are eligible to be included in the return. Whether an individual is included in a composite return is a matter that should be decided by the individual and the entity. Persons not included in composite returns are required to meet their Illinois filing and payment obligations separately, and failure to do so could mean the imposition of civil and criminal penalties.
e) Nonresidents With Other Illinois Source Income. Nonresident individuals, trusts and estates with Illinois source income other than from a partnership, subchapter S corporation, or Lloyd's plan of operation may, but need not, be included in a composite return. If those nonresidents are included in a composite return for a taxable year ending on or after December 31, 2008 (December 31, 1999, in the case of a composite return filed by a Lloyd's plan of operation), they may claim a credit against their Illinois income tax liability for their share of the tax paid on their behalf on the composite return. If nonresidents are included in a composite return for an earlier taxable year, they will not be permitted to claim credits on their individual returns for their shares of the composite tax payments unless the authorized agent files a petition with the Department of Revenue requesting permission for the nonresidents to claim the credit and the petition is granted. The Department shall grant the petition if the authorized agent clearly demonstrates that no other method of filing would achieve the same degree of compliance and administrative ease for both the Department and the taxpayers. Factors to be considered will be the same as for petitions pursuant to subsection (c). The petition must be filed prior to the end of the authorized agent's taxable year, and the petition must be granted or denied prior to the due date of the return without regard to extensions. If the petition is granted, credit will be claimed by the nonresidents for their share of the composite payments in the same manner and amount as permitted resident individuals under Section 100.5160. Petitions should be mailed to:
Illinois Department of Revenue
Attn: Document Perfection Section
Post Office Box 19014
Springfield, Illinois 62794-9014
(Source: Amended at 40 Ill. Reg. 15575, effective November 2, 2016)
Section 100.5110 Composite Returns: Responsibilities of Authorized Agent
a) Authorized Agent. If a composite return is filed, it shall be signed by a general partner in the case of partnership income, a corporate officer in the case of S Corporation income, or an attorney-in-fact in the case of a Lloyd's plan of operation. The filing of a composite return shall mean that the partnership, S Corporation, or Lloyd's plan of operation, whichever the case may be, is the authorized agent of the individuals included in the return. As such, the authorized agent shall assume responsibility for all matters relating to the composite return including the following: filing the return, amended returns, and requests for extension of time; the payment of tax, penalty and interest; assessment and collection; receiving and responding to notices from the Department of Revenue; and participating in an audit of the return.
b) Notice by the authorized agent. Other than the petitions required by Section 100.5100(c) and (e), the authorized agent does not have to notify the Department of Revenue that it will commence or cease the filing of a composite return, nor does it have to give notice of any change in the individuals who will be included in a composite return for the next year.
(Source: Added at 12 Ill. Reg. 4865, effective February 25, 1988)
Section 100.5120 Composite Returns: Individual Liability
Notwithstanding the assumption of liability by the authorized agent, the persons included in a composite return will continue to remain liable for any unpaid liability attributable to them in their separate capacities. The filing of a composite return will be considered as a group of separate returns which will meet the individual filing requirements of the Illinois Income Tax Act. Persons not included in composite returns are required to meet their Illinois filing and payment obligations separately, and failure to do so could mean the imposition of civil and criminal penalties.
(Source: Added at 12 Ill. Reg. 4865, effective February 25, 1988)
Section 100.5130 Composite Returns: Required forms and computation of Income (IITA Section 502(f))
a) Composite Returns of Partners and Shareholders
1) Required form and information. Composite returns of shareholders and partners shall be filed using forms prescribed by the Department. The following information shall be attached to the composite returns: the name, address, social security number and amount of income apportionable and allocable to Illinois for each individual included in the composite return; and the computation of the proper amount of composite income reportable to Illinois.
2) Composite income. The amount of composite income apportionable and allocable to Illinois shall be the sum of the income earned or received for the taxable year from the authorized agent by the persons included in the composite return.
A) The composite income of a partnership shall be computed by first computing the partnership's base income, and then including in composite income the entire partnership share of the base income of each resident partner joining in the composite return and the partnership share of the portion of the base income allocable to Illinois per Form IL-1065 of each nonresident partner joining in the composite return. However, the base income of the partnership for this purpose shall be computed without regard to:
i) the addition modification under IITA Section 203(d)(2)(C) for guaranteed payments to partners other than those partners included in the composite return;
ii) the subtraction modification under IITA Section 203(d)(2)(H) for personal service income or for a reasonable allowance for compensation paid or accrued to partners; or
iii) the subtraction (or addition) modification under IITA Section 203(d)(2)(I) for the share of income (or loss) distributable to a partner subject to Personal Property Tax Replacement Income Tax.
B) The authorized agent shall pay income tax on the composite income that is attributable to the partners included in the composite return and Personal Property Tax Replacement Income Tax on the portion of the composite income which is attributable to trusts included in the composite return.
C) The composite income of a Subchapter S corporation shall be computed by first computing the Subchapter S corporation's base income, and then including in composite income the entire share of the base income distributable to each resident shareholder joining in the composite return and the share of the portion of the base income allocable to Illinois per Form IL-1120-ST distributable to each nonresident shareholder. (Line 1 of Part II of the Subchapter S corporation's IL-1120-ST) However, the base income of the Subchapter S corporation for this purpose shall be computed without regard to:
i) the subtraction modification under IITA Section 203(b)(2)(G) for amounts included in federal taxable income under IRC section 78;
ii) the subtraction modification under IITA Section 203(b)(2)(M) for interest income from loans secured by property eligible for the Enterprise Zone Investment Credit;
iii) the subtraction modification under IITA Section 203(b)(2)(M-1) for interest income from loans secured by property eligible for the High Impact Business Investment Credit;
iv) the subtraction modification under IITA Section 203(b)(2)(N) for contributions to eligible Enterprise Zone projects;
v) the subtraction modification under IITA Section 203(b)(2)(O) for dividends received from foreign corporations;
vi) the subtraction modification under IITA Section 203(b)(2)(P) for contributions to job training projects; or
vii) the subtraction modification under IITA Section 203(b)(2)(S) for the share of income (or loss) distributable to a shareholder subject to Personal Property Tax Replacement Income Tax.
D) The authorized agent will pay income tax on the amount of the composite income distributable to shareholders included in the composite return and pay Personal Property Tax Replacement Income Tax on the amount distributable to trusts included in the composite return.
b) Composite returns of individuals, corporations and other taxpayers transacting an insurance business under a Lloyd's plan of operation. For taxable years ending on and after December 31, 1999, IITA Section 502(f) permits any persons transacting an insurance business organized under a Lloyd's plan of operation to file composite returns reflecting the income of such persons allocable to Illinois and the tax rates applicable to such persons under IITA Section 201 and to make composite tax payments.
1) Composite returns shall be made on the forms prescribed by the Department.
2) Composite returns shall include an attachment showing the separate federal taxable income (adjusted gross income, in the case of an individual), net amount of addition and subtraction modifications, apportionment fraction and Illinois net income of each underwriter subject to tax under IITA Section 201(a) and electing to join in the composite return, and multiplying each amount of Illinois net income by the appropriate tax rate under IITA Section 201(b). In addition, the attachment shall show the separate federal taxable income, net amount of addition and subtraction modifications, apportionment fraction and Illinois net income of each underwriter subject to replacement tax under IITA Section 201(c) and electing to join in the composite return. At the election of the underwriter joining in a composite return, the composite return may include either or both of the Lloyd's plan amounts included in federal taxable income or adjusted gross income by the underwriter and any amounts reported (with payment made of any federal income tax due on those amounts) on behalf of the underwriter by the Lloyd's plan of operation pursuant to a closing agreement with the Secretary of the Treasury under IRC section 7121. If the Illinois net income of an underwriter included in the composite return is less than zero, that loss may not be used to offset the Illinois net income of any other underwriter included in the composite return or any Illinois net income derived by that underwriter from any source other than the Lloyd's plan of operation. However, in the case of an underwriter other than an individual, that loss may be carried back or forward in the manner allowed under IITA Section 207 as a deduction against the Illinois net income of that underwriter in other years for which a composite return is filed and for which the underwriter's Lloyd's plan has entered into a closing agreement under IRC section 7121 allowing net operating losses to be carried over on behalf of its underwriters on returns filed by that Lloyd's plan. The schedules showing computations of Illinois net income required by this subsection (b) shall include a separate statement of any Illinois net loss deduction claimed for an underwriter, showing the amount of loss incurred in each year from which the deduction is carried and the amounts of those losses carried to and deducted in years prior to the year for which the schedules are filed. The composite return shall include an attachment showing the name and social security number or taxpayer identification number (or equivalent) of each underwriter who does not elect to join in the composite return.
3) Alternative apportionment methods under IITA Section 304(f). IITA Section 304(f) provides that, if the allocation and apportionment provisions of IITA Section 304(b) do not, for taxable years ending before December 31, 2008, fairly represent the extent of a person's business activity in this State, or, for taxable years ending on or after December 31, 2008, fairly represent the market for the person's goods, services, or other sources of business income, the Director may require the person to use another method that will effectuate an equitable allocation and apportionment of the person's business income.
A) IITA Section 304(b) provides that an insurance company shall apportion its business income to Illinois by multiplying such income by a fraction, the numerator of which is the direct premiums written for insurance upon property or risk in this State, and the denominator of which is the direct premiums written for insurance upon property or risk everywhere. For purposes of this subsection (b), the term "direct premiums written" means the total amount of direct premiums written, assessments and annuity considerations as reported for the taxable year on the annual statement filed by the company with the Illinois Director of Insurance in the form approved by the National Convention of Insurance Commissioners or such other form as may be prescribed in lieu thereof. A Lloyd's plan syndicate reports only its premiums written on property and risks within Illinois on its annual statement filed with the Illinois Director of Insurance. Accordingly, the use of only the "direct premiums written" by underwriters in a Lloyd's plan of operation as actually reported on the annual statements would apportion 100% of the business income of the nonresident underwriters to Illinois, which would not fairly represent the extent of their business activity or the market for their services in Illinois within the meaning of IITA Section 304(f). A Lloyd's plan of operation which files a composite return under this subsection (b) and which does not report on an annual statement its premiums written on property or risks outside the State shall apportion the business income of its nonresident underwriters electing to join in the composite return by multiplying that business income by a fraction, the numerator of which shall be the underwriter's premiums written on property or risks within Illinois as reported on its annual statement and the denominator of which shall be the total of the underwriter's premiums related to amounts included in the apportionable business income of the underwriter.
B) A Lloyd's plan of operations will commonly use a "year of account" as a basis for the conduct of business of its underwriters. Under the year of account method, a syndicate of underwriters will be in existence for a specified number of years. The syndicate will underwrite policies only in the first year of its existence, which is the year of account. Premiums may be collected and losses incurred by the syndicate only during the years of the syndicate's existence. After the syndicate's existence is terminated at the end of the year of account period, any unexpired policies are reinsured with another syndicate, and profit and loss on all policies for the year of account are determined and recognized for federal income tax purposes. Use of the premiums written in the year after the close of the year of account period to apportion an underwriter's business income earned over that period would not fairly represent the extent of the underwriter's business activity or market in Illinois that generated that business income. Accordingly, in apportioning the business income recognized after the termination of a year of account period, the direct premiums written on property or risk in this State and on property and risk everywhere shall be the direct premiums written during the year of account period. A composite return that includes for an underwriter both income recognized after the termination of a year of account period apportioned under this subsection (b)(3)(B) and other income apportioned using the direct premiums written during the taxable year shall show each type of income and each apportionment fraction separately on the schedules attached to the return under subsection (b)(2).
4) IITA Section 502(f) provides that the income and apportionment factors attributable to the transaction of an insurance business organized under a Lloyd's plan of operation by any person joining in the filing of a composite return shall, for purposes of allocating and apportioning income under IITA Article 3 and computing net income under IITA Section 202, be excluded from any other income and apportionment factors of that person or of any unitary business group, as defined in IITA Section 1501(a)(27), to which that person may belong.
A) Because the Lloyd's income and apportionment factors are excluded from the computation of the Illinois income tax liability of any person joining in a composite return under this subsection (b), no credit may be allowed to that person under Section 100.5160. Because no underwriter shall be allowed to claim a credit for taxes paid on its behalf under this subsection (b), no administrative burden will be created by allowing an underwriter who is a resident or who has other sources of Illinois income to join in the filing of a composite return and accordingly no underwriter need petition for permission under Section 100.5100(c) or (e) to join in the filing of a composite return under this subsection (b).
B) Because any Illinois income, positive or negative, of an underwriter that is reported on a composite return must be excluded from other income of that underwriter in determining its Illinois net income, an Illinois net loss reported on a composite return may not be used to reduce net income of an underwriter otherwise reportable in the taxable year the net loss is incurred nor carried over to another taxable year to reduce net income of that underwriter, other than net income reported on a Lloyd's plan composite return for that taxable year.
C) The statutory provision excluding income reported on a composite return from other income of the underwriter does not imply that the Lloyd's plan business conducted by the underwriter is unitary with any other business conducted by the underwriter. If an underwriter chooses not to join in a composite return, the determination of whether the underwriter's Lloyd's plan business is unitary with any other business conducted by the underwriter and of whether the underwriter is a member of a unitary business group will be made based on the facts and circumstances of the case, without any consideration given to this statutory provision.
5) Time for returns and payment. In the case of a Lloyd's plan of operation that files a federal income tax return and pays federal income taxes on behalf of its underwriters for a taxable year pursuant to a closing agreement with the Secretary of the Treasury under IRC section 7121, the due date for filing a composite return and paying tax under this subsection (b) shall be the due date (including any extensions) for filing the federal return for that taxable year.
6) The composite estimated tax vouchers and the composite returns shall be clearly marked "Composite Payment by Underwriters at Lloyd's, London" or "Composite Return by Underwriters at Lloyd's, London" in the top center of the voucher or return. The tax I.D. number on the voucher or return shall be left blank, and the payment or return shall be mailed to the address specified in the instructions for the form.
7) Transition rule. Public Act 91-913, allowing Lloyd's plans of operation to file composite returns on behalf of all underwriters for taxable years ending on or after December 31, 1999, was not enacted until July 9, 2000, after the unextended due date for the composite return for calendar year 1999. Accordingly, a Lloyd's plan of operation that had filed a composite return for a taxable year ending on or after December 31, 1999, prior to the enactment of Public Act 91-913, may file a second composite return for that year, on or before the due date in subsection (b)(5), on behalf of any of its underwriters which were unable to join in the composite return prior to the enactment of Public Act 91-913.
c) Standard exemption. The amount of composite income apportionable and allocable to Illinois shall not be reduced by the standard exemption. (See IITA Section 204(a).)
(Source: Amended at 40 Ill. Reg. 15575, effective November 2, 2016)
Section 100.5140 Composite Returns: Estimated Payments
No estimated payments are required to be made for taxes reported on a composite return.
(Source: Amended at 33 Ill. Reg. 2306, effective January 23, 2009)
Section 100.5150 Composite Return: Tax, Penalties and Interest
The amount of tax due shall be based on the amount of income properly shown on the return, and, for taxable years ending on or after December 31, 2009, may be reduced by any share of any credit earned under Article 2 of the Illinois Income Tax Code during the taxable year that is passed through to the partners or shareholders joining in the composite return. Penalties and interest shall be determined on a composite basis.
(Source: Amended at 34 Ill. Reg. 550, effective December 22, 2009)
Section 100.5160 Composite Returns: Credits on Separate Returns
When the income of a taxpayer is included in a composite return pursuant to an approved petition under Section 100.5100(c) or, for taxable years ending prior to December 31, 1999, by a Lloyd's plan of operation or, for taxable years ending on or after December 31, 2008, for any other pass-through entity, the same amount of income will also be included in the taxpayer's separate return. In this event, a credit may be claimed on the taxpayer's separate return for the taxpayer's share of the composite tax payment. A copy of the composite return shall be attached to the taxpayer's return showing the amount of tax paid on the taxpayer's behalf by the pass-through entity.
(Source: Amended at 33 Ill. Reg. 2306, effective January 23, 2009)
Section 100.5170 Composite Returns: Definition of a "Lloyd's Plan of Operation"
For purposes of these composite return regulations, a "Lloyd's plan of operation" is a plan of insurance by contract where members of an association which is not incorporated agree to indemnify each other, or some third person, against loss, damage, liability arising from an unknown or contingent event, each member agreeing to bear a given amount of such loss, damage, or liability. 46 Corpus Juris Secundum Insurance Section 1410. In Illinois, an insurance company using a Lloyd's plan of operation must have obtained a Certificate of Authority from the Department of Insurance pursuant to Section 96 of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch 73, par. 708).
(Source: Added at 12 Ill. Reg. 4865, effective February 25, 1988)
Section 100.5180 Composite Returns: Overpayments and Underpayments
a) When an authorized agent has made an error in determining the amount of any item of income, deduction, addition, subtraction or credit reported on a composite return, the authorized agent shall file an amended return to correct the error and claim a refund or credit, or pay the liability, for any person included on the composite return.
b) For taxable years ending on or after December 31, 2008, a partnership or subchapter S corporation may report the changes in liabilities of its partners or shareholders and pay the resulting underpayments, on behalf of its partners and shareholders, whether or not a composite return was filed for the taxable year or any specific partner or shareholder was included on that composite return. A partnership or subchapter S corporation may claim a refund or credit of any amount it paid on behalf of its partners or shareholders under Section 100.5100, subsection (a) or this subsection, but may not claim a refund or credit of any amount paid to the Department by a partner or shareholder.
c) If the amount of tax properly reportable on any return filed under Section 100.5100 or any original or amended return filed under subsection (a) or (b) is not reported and timely paid, the Department may issue a notice of deficiency to the authorized agent with respect to that underpayment and any associated penalties and interest and may issue notices of deficiency to the partners or shareholders, provided that:
1) The Department may not collect the underpaid amount of tax, including associated penalties and interest, more than once, and, if claims for refund or credit of any amount collected more than once are timely filed by both a partner or shareholder and the authorized agent, any amount collected from that partner or shareholder in excess of the underpayment attributable to that partner or shareholder shall be refunded or credited to that partner or shareholder rather than to the authorized agent; and
2) No penalty for failure to timely file a return or pay the amount of tax due shall be assessed against a partner or shareholder who had timely requested the authorized agent in writing to file composite original or amended returns and pay tax on his or her behalf under this Part, and had no knowledge that the authorized agent would not comply with that request prior to the earlier of the date of filing or the due date (including extensions) for filing the partner's or shareholder's return.
(Source: Added at 33 Ill. Reg. 2306, effective January 23, 2009)
SUBPART Q: COMBINED RETURNS
Section 100.5200 Filing of Combined Returns
For a number of years, Illinois corporate taxpayers that were members of a unitary business group were able to elect to file combined returns. Section 100.5205 provides guidance for the tax years for which this election was available. Taxpayers are now required to file combined returns in certain situations. For taxable years ending on or after December 31, 1993, taxpayers that are corporations (other than Subchapter S corporations) and that are members of the same unitary business group shall be treated as one taxpayer for purposes of any original return, amended return which includes the same taxpayers of the unitary group which joined in filing the original return, extension, claim for refund, assessment, collection and payment and determination of the group's tax liability under the Act (IITA Section 502(e)). The rules in this Subpart P are promulgated under the express statutory direction that the Department shall make, promulgate and enforce such reasonable rules and regulations, and prescribe such forms as it may deem appropriate, to require all taxpayers that are corporations (other than Subchapter S corporations) and that are members of the same unitary business groups to be treated as one taxpayer. (IITA Section 1401(b)(2))
(Source: Old Section 100.5200 renumbered to Section 100.5205 and new Section 100.5200 added at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5201 Definitions and Miscellaneous Provisions Relating to Combined Returns
a) In general. These definitions and provisions apply to this Subpart P.
b) Combined group. The term "combined group" means those eligible members of a unitary business group who have made an election to be treated as one taxpayer, or who are required to be treated as one taxpayer, under IITA Section 502(e).
c) Combined return. The term "combined return" means a single tax return filed on behalf of a combined group. A combined return shall be filed using a single Form IL-1120 with Schedule UB (Unitary Business Schedule).
d) Combined return year. The term "combined return year" means a taxable year for which a combined return is filed or is required to be filed.
e) Common taxable year. The term "common taxable year" means the taxable year used by a combined group in reporting its combined net income, as determined under the provisions of Section 100.5265.
f) Controlling corporation. The "controlling corporation" of a combined group is the corporation, if any, that directly or indirectly owns a controlling interest in all of the other eligible members of a combined group. A controlling interest means more than 50% of the outstanding voting stock of a member. Indirect ownership of an interest in a corporation includes constructive ownership (under Section 318 of the Internal Revenue Code) of an interest in the corporation which is owned by a related party, whether or not the related party is itself a member of the combined group.
g) Designated agent. The term "designated agent" means the member appointed under Section 100.5220.
h) Election. The term "election" refers to the election provided in Section IITA 502(e), as in effect for taxable years ending prior to December 31, 1993, to be treated as one taxpayer.
i) Eligible member. The term "eligible member" means a corporation which is a member of a unitary business group and which has taxable presence in Illinois. Part-year members of a unitary business group are eligible members. Noncorporate taxpayers and Subchapter S corporations are not eligible members, either in combination with corporations which are eligible members or in combination with other noncorporate taxpayers or Subchapter S corporations. Members of a unitary business group are eligible members even though the unitary business group includes noncorporate members or Subchapter S corporations which are not eligible to join in the filing of a combined return.
j) Separate company return. The term "separate company return" means an Illinois income tax return filed by a corporation which is not a member of a unitary business group.
k) Separate company items. The term "separate company items" means the income, deductions, credits, tax liability and other facts of a corporation relevant to the computation of its Illinois Income Tax liabilities, determined as if such corporation was neither a member of an affiliated group filing consolidated federal income tax returns nor a member of a combined group.
l) Separate unitary return. The term "separate unitary return" means an Illinois income tax return of a member of a unitary business group which has not elected to file a combined return for a taxable year ending prior to December 31, 1993 or by a member of a unitary business group which is not eligible to join in the filing of a combined return.
m) Unitary business group. The term "unitary business group" shall have the same meaning as provided in IITA Section 1501(a)(27) and Section 100.9700 of this Part.
(Source: Added at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5205 Election to File a Combined Return
a) Effective date. The provision allowing corporations to elect to be treated as a single taxpayer was in effect for taxable years ending on or after December 31, 1985, and before December 31, 1993.
b) Scope of the election. Pursuant to IITA Section 502(e), taxpayers that are corporations (other than Subchapter S corporations) having the same taxable year and that are members of the same unitary business group may elect to be treated as one taxpayer for purposes of any original return, amended return which includes the same taxpayers of the unitary group which joined in the election to file the original return, extension, claim for refund, assessment, collection and payment and determination of the group's tax liability under the Act. Section 502 (e) of the Act does not permit the election to be made for some, but not all, of the purposes enumerated above. For taxable years ending on or after December 31, 1987, corporate members (other than Subchapter S corporations) of the same unitary business group making the subsection (e) election are not required to have the same taxable year. (IITA Section 502(e))
c) The election under IITA Section 502(e) is not an election to be a member of a unitary business group. Membership in a unitary business group is mandatory if the criteria for inclusion are met, and is determined under IITA Section 1501(a)(27) and Section 100.9700 of this Part. If a unitary business group does not elect to file a combined return, each Illinois taxpayer member of that group will be treated as a separate taxpayer for all Illinois income tax purposes except for the apportionment of unitary business income. Such taxpayers shall each file their own separate unitary returns.
d) Except as expressly provided, Sections 100.5201 through 100.5280 of this Subpart are applicable to all elections made pursuant to IITA Section 502(e).
(Source: Renumbered from Section 100.5200 and amended at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5210 Procedures for Elective and Mandatory Filing of Combined Returns
a) Conditions of the election and election procedures. This subsection (a) applies to taxable years ending on or after December 31, 1985 and prior to December 31, 1993.
1) Conditions
A) The election, if made, must include all eligible members of the unitary business group, not just some.
B) For taxable years ending on or after December 31, 1987, taxpayers are not required to have the same taxable year.
C) For taxable years ending on or after December 31, 1985 and before December 31, 1987, taxpayers were required to have the same taxable year to be eligible for the election. Corporate members with taxable years which were different from the common taxable year were required to file their own separate unitary returns or, in the case of two or more corporate members which have the same taxable year that is different from other corporate members making the election, they were allowed to elect to file their own combined return.
2) Consent. The election to file a combined return shall be upon the condition that all eligible members shall consent to this Subpart P, and shall consent to be represented by the designated agent appointed on the Schedule UB in all matters described in Section 100.5220 of this Part. The filing of a combined return that includes the income and factors of any eligible member shall be the consent as to that member. If an eligible member fails to have its income and factors included in the combined return, then the tax liability of that member shall be determined on the basis of a separate unitary return unless the failure of such member was due to a mistake of law or fact, or to inadvertence (as determined by the designated agent) in which case the failure must be corrected prior to the issuance of any Notice of Deficiency. Where such failure is corrected, such member shall be treated as if it had properly consented and been included in the election from the beginning.
3) Making the election. The election is to be made by properly completing and filing a combined return (using Form IL-1120 and Schedule UB) by its due date (including extensions). In the case of a first combined return year, a combined request for extension of time to file the first combined return can be made.
4) Revocation. An election to be treated as a single taxpayer for the purposes set forth in IITA Section 502(e) remains in effect until it is revoked. If a taxpayer ceases to be a member, or was never properly a member, of a unitary business group for which an election is in effect, the election will automatically be revoked as to that taxpayer. In the case of a taxpayer that was improperly included in a combined return and whose election has been revoked, the Department shall consider the combined return to be the return filed by the taxpayer only for the limited purposes of determining the limitations period within which certain actions must occur (e.g., the limitations period for issuing a notice of deficiency) and shall use the filing date of the combined return for purposes of determining any late filing penalty. Once an election is in effect for a taxable year, it cannot be revoked for that year unless the combined group is not a unitary business group, in which case the election will automatically be revoked. The Department shall revoke the election for abusive failure to comply with these regulations, such as blatant omission of members or a non-responsive designated agent, if the failure is not rectified after notification to the designated agent. The designated agent may revoke the election on behalf of all members for any taxable year by notifying the Department in writing of its intent prior to the due date for the filing of the return (excluding extensions) at the address stated in the instructions of Schedule UB.
b) Mandatory filing of combined returns
1) For taxable years ending on or after December 31, 1993, each group of eligible members is required to file combined returns and to be treated as one taxpayer for purposes of any original return, amended return which includes the same taxpayers of the unitary group which joined in filing the original return, extension, claim for refund, assessment, collection and payment and determination of the group's tax liability under the IITA.
2) Each combined group is required to properly complete and file a combined return (using Form IL-1120 and Schedule UB) by the due date of the return (including extensions). For the first year for which a combined return must be filed, a single combined request for extension of time to file the return can be made by one member acting as designated agent on behalf of the entire combined group, even though the designated agent will not actually be appointed until the combined return is filed.
(Source: Amended at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5215 Filing of Separate Unitary Returns (IITA Section 304(e))
a) Not every member of a unitary business group is eligible to join in the filing of a combined return and, for taxable years ending prior to December 31, 1993, joining in the filing of a combined return was elective.
b) Each member of a unitary business group who is subject to Illinois income tax and who properly does not join in the filing of a combined return must file a separate return, and compute its business income apportionable to Illinois by computing the base income of the unitary business group in accordance with Section 100.5270(a)(1) and by multiplying the business income included in the base income by an apportionment fraction computed by using the Illinois apportionment factor or factors applicable to the return filer under IITA Section 304 and the everywhere factor or factors of the entire unitary business group.
c) Each member of a unitary business group who is subject to Illinois income tax and who properly does not join in the filing of a combined return shall separately determine the amount of its nonbusiness income allocable to Illinois, the amount of the exemption allowed to it under IITA Section 204, the amounts of net loss carryovers, and the amounts of any credits and credit carryforwards to which it is entitled, without regard to the income, deductions, credits and other tax items of other members of the unitary business group, except to the extent those items enter into the computation of business income of the member apportioned to Illinois under subsection (b).
d) Examples. The following examples illustrate the provisions of this Section.
1) EXAMPLE 1: Individual A is a nonresident and is the sole shareholder of Corporation S, a subchapter S corporation, and Corporation C, a subchapter C corporation. Corporation S and Corporation C are engaged in a unitary business within the meaning of IITA Section 1501(a)(27). Corporation S' taxable year is the calendar year. Corporation C's taxable year is the fiscal year ending June 30. For its taxable year ending 12/31/14, Corporation S has business income (as defined in Section 100.3010(a)(2)) of $125,000, Illinois sales of $750,000, and total sales of $1,000,000. For its taxable year ending 6/30/14, Corporation C has business income of $75,000, Illinois sales of $40,000, and total sales of $500,000. Under subsection (b), Corporation S must file a separate return using the combined apportionment method to determine its business income apportionable to Illinois. Combined apportionment must be computed on the basis of Corporation S' taxable year. Because Corporation C's taxable year differs, Corporation S may elect to apply any of the methods available under Section 100.5265 by treating S' taxable year as the common taxable year. Assume S elects to use method 3 to determine combined business income for the common taxable year ending 12/31/14. S' business income apportionable to Illinois is computed as follows: $200,000 × ($750,000/$1,500,000) = $100,000. Corporation C must also file a separate return computing its business income apportionable to Illinois by applying the combined apportionment method. Corporation C may elect to apply any of the methods available under Section 100.5265 to determine the amount of business income and apportionment factors of Corporation S to be used in computing Corporation C's business income apportioned to Illinois.
2) EXAMPLE 2: Assume that Corporation A owns a 91% interest, Corporation B a 4% interest and nonresident Individual Y a 5% interest, in P, a partnership. Corporation A and P are engaged in a unitary business within the meaning of IITA Section 1501(a)(27). Because Corporation A owns more than 90% of P, the alternative apportionment provisions for unitary partners and partnerships in Section 100.3380(d)(2) do not apply and P shall be treated as a member of Corporation A's unitary business group for all purposes. (See Section 100.3380(d)(4).) Corporation A, Corporation B, Individual Y, and P all use the calendar year as their taxable year. For taxable year 12/31/14, Corporation A has business income of $300,000 (not including any business income from P), Illinois sales of $450,000, and total sales of $600,000. P has business income of $100,000, Illinois sales of $30,000, and total sales of $400,000. There are no intercompany sales. Under Section 100.3380(d)(4), substantially all of the interests in P are owned or controlled by members of the same unitary business group, so that P is treated as a member of the unitary business group for all purposes. Because Corporation A's share of the business income of P will be eliminated in combination, combined business income is $400,000. Under subsection (b), Corporation A and P are required to file separate returns in which business income apportionable to Illinois is computed by applying the combined apportionment method under IITA Section 304(e). Under the combined apportionment method, P's business income apportionable to Illinois is computed by combining its business income and total sales everywhere with the business income and total sales everywhere of A. P's business income apportioned to Illinois is thus $12,000, computed as follows: $400,000 in combined business income × ($30,000 of P's Illinois sales/$1,000,000 of combined total sales) = $12,000. Under IITA Section 304(e), Corporation A's business income apportionable to Illinois is $180,000, computed as follows: $400,000 in combined business income × ($450,000 of Corporation A's Illinois sales/$1,000,000 of combined total sales) = $180,000. In addition, under IITA Section 305(a), Corporation A must include its $10,920 distributive share (i.e., 91% × $12,000) of the business income of P apportioned to Illinois in its Illinois net income. Also, Individual Y must include her $600 distributable share of the business income of P apportioned to Illinois in her Illinois net income (i.e., 5% × $12,000), and Corporation B must include its $480 distributable share of the business income of P apportioned to Illinois in its Illinois net income (i.e., 4% of $12,000). Finally, P computes Illinois personal property tax replacement income tax on net income of $600, computed as follows: $400,000 - $380,000 (95% of its base income distributable to partners subject to replacement tax) = $20,000, and $20,000 × ($30,000/$1,000,000) = $600.
3) EXAMPLE 3: Assume the same facts as Example 2, except that P's business income is a loss of ($100,000). Under the combined apportionment method, P's business income apportionable to Illinois is computed by combining its business loss and total sales everywhere with the business income and total sales everywhere of A. P's business income apportioned to Illinois is thus $6,000, computed as follows: $200,000 × ($30,000/$1,000,000) = $6,000. Under IITA Section 304(e), Corporation A's business income apportionable to Illinois is $90,000, computed as follows: $200,000 × ($450,000/$1,000,000) = $90,000. In addition, Corporation A must include its $5,460 distributive share of the business income of P apportioned to Illinois in its Illinois net income. Individual Y must include her $300 distributable share of the business income of P apportioned to Illinois in her Illinois net income (i.e., 5% × $6,000), and Corporation B must include its $240 distributable share. P computes Illinois personal property tax replacement income tax of $300, computed as follows: $200,000 - $190,000 = $10,000, and $10,000 × ($30,000/$1,000,000) = $300.
(Source: Amended at 40 Ill. Reg. 15575, effective November 2, 2016)
Section 100.5220 Designated Agent for the Members (IITA Section 304(e))
a) Qualification. The controlling corporation of a combined group is the designated agent for the group if the controlling corporation is a member of the combined group. Otherwise, the members of the combined group shall choose any Illinois taxpayer member of the combined group to be the designated agent. Designation of the agent is made on Schedule UB. Instances in which a controlling corporation is not a member of the combined group include:
1) The combined group is comprised of corporations that are wholly owned by an individual. In this instance, there is no controlling corporation.
2) A manufacturing corporation required to apportion its business income under IITA Section 304(a) owns a unitary business group of financial organizations required to apportion their business income under IITA Section 304(c). IITA Section 1502(a)(27) provides that, for taxable years ending prior to December 31, 2017, corporations that use different apportionment formulas under IITA Section 304 shall not be included in the same unitary business group. Accordingly, the controlling corporation in this example is not a member of the combined group comprised of its financial organization subsidiaries.
3) The controlling corporation does not have nexus with Illinois, and thus is not an Illinois taxpayer. Only Illinois taxpayers may be members of a combined group.
b) Scope of Agency. The designated agent, for all purposes other than the making of the consent required by Section 100.5210(a)(2), shall be the sole agent for each member of the combined group, duly authorized to act in its own name in all matters relating to the tax liability for the combined return year. Except as provided in the preceding sentence, no member shall have authority to act for or to represent itself in any Illinois income tax matter. For example, all correspondence between the Department and the combined group shall be carried on directly with the designated agent; the designated agent shall file for all extensions of time; notices of deficiencies will be mailed only to the designated agent, and the mailing to the designated agent shall be considered a mailing to each member in the group; notice and demand for payment of taxes will be given only to the designated agent and the notice and demand will be considered a notice and demand to each member. All taxes, including estimated taxes, shall be paid in the name of the designated agent. The designated agent shall participate in investigations and hearings on behalf of each member; it shall make available the information necessary to conduct those proceedings; and it may execute a power of attorney on behalf of itself and the other members of the combined group. The designated agent shall file combined returns and claims for refund or credit of the combined group. Any refund will be made directly to and in the name of the designated agent and will discharge any liability of the State to any member of the combined group. The designated agent, in its name, shall give waivers and execute closing agreements and all other documents. Any waiver so given, or agreement or any other document so executed, will be considered as having also been given or executed by each member of the combined group. Notwithstanding the preceding provisions of this subsection (b), if the Department deals in good faith with a member representing itself to be designated agent for a combined group, any action of that member or of the Department in the course of that dealing shall have the same effect as if the member were the designated agent.
c) Notices from the Department. Notwithstanding the provisions of subsection (b), any Notice of Deficiency, in respect to the tax for a combined return year, will identify each corporation that was a member of the combined group during any part of the period covered by the notice. A failure to properly list all members of the combined group will not affect the validity of the Notice of Deficiency as to any member. Any notice and demand for payment will be sent to the designated agent and the Department will, if requested by the designated agent, identify each corporation that was a member of the combined group during any part of the period for which the notice and demand is issued. Any levy, any notice of a lien, or any other proceeding to collect the amount of any assessment, after the assessment has been made, will name the corporation from which the collection is to be made.
d) Continuity of Agency. The provisions of subsections (b) and (c) shall apply to those tax years for which a combined return is required to be made, whether or not a combined return is made for any subsequent year, and whether or not one or more persons have become or have ceased to be members of the combined group at any time.
1) Once a member of a combined group is appointed as the designated agent for that combined group, it remains the designated agent for all future years unless:
A) the designated agent ceases to be an eligible member of the combined group. A new designated agent shall be appointed for purposes of common taxable years ending after the date the designated agent ceases to be an eligible member;
B) the controlling corporation of the unitary business group either becomes an eligible member or is replaced as controlling corporation by an eligible member, at which time the controlling corporation becomes the designated agent for purposes of common taxable years ending thereafter; or
C) a combined group, for its first taxable year ending on or after December 31, 2017, is comprised of two or more combined groups that were not included in the same unitary business group in the previous taxable year because the members of each group used a different apportionment formula under IITA Section 304, and the controlling corporation is not a member of the combined group. The combined group shall choose any member of the combined group as the designated agent for that taxable year, whether or not that member was the designated agent of any of the combined groups in the previous taxable year.
2) The designated agent that files a return for a common taxable year shall continue to act as designated agent for the combined group for that common taxable year.
A) If the designated agent is being dissolved or a new designated agent has been appointed for the combined group under subsection (d)(1), the designated agent shall notify the Department in writing that another member of the combined group (or a successor corporation of any member of the combined group) will thereafter act as designated agent for that common taxable year. The member appointed as the substitute designated agent for this purpose need not be the new designated agent appointed under subsection (d)(1). The substitute designated agent will succeed to the rights and responsibilities of the former designated agent under subsections (b) and (c) and may, in turn, appoint another substitute designated agent under this subsection (d)(2)(A).
B) If the designated agent is unable or unwilling to satisfy the tax liability of the combined group or is unresponsive, the Department may, upon notifying the designated agent, deal directly with any member of the combined group in respect to its liability, in which event that member shall have full authority to act for itself.
e) Notification of Deficiency to Corporation that has Ceased to be a Member of the Combined Group. If a corporation that joined in the filing of a combined return has ceased to be a member of the combined group, and if that corporation files written notice of the cessation with the Department, then the Department, upon request of that corporation, will furnish the corporation with a copy of any Notice of Deficiency in respect of the tax for a combined return year for which it was a member of the combined group and information regarding any notice and demand for payment of that deficiency. The written notice of cessation should be mailed to the address stated in the instructions to Illinois Schedule UB. The filing of the written notification of cessation and the request by a corporation does not have the effect of limiting the scope of the agency of the designated agent provided for in subsection (b) with respect to those tax years during which the corporation was a member of the combined group. Failure by the Department to comply with the corporation's written request does not have the effect of limiting the liability of the corporation provided for in Section 100.5250.
f) Appointment of Designated Agent for Purposes of Resolving Disputes Over Membership in a Combined Group. If the Department determines that one or more corporations that did not join in the filing of a combined return are members of a combined group, or that one or more corporations that did join in the filing of a combined return are not members of the combined group that filed the return, then, for purposes of resolving disputes over the membership of the combined group and any separate company item of any such corporation:
1) if no combined return was filed, the corporations may appoint a member of the combined group that meets the requirements of subsection (a) as the designated agent solely for purposes of contesting the Department's determination. The Department may accept a written representation made by any member of the combined group that it has been appointed the designated agent. The appointment of a designated agent under this subsection (f)(1) is not a concession by either the corporations or the Department regarding the proper composition of the combined group. The designated agent appointed under this subsection (f)(1) shall have all the rights and responsibilities of a designated agent under this Section. The designated agent appointed under this subsection (f) shall continue to act as designated agent for the combined group under subsection (d).
2) if a combined return was filed, the designated agent that filed the return shall represent all corporations that joined in the filing of the combined return and all corporations the Department asserts are members of the combined group.
A) However, the Department may allow any corporation that the Department asserts should be added to or eliminated from the combined group included in the return to represent itself after receipt of a written request from that corporation.
B) In that case, the corporation shall be bound by any action taken by the designated agent (including, for example, extensions of the statute of limitations, settlements, stipulations or concessions of fact) before the request of the corporation to represent itself has been accepted by the Department.
(Source: Amended at 43 Ill. Reg. 10124, effective August 27, 2019)
Section 100.5230 Combined Estimated Tax Payments
a) In general. If a combined return is filed for two consecutive taxable years, payments of estimated tax must be made on a combined basis for each subsequent taxable year, until such time as separate returns are properly filed. For the taxable years in which combined estimated payments are required, the combined group shall be treated as one taxpayer for purposes of IITA Section 803 (relating to payment of estimated tax). If separate returns are properly filed in a year after a combined return year, the amount of any estimated tax payments made on a combined basis for such year shall be credited against the separate tax liabilities of the former members of the combined group in the manner allocated by the designated agent which is satisfactory to the Department. The manner of allocation will be satisfactory to the Department if it does not jeopardize the collection of any liability and does not conflict with any allocation made under Section 100.5250(d)(2) of this Part.
b) First two combined return years. For the first two years for which a combined return is filed, payments of estimated tax may be made on either a combined or separate basis. The amount of any separate estimated tax payments made for such year shall be credited against the combined tax liability. The designated agent shall give notice, in the manner and form prescribed by the Department in the instructions to Illinois Schedule UB, of any estimated payments made on a separate basis for any such year.
c) Penalty for underpayment of estimated tax
1) In general. If a combined return is filed, the amount of any penalty for underpayment of estimated tax shall be computed as if the combined group were one taxpayer.
2) Penalty in the first combined return year. In the first combined return year, the determination of any penalty due under IITA Section 804 (including, for taxable years ending prior to December 31, 1990 the application of the exceptions under former IITA Section 804(d)(1) and (2) shall be made using the aggregate of the tax and income shown on the returns filed by members of the combined group for the previous year.
3) Combined payments made but separate returns filed for a tax year following a combined return year. If a combined group makes payments of estimated tax on a combined basis for all or any part of a taxable year, and its members properly file separate returns for the taxable year, the payments made shall be allocated in the manner provided by subsection (a). The determination of any penalty due from any of the members of the combined group making the estimated payments, as imposed under IITA Section 804 (including, for taxable years ending prior to December 31, 1990, the application of the exceptions under prior IITA Section 804(d)(1) and (2), shall be made using each former member's separate company items from the combined return filed for the previous year and such member's allocated share of the combined estimated payments for the current year. The allocated shares shall be reported to the Department by the designated agent in the manner prescribed in the instructions to Schedule UB.
4) Combined payments made but separate returns filed for a tax year not following a combined return year. If combined estimated payments are made for a tax year but no combined return is filed for that year and no combined return was filed in the previous year, the estimated tax shall be a credit only for the corporation that made the payment.
d) Change in membership
1) Entering. If a corporation becomes a member of a new or existing combined group during a common taxable year (the "entry year"):
A) for purposes of applying IITA Section 804 for the entry year, such corporation's separate company items shown on its return for its taxable year preceding the entry year shall be included with the corresponding items of the members of the combined group for the common taxable year preceding the entry year;
B) if such corporation is not a member of the combined group for the entire entry year, for purposes of applying IITA Section 804 to the common taxable year immediately following the entry year, such corporation's separate company items for that portion of the entry year prior to the date of entry shall be included with the corresponding items of the combined group for that taxable year; and
C) if a corporation was a member of another combined group during any portion of the entry year in which it becomes a member of a second combined group or during any portion of the preceding taxable year, for purposes of applying subsections (d)(1)(A) and (B) of this Section, such corporation's separate company item shall include the items attributed to such corporation by the designated agent of the first combined group under subsection (d)(2) below.
2) Leaving
A) If a corporation leaves a combined group during a common taxable year (the "departure year"):
i) for purposes of applying IITA Section 804 to the combined group for the departure year, the separate company items attributed to such corporation by the designated agent for the common taxable year preceding the departure year shall be excluded from the corresponding items of the combined group as if such corporation had not been a member of the combined group during the common taxable year preceding the departure year;
ii) in the case of a corporation departing a combined group after the beginning of the departure year, for purposes of applying IITA Section 804 to the combined group in the common taxable year beginning after the departure year, separate company items attributed to such corporation by the designated agent for the portion of the departure year prior to its departure shall be excluded from the corresponding items of the combined group as if such corporation had not been a member of the group during that portion of the departure year; and
iii) for purposes of applying IITA Section 804 to such corporation, for the first taxable year of the corporation beginning after the date of departure, and, in the case of a corporation that leaves a group prior to the end of such corporation's taxable year, for the portion of its separate taxable year remaining after the date of departure, such corporation shall take into account the separate company items attributed to it by the designated agent under subsections (d)(2)(A)(i) and (ii) of this Section.
B) If the designated agent fails to make reasonable attributions of separate company items, as described in subsections (d)(2)(A)(i) and (ii) of this Section, prior to the date on which the first Illinois Income Tax return for the departure year is filed by either the combined group or such corporation, no items shall be attributed to such corporation for purposes of applying Section 804 to the combined group or to such corporation.
e) Examples. The provisions of this Section may be illustrated by the following examples:
1) Example 1. Corporations P and S-1 file a combined return for the first time for calendar year 1985. P and S-1 also file combined returns for 1986 and 1987. For 1985 and 1986, P and S-1 may make payments of estimated tax on either a separate or combined basis. For 1987, however, the group must pay its estimated tax on a combined basis. In determining whether P and S-1 come within the exception provided in IITA Section 804(d)(1) (as in effect for 1985), the "tax shown on the return" is the aggregate amount of tax shown on the separate returns of each member for 1984.
2) Example 2. Corporations X and Y filed combined returns for the calendar years 1985 and 1986 and separate returns for 1987. In determining whether X or Y comes within the exception provided in IITA Section 804(d)(2) (as in effect for 1987), the "facts shown on the return" are the facts shown on the combined return for 1986 attributable to X and to Y by the designated agent.
3) Example 3. Assume the same facts as in Example 1. Assume further that corporation S-2 becomes a member of the group on July 1, 1987, and joins in the filing of the combined return for 1987. In determining whether the group (which now includes S-2) comes within the exception provided in IITA Section 804(d)(1) (as in effect for 1987), the "tax shown on the return" is the tax shown on the combined return for 1986 plus any tax of S-2 on its separate return for 1986. In addition, for purposes of applying IITA Section 804(d)(2) (as in effect for 1987), the "facts shown on the return" for 1986 shall include the facts shown on the combined return plus the separate company items of S-2 for 1986.
In applying IITA Section 804(d) for 1988, the "tax shown on the return" and the "facts shown on the return" for 1987 shall include the separate company items of S-2 for the period prior to the July 1, 1987 date of its entry into the combined group.
4) Example 4. Assume the same facts as in Example 1. Assume further that corporation S-2 is a member of the group during 1986, and joins in the filing of the combined return for such year, but ceases to be a member of the group on September 15, 1987. In determining whether the group (which no longer includes S-2) comes within the exception provided in IITA Section 804(d)(1) (as in effect for 1987), the "tax shown on the return" is the tax shown on the combined return for 1986 less the amount attributed to S-2 by the designated agent. In applying IITA Section 804(d)(2), the "facts shown on the return" for 1986 will exclude the separate company items attributed to S-2 by the designated agent. Likewise, with regard to S-2's return, the "tax shown on the return" and the "facts shown on the return" for 1986 shall be the amounts attributed to S-2 by the designated agent.
5) Example 5. Assume that, on July 1, 1996, S-3 becomes a member of a combined group. Both S-3 and the combined group use a calendar taxable year. For purposes of applying IITA Section 804(c)(1)(B)(ii) for 1996, the "tax shown on the return of the taxpayer for the preceding taxable year" shall include the tax shown on the combined return for 1995 plus the tax shown on S-2's separate return for 1995. If S-3 was a member of another combined group during 1995, the tax attributed to it for 1995 by the designated agent of its former combined group shall be added to the tax shown on the combined return of its new group for 1995. For purposes of applying IITA Section 804(c)(1)(B)(ii) for 1997, the "tax shown on the return of the taxpayer for the preceding taxable year" shall include the tax reported by S-3 on its separate company return for the period ending prior to its July 1, 1996 entry into the group or any tax liability of its former combined group for 1996 attributed to it by the designated agent of the former combined group.
f) For tax years ending on and after December 31, 1990, IITA Section 804(e) provides that the penalty imposed by Section 804(a) will not be imposed "if the taxpayer was not required to file an Illinois income tax return for the preceding year." Because a combined group is treated as a single taxpayer, this exception to the Section 804 penalty shall apply to a combined group only if none of its members were required to file an Illinois income tax return for the preceding year.
g) If a designated agent makes estimated payments on the erroneous premise that a corporation is an eligible member of the combined group, and discovers the error prior to the time the combined group and the corporation file their respective returns, the designated agent of the combined group may allocate some or all of the estimated payments made on behalf of the combined group to such corporation, and the combined group and the corporation will each compute their penalties as if the estimated payments allocated to such corporation had actually been paid by it rather than by the combined group. The amount of estimated tax payments allocated to such corporation pursuant to this subsection (g) must be consistent with the amounts allocated to such corporation under Section 100.5250(d)(2) of this Part.
(Source: Amended at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5240 Claims for Credit of Overpayments
a) In general. If a taxpayer becomes a member of a combined group during a common taxable year, any requested credit carryforward shown on its separate return for the taxable period ending with its entry into the combined group shall be credited against the combined liability, and the designated agent shall claim this credit on the combined return, for the taxable year in which the member joins the combined group. A taxpayer that leaves a combined group may not claim a credit shown on a combined return against its separate tax liability in a subsequent taxable year. When an election is revoked, any claim for credit shown on the last combined return shall be credited against the separate liabilities of the electing members in the manner designated by the designated agent that is satisfactory to the Department. The manner designated will be satisfactory to the Department if it does not jeopardize the collection of any liability.
b) Examples. The provisions of this Section may be illustrated by the following examples:
1) Example 1. Corporation P and S-1 file a combined return in 1985. S-2 becomes an eligible member on January 1, 1986. S-2's 1985 overpayment of tax which it elected to be credited to 1986 shall be utilized against the combined 1986 liability.
2) Example 2. The 1985 combined return of P, S-1 and S-2 shows an overpayment which the designated agent elects as a credit against its 1986 liability. If S-2 leaves the combined group during 1986 it does not share in the overpayment credit.
(Source: Amended at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5250 Liability for Combined Tax, Penalty and Interest
a) Joint and several liability of members of a combined group. The members of a combined group shall be jointly and severally liable for the combined tax, penalty and interest computed in accordance with this Subpart P, as well as the Uniform Penalty and Interest Act and rules adopted pursuant to the UPIA at 86 Ill. Adm. Code 700.
b) Effect of intercompany agreements. No agreement entered into by one or more members of a combined group with any other member of such group or with any other person shall in any case have the effect of reducing the liability prescribed under this Section.
c) Penalties. If a penalty is imposed under the IITA and the UPIA with respect to a combined return year, the amount shall be based on the combined tax liability or deficiency for the common taxable year.
1) For purposes of applying the penalties for failure to file a return imposed by Section 3-3(a), Section 3-3(a-5) and Section 3-3(a-10) of the Uniform Penalty and Interest Act (UPIA) [35 ILCS 735/3-3]:
A) A corporation which erroneously fails to join in the filing of a combined return, but which timely files a separate Illinois income tax return or joins in the timely filing of a combined return for another combined group, shall not be subject to any penalty. In determining whether such separate or combined return is timely filed, the separate taxable year of such corporation or the common taxable year of the combined group such corporation erroneously joined shall be used, rather than the common taxable year of the combined group with which such corporation should have filed.
B) A corporation which erroneously fails to join in the filing of a combined return, and which fails, without reasonable cause, to timely file a separate Illinois income tax return or to join in the timely filing of a combined return for another combined group, shall be subject to penalty computed on the amount of tax shown (or required to be shown) due on the combined return for its proper combined group. Because it is the duty of the designated agent, acting on behalf of the combined group, to include such corporation in the combined return, the members of the combined groups shall be jointly and severally liable for the penalty.
C) A corporation which erroneously joins in the timely filing of a combined return shall not be subject to penalty for failure to file a return.
2) For purposes of applying the penalty for failure to timely pay tax imposed by UPIA Section 3-3(b), Section 3-3(b-5) and Section 3-3(b-10) [35 ILCS 735/3-3]:
A) In a case where a corporation erroneously fails to join in the filing of a combined return for a common taxable year, neither that corporation nor the combined group shall be subject to any failure-to-pay penalty under UPIA Section 3-3(b)(1), Section 3-3(b-5)(1) or Section 3-3(b-10)(1) if timely payment is made of the tax shown on a separate return filed by such corporation or on a combined return in which it erroneously joins in filing for each taxable year ending with or within such common taxable year. Unless there is reasonable cause for the failure of such corporation to join in the filing of the combined return, such corporation and the combined group may be jointly and severally liable for a penalty under UPIA Section 3-3(b)(2), Section 3-3(b-5)(2) or Section 3-3(b-10)(2) for failure to pay any additional amount which would have been shown on the combined return had such corporation been included.
B) A corporation which erroneously fails to join in the filing of a combined return for a common taxable year and also fails to timely pay the tax shown on a separate return it files or on a combined return in which it joins in filing for each taxable year ending with or within such common taxable year shall be subject to penalty under UPIA Section 3-3(b)(1), Section 3-3(b-5)(1) or Section 3-3(b-10)(1) only for failure to pay the tax shown on the return it actually files or joins in filing. Unless there is reasonable cause for the failure of such corporation to join in the filing of the combined return, such corporation and the combined group may be jointly and severally liable for a penalty under UPIA Section 3-3(b)(2), Section 3-3(b-5)(2) or Section 3-3(b-10)(2) for failure to pay any additional amount which would have been shown on the combined return had such corporation been included.
C) If a corporation erroneously joins in the filing of a combined return, neither such corporation nor the combined group shall be subject to penalty under UPIA Section 3-3(b)(2), Section 3-3(b-5)(2) or Section 3-3(b-10)(2) for failure to pay any tax required to be shown on a separate company return and the combined group shall not be subject to penalty under UPIA Section 3-3(b)(2), Section 3-3(b-5)(2) or Section 3-3(b-10)(2) for failure to pay any increase in tax resulting from the exclusion of such corporation from the combined group if the tax timely paid with the original combined return exceeds the total tax required to be shown on the correct returns.
3) For purposes of applying the negligence penalty imposed by UPIA Section 3-5 [35 ILCS 735/3-5] or the fraud penalty imposed by UPIA Section 3-6 [35 ILCS 735/3-6] in any case in which a corporation erroneously joins or fails to join in the filing of a combined return, the penalty may be imposed on any deficiency resulting from such error, without taking into account any overpayment which may have resulted from the error.
Example. Corporations A, B and C meet all the requirements of a unitary business group, except that Corporations A and B are financial organizations which cannot be included in the same unitary business group as Corporation C, a manufacturer. On a separate-return basis, Corporation A has an Illinois net loss of $500, Corporation B has Illinois net income of $300 and Corporation C has Illinois net income of $700. Corporations A and C file a combined return reporting combined Illinois net income of $200, while Corporation B files a separate return reporting Illinois net income of $300. On audit, the Department corrects the liabilities by combining Corporations A and B, which eliminates Corporation B's separate return income and entitles them to a refund of the taxes paid by Corporation B, and by determining a separate return deficiency for Corporation C. If the combination of Corporations B and C on the original return was due to negligence or an intent to defraud, Corporation C will be subject to the applicable penalty on its entire deficiency without regard to the overpayment made by Corporation B.
4) For purposes of applying the penalty for failure to pay estimated taxes under IITA Section 804, see Section 100.5230 of this Part.
d) Interest. If interest is imposed under the IITA, at the rate determined under the UPIA, with respect to a combined return year, the amount shall be based on the combined tax liability or deficiency for the common taxable year. For purposes of computing any combined overpayment or underpayment on which interest is imposed:
1) in a case in which one or more corporations erroneously failed to join in the filing of the combined return, all payments, credits and other amounts collected from such corporations which are properly attributable to the common taxable year shall be treated as having been paid by the combined group for such common taxable year; and
2) in a case where one or more corporations are erroneously included in a combined return, the designated agent may allocate to each such corporation some or all of the payments, credits and other amounts collected from the combined group which are properly attributable to the common taxable year, and all overpayments and underpayments for such corporations and the combined group will be computed in accordance with such allocation. The amount of estimated tax payments allocated to each such corporation pursuant to this subsection (d)(2) must be consistent with the amounts allocated to such corporation under Section 100.5230(a) and (g) of this Part.
(Source: Amended at 25 Ill. Reg. 4929, effective March 23, 2001)
Section 100.5260 Combined Amended Returns
a) In general. The election or requirement to be treated as a single taxpayer applies to any amended return which includes the same taxpayers of the unitary business group which joined in the filing of the original return.
b) No election. If an election is not in effect for a taxable year ending prior to December 31, 1993, a combined amended return shall not be filed for that year.
c) If an election is in effect for a taxable year and it is subsequently revoked for that year because the group is not a unitary business, the designated agent may not file a combined amended return. Similarly, if a group files what it believes to be a required combined return, and it is later determined that the group is not engaged in a unitary business, the designated agent shall not file a combined amended return. Instead, in either instance, the designated agent and each corporation which joined in the filing of the combined return shall file a separate amended return. In computing the tax due on any such amended return, the filer shall take into account all payments, credits and other amounts (including refunds) allocated to it by the designated agent pursuant to Section 100.5230(g) or Section 100.5250(d)(2) of this Part.
d) Ineligible member. If a change in liability relates to the removal of a member that was not eligible to make the election, or of a taxpayer which could not be required to be a part of the group (e.g., a corporation which was not engaged in a unitary business with the combined group members, a partnership, or a Subchapter S Corporation), the designated agent shall file a combined amended return and the ineligible taxpayer shall file a separate amended return.
e) If a corporation erroneously fails to join in the filing of a combined return, the designated agent shall file an amended combined return adding such corporation and, if a separate return was filed by such corporation, such corporation shall file an amended separate return showing no net income, overpayment or underpayment, and stating that such corporation has joined in the filing of a combined return.
(Source: Amended at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5265 Common Taxable Year
a) The common taxable year of a combined group shall be the taxable year of the designated agent. However, if a combined group has been using the taxable year of the member of the combined group that, as of the time the combined group becomes eligible to file a combined return, would be expected to have the greatest Illinois income tax liability on a recurring basis if it were not a member of a unitary business group, it may continue to do so for taxable years ending prior to January 1, 1999. The combined group must thereafter use the taxable year of the designated agent.
b) For taxable years ending on or after December 31, 1987, members of a combined group may have different taxable years. In the case of a member having a taxable year different from the common taxable year determined in subsection (a) above, the separate company taxable income of that member used in computing the combined net income of the combined group shall be determined using one of the following methods:
1) Method 1. The member may compute its pro-forma taxable income from its books and records for the common taxable year.
2) Method 2. The member may use pro-rated shares of its taxable income for its taxable years ending in and beginning in a common taxable year. This method may be used only if the combined return for a common taxable year may be timely filed (including automatic extensions) after the close of such member's taxable year which begins in the common taxable year for which the return is filed, and such combined return may not be filed until after the close of such member's taxable year. To illustrate:
Example 1: Corporation A is a calendar-year member of a combined group having a common taxable year ending July 31. If Corporation A uses the method described in this subsection (b)(2), its taxable income for the taxable year ending July 31, 1995 would be five-twelfths of its 1994 taxable income and seven-twelfths of its 1995 taxable income. Rather than using months to pro-rate its income, Corporation A may use the number of days in its taxable year or (in the case of a corporation using a 52/53 week taxable year) the number of weeks in the taxable year. The combined return for the common taxable year ending July 31, 1995, may not be filed until after December 31, 1995, the close of Corporation A's taxable year which begins during that common taxable year.
Example 2. Corporation B uses a taxable year ending October 31, and is a member of a combined group with a calendar common taxable year. Corporation B may not use the method described in this subsection (b)(2), because, in applying this method for calendar year 1995, Corporation B would have to include in its common taxable year income two-twelfths of its income for its taxable year ending October 31, 1996, and the group's 1995 return (including automatic extensions) would be due on October 15, 1996, before the close of Corporation B's taxable year.
3) Method 3. The separate company taxable income of such member for any taxable year ending in the common taxable year shall be included in combined net income of the combined group.
c) Consistency in use of method. Each taxpayer having a taxable year different from the common taxable year of its combined group may separately elect which of the methods listed in subsection (b) above it will use for the first combined return in which such taxpayer is a member the combined group. Once a member has used one of those methods for a combined return, that method shall be used for all subsequent combined returns of such group unless:
1) the change in method is disclosed in an attachment to the first combined return for which a different method is used;
2) the attachment shows, for each year in which the member changing its method has been a member of the combined group, including the year in which the new method will be used:
A) the net income of the combined group computed with such member using its former method;
B) the net income of the combined group computed with such member using the new method; and
C) the totals of such combined net incomes as computed using each method; and
3) any excess of the total amounts of combined net income computed using the new method over the total amounts computed using the old method must be added to (or any deficiency be subtracted from) the net income of the combined group for the year in which the new method is first used.
d) If the common taxable year of a combined group is changed, and the new common taxable year ends before the end of the former common taxable year during which the change occurs, all separate company items of each member of the combined group arising since the end of the last common taxable year before the change must be taken into account on the combined return filed for the first common taxable year after the change, and any separate company item reported on a combined return for a prior common year shall be excluded from the combined return filed for the first common taxable year after the change.
Example. Combined group ABC uses a common taxable year ending on December 31, the taxable year of all three corporations. Corporation D is the controlling corporation of ABC, but is not an eligible member because it has no taxable presence in Illinois. On January 1, 1998, Corporation D establishes a taxable presence in Illinois, and becomes the designated agent under Section 100.5220(d)(1)(B). The group is thereafter required to use Corporation D's taxable year, which ends on June 30. If Corporation A, B or C elects to use either Method 1 or Method 2, combined group ABCD's combined return for the common taxable year ending June 30, 1998 shall include the separate company items of that corporation only for the period from January 1, 1998 through June 30, 1998 as determined under the elected method. If one of the corporations elects to use Method 3, it must determine its separate company items for the period from January 1, 1998 through June 30, 1998 using either Method 1 or Method 2 and include such items in the combined return for combined group ABCD for the common taxable year ending June 30, 1998. The remainder of the corporation's income for its taxable year ending December 31, 1998 will then be included in the combined return for the common year ending June 30, 1999.
e) If the common taxable year of a combined group is changed, and the new common taxable year ends after the end of the former common taxable year during which the change occurs, the combined group must file a combined return for the period ending with the date the common taxable year is changed and a combined return for the period from the date of change to the end of the new common taxable year.
Example. Combined group AB uses a common taxable year ending on June 30, the taxable year of Corporation A, the corporation which has the greatest Illinois income, rather than the October 31 taxable year of Corporation B, its designated agent. Under subsection (a), the combined group is required to change to an October 31 common taxable year as of January 1, 1999. The group must file a combined return for the short taxable year from June 30, 1998 through December 31, 1998 and a combined return for the common taxable year ending through October 31, 1999 which includes only the separate company items of the members arising after January 1, 1999. Each corporation may separately elect to use either Method 1 or Method 2 to determine its separate company items for each short taxable year.
f) Members entering and leaving a combined group. Regardless of which method under subsection (b) is used by a member with a taxable year other than the common taxable year:
1) in the case of a corporation becoming a member of a combined group after the beginning of the corporation's taxable year:
A) if the corporation was not a member of another combined group immediately prior to the time it joins the combined group, the corporation shall file a separate return for the short taxable year ending on the day prior to the date it joins the combined group. The net income reported on that separate return shall be determined using the method elected by the corporation under subsection (b) for determining the portion of its separate taxable income to be included in the combined group's combined net income for the common taxable year in which the corporation becomes a member of the combined group. The separate return shall be due on the due date (including extensions) of the combined return of the combined group for the common taxable year in which the corporation becomes a member.
Example 1. Corporation A uses a calendar taxable year. On April 1, 1999, a member of unitary business group BCD acquires 51% of the stock of Corporation A, and Corporation A immediately becomes a member of the unitary business group. Group BCD has a common taxable year ending June 30, which remains the common taxable year of group ABCD. If Corporation A elects to use Method 1, it must report pro-forma taxable income for the period from January 1 through March 31, 1999 on a separate return; include pro-forma taxable income for the period from April 1 through June 30, 1999 in the combined return of group ABCD for the common taxable year ending June 30, 1999; and include pro-forma taxable income for the period from July 1 through December 31, 1999 and for the period from January 1 through June 30, 2000 in the combined return of group ABCD for the common taxable year ending June 30, 2000. The separate return for the period ending March 31, 1999 will be due on the due date of group ABCD's combined return for June 30, 1999. If Corporation A elects to use Method 2, it must report its income for 1999 in the same manner, except that it will pro-rate its 1999 income among the four different periods in proportion to the length of each period. If Corporation A elects to use Method 3, Corporation A must use either Method 1 or Method 2 to determine its taxable income for its separate return for the period ending March 31, 1999, and will include the remainder of its 1999 income in the combined return for group ABCD for the common taxable year ending June 30, 2000.
B) if the corporation was a member of another combined group immediately prior to the time it joins the new combined group, the corporation shall include in the combined net income of the new combined group for the common taxable year in which it becomes a member all of its separate company taxable income for its taxable year which was not included in the combined net income of the old combined group for the common taxable year of the old combined group during which the corporation joins the new combined group. The corporation must use either Method 1 or Method 2 to determine the separate company items to include in each combined return which includes the date it leaves the old combined group and joins the new combined group. Thereafter, if its taxable year is not the common taxable year of the new combined group, it may elect any of the three methods.
Example 2. Assume the same facts in Example 1 above except that Corporation A is a member of combined group AXYZ prior to the date its stock was acquired by a member of combined group BCD. Corporation A must use either Method 1 or Method 2 to determine the portion of its 1999 separate company taxable income for the period from January 1 through March 31, 1999, which will be included in the combined net income of group AXYZ. If Corporation A was using either Method 1 or Method 2 while a member of group AXYZ, it must use the same method for this purpose. Corporation A may then elect any of the three methods for use in computing the combined net income of group ABCD; provided, however, that Corporation A's separate company taxable income for the period from April 1 through December 31, 1999 shall be equal to its separate company taxable income for 1999 minus the amount of its separate company taxable income for January 1 through March 31, 1999 included in the combined net income of group AXYZ.
2) in the case of a corporation which ceases to be a member of a combined group, no separate company taxable income of such member which has been included in the combined net income of the combined group on any combined return shall be included in net income on any separate company return or any combined return of another combined group.
(Source: Added at 22 Ill. Reg. 19033, effective October 1, 1998)
Section 100.5270 Computation of Combined Net Income and Tax (IITA Section 304(e))
a) Determination of Base Income. The combined base income shall be determined by first computing the combined group's combined taxable income and then modifying this amount by the combined group's combined Illinois addition and subtraction modification amounts.
1) Combined Net Income. Combined base income shall be determined by treating all members of the unitary business group (including ineligible members) as if they constituted a federal consolidated group and by applying the federal regulations for determining consolidated taxable income, except that the separate return limitation year provisions and the limitations on consolidation of life and non-life companies in 26 CFR 1.1502-47 do not apply. (See 26 CFR 1.1502-11.) A consolidated net operating loss deduction, as defined in 26 CFR 1.1502-21 shall be added back to taxable income, in whole or in part, in accordance with subsections (a)(2), (a)(4) and (a)(5). Pursuant to IITA Section 203(e)(2)(E), combined base income shall be determined as if the election provided by IRC section 243(b)(2) had been in effect.
EXAMPLE 1: Corporations A and B properly make an election under IITA Section 502(e), or are properly required to file a combined return under IITA Section 502(e). On a separate return basis, A's federal taxable income would be a loss of ($500). This amount does not include an excess capital loss of $75 pursuant to IRC section 1211(a). B's federal taxable income is $1,000 of which $100 is capital gain. As a result of applying 26 CFR 1.1502-11 and 26 CFR 1.1502-22, the combined federal taxable income for A and B is $425.
2) Combined Illinois Net Loss. The combined group's current year combined taxable income may be less than zero, in which case combined taxable income shall be determined by applying the provisions of 26 CFR 1.1502-21(f) (consolidated net operating loss) to the unitary business group.
EXAMPLE 2: Same facts as Example 1 in subsection (a)(1) except that Corporation C has also properly joined in the election, or is properly required to join in the combined return filing, and its federal taxable income is a loss of ($800). If there are no addition or subtraction modifications and all of the group's base income is apportioned to Illinois, the group's combined Illinois net loss for the taxable year is ($375).
3) Carrybacks and Carryovers. Carrybacks and carryovers, if any, shall be determined for each member and not for the group. A pro rata share of the loss is attributable to each of the loss members. For Illinois net losses that occurred in taxable years ending on or after December 31, 1986, the amount of any carryback or carryover shall be determined by applying Sections 100.2340 and 100.2350(c)(3) and (c)(4). For federal net operating losses that occurred in taxable years ending prior to December 31, 1986, the amount of any carryback or carryforward shall be determined by applying Section 100.2230.
EXAMPLE 3: Same facts as Example 2 in subsection (a)(2). Assuming the taxable year ends prior to December 31, 1986, the group's combined net operating loss of ($375) shall be divided between A and C as follows for purposes of carryback and carryover:
Corp. A: 500/1,300 x (375) = 144
Corp. C: 800/1,300 x (375) = 231
4) Addition Modification of Federal Net Operating Loss (NOL) Deductions from a Loss Incurred in a Taxable Year Ending on or after December 31, 1986. IITA Section 203(b)(2)(D) requires that the amount of any federal net operating loss deduction taken in arriving at taxable income for federal tax purposes, other than from a loss in a taxable year ending prior to December 31, 1986, shall be added back to taxable income in the computation of base income. (See Section 100.2320(a).)
5) Addition Modification of Pre-December 31, 1986 Federal Losses. IITA Section 203(b)(2)(E) requires an addition modification subject to two limitations for taxable years in which a federal net operating loss carryforward from a taxable year ending prior to December 31, 1986 is an element of taxable income. Consequently, each member allowed to carryback or forward a portion of the group's combined net operating loss from a year in which that combined loss was used to offset a portion of the group's combined excess addition modifications shall take as an addition modification in the carryback or carryover year its respective share of the NOL addition modification required by IITA Section 203(b)(2)(E). In accordance with Section 100.2240, the respective shares shall be determined in the same manner as the determination of the amount of NOL carryback or carryover.
EXAMPLE 4: Same facts as Example 2 in subsection (a)(2) except that the group had combined excess addition modifications of $100. This amount will be divided among the loss members as follows:
Corp. A: 500/1,300 x 100 = 38
Corp. C: 800/1,300 x 100 = 62
b) Combined Base Income Allocable to Illinois. Combined base income allocable to Illinois is the sum of the combined business income or loss apportioned to Illinois plus the combined nonbusiness income or loss allocated to Illinois plus the combined business income or loss apportioned to Illinois by partnerships in which the members are partners (other than partnerships that apportion business income under Section 100.3380(d)), less the combined net loss deduction.
1) Combined Business Income Apportionable to Illinois. In the case of a combined group composed solely of members that apportion their business income under the same subsection of IITA Section 304 (that is, insurance companies apportioning business income under IITA Section 304(b), financial organizations apportioning business income under IITA Section 304(c), federally regulated exchanges apportioning business income under IITA Section 304(c-1), transportation companies apportioning business income under IITA Section 304(d), and all other businesses apportioning business income under IITA Section 304(a)), the combined group's combined business income shall be apportioned using the total Illinois factors of the combined group and total everywhere factors of the unitary business group. In the case of a combined group that includes members that apportion their business income under different subsections of IITA Section 304, the combined group's combined business income is apportioned as provided in Section 100.3600. Items of income and deduction arising from transactions between members of the unitary business groups shall be eliminated whenever necessary to avoid distortion of the denominators used by the unitary business group in calculating apportionment factors, or of the numerators used by the combined group or by ineligible members of the group in calculating apportionment factors.
EXAMPLE 1: Corporations A, B and C constitute a unitary business group. Corporations A and B are eligible to make the election under IITA Section 502(e) for tax years ending before December 31, 1993. However, under Public Law 86-272, Corporation C is not taxable in Illinois. Based on these facts, if the election to be treated as one taxpayer is made, the combined Illinois sales factor shall be determined by dividing the combined group's total combined Illinois sales (that is, excluding any sales of Corporation C shipped to purchasers in Illinois) by the total combined sales of the unitary business group everywhere. If the same facts are applied to a tax year ending on or after December 31, 1993, the same result will occur in the mandatory combined return situation.
EXAMPLE 2: Same facts as in Example 1, except these additional facts also exist. Under Public Law 86-272, Corporations B and C are taxable in South Carolina, but corporation A is not. Based on these facts, if the election to be treated as one taxpayer is made, or the taxpayers are required to be treated as one taxpayer, the combined Illinois sales factor shall be determined by dividing the combined group's total Illinois sales (including any sales of Corporation A shipped to purchasers in South Carolina from any place of storage in Illinois, i.e., throwback sales) by the total sales of the unitary business group everywhere.
2) Combined Nonbusiness Income and Business Income Apportioned to Illinois by Partnerships in which the Members are Partners (other than partnerships that apportion business income under Section 100.3380(d)). The amount of combined nonbusiness income or loss allocable to Illinois shall be computed by first determining the amount for each member of the combined group and then combining these amounts. Similarly, the amount of combined business income or loss apportioned to Illinois by partnerships in which the members are partners (other than partnerships that apportion business income under Section 100.3380(d)) shall be computed by first determining the amount for each member and then combining these amounts.
3) Combined Illinois Net Loss Deduction. The combined Illinois net loss deduction for losses originating in tax years ending on or after December 31, 1986 shall be computed by determining the amount of deduction available for each member of the combined group in accordance with Sections 100.2330, 100.2340 and 100.2350 and then by combining these amounts.
c) Combined Exemption. Under the election or requirement to be treated as one taxpayer, there is one exemption per combined return. The combined exemption shall be computed by multiplying the amount of the exemption allowed under IITA Section 204 and Section 100.2055 by a fraction, the numerator of which is combined base income allocable to Illinois and the denominator of which is the group's combined base income. The exemption amount for members of unitary groups not making the election, or not subject to the requirement, and for members of unitary groups ineligible to make the election, or not subject to the requirement, shall be computed by multiplying the amount of the exemption allowed under IITA Sections 204 and 100.2055 by a fraction, the numerator of which shall be that member's base income allocable to Illinois, and the denominator of which is the group's combined base income.
d) Combined Credits
1) Applicability of Credits. Any credit allowed by the IITA is determined based on the combined activities of the members of the combined group and that credit shall be applied against the combined liability of the combined group.
2) Credits Based on Members' Activities. The investment credits provided in IITA Sections 201(e), (f) and (h) and 206(b) are available when certain property is purchased and placed in service by a taxpayer. The combined group is entitled to a combined credit, assuming the other statutory or regulatory requirements applicable to the given credit are satisfied, even if one of the members purchases the qualified property and another member uses the property in a qualified manner.
3) Effective January 1, 1994, the investment credit provided in IITA Section 201(e) is allowed for a taxpayer who is primarily engaged in manufacturing, or in mining coal or fluorite, or in retailing. In the case of a combined group, the determination of eligibility shall be made for the combined group as a whole, rather than for any individual member. The determination of whether a combined group is primarily engaged in a qualifying activity shall be made by applying the 50% of gross receipts test in Section 100.2101(f) by taking into account the gross receipts of only the eligible members of the combined group. Gross receipts of corporations that would otherwise be members of the combined group, but have no taxable presence in Illinois or that cannot be combined for any other reason, shall not be considered in this determination. In determining whether a combined group is primarily engaged in retailing, gross receipts from transactions between eligible members of the combined group shall be eliminated from both the numerator and the denominator of the computation. In determining whether a combined group is primarily engaged in manufacturing or in the mining of coal or fluorite, gross receipts from manufacturing or the mining of coal or fluorite shall include:
A) gross receipts from sales of products manufactured or coal or fluorite mined by one eligible member of the combined group to another eligible member of the combined group for use or consumption, and not for resale. However, the amount of those gross receipts shall be subject to adjustment by the Department under IITA Section 404; and
B) gross receipts from sales to persons outside the combined group by one eligible member of the combined group of items manufactured, or coal or fluorite mined, by another eligible member of the combined group.
4) The additional credit provided in IITA Section 201(e) and the credit provided in IITA Section 201(g) are based on specified increases in employment in Illinois. For purposes of determining entitlement to these credits during a combined-return year, the increase in employment shall be determined with respect to the employment of all members of the combined group in Illinois and not an individual member's employment. For purposes of determining the increase in employment in Illinois for a common taxable year, the Illinois employment of all taxpayers who are members of the combined group during that common taxable year shall be used; that is, both prior and current year Illinois employment of current members who were not members of the combined group in the prior year shall be included in the determination, while prior and current year Illinois employment of taxpayers who ceased to be members of the combined group during the current or prior year shall be excluded. The application of this subsection (d)(4) is illustrated by the following examples:
EXAMPLE 1: Corporations A, B and C were members of a unitary business group that elected to file a combined return for 1989. Corporation D was not a member of the ABC combined group in 1989, but becomes a member of combined group ABCD filing a combined return for 1990. During 1989, Corporations A, B and C employed a total of 150 persons in Illinois and Corporation D employed 50 people in Illinois, for a total of 200. During 1990, Corporations A, B and C employed 100 persons in Illinois and Corporation D employed 100 persons in Illinois, again for a total of 200. IITA Section 201(e), which provides for a Replacement Tax Investment Credit for qualified property placed in service by the taxpayer during the year, allows an additional 0.5% credit for that property to a taxpayer whose Illinois employment has increased by at least 1% over its Illinois employment in the immediately preceding year. Combined group ABCD cannot qualify for the additional 0.5% credit during 1990 because the combined Illinois employment of Corporations A, B, C and D remained unchanged between 1989 and 1990. Because eligibility is determined at the combined group level, no additional credit is allowed for qualified property placed in service by Corporation D in 1990, even though Corporation D's Illinois employment doubled between 1989 and 1990.
EXAMPLE 2: Corporations P, Q, R and S filed a combined Illinois return for calendar year 1990. On January 1, 1991, Corporation S was sold to an unrelated purchaser. Corporations P, Q and R filed a combined Illinois return for calendar year 1991. Combined group PQRS employed 400 people in Illinois during 1990, 100 of whom were actually employees of Corporation P and 100 of whom were actually employees of Corporation S. Combined group PQR employed 350 people in Illinois during 1991, 50 of whom were actually employees of Corporation P. Combined group PQR can qualify for the additional 0.5% Replacement Tax Investment Credit allowed under IITA Section 201(e) for qualified property placed in service during 1990 because the Illinois employment of the three members of the combined group increased from 300 in 1989 to 400 in 1990. Because the eligibility is determined at the combined group level, property placed in service by Corporation P during 1990 may qualify for the additional 0.5% credit even though Corporation P's Illinois employment actually decreased.
EXAMPLE 3: Prior to its 2013 repeal by Public Act 98-109, IITA Section 201(g) allowed a Jobs Tax Credit equal to $500 per eligible employee hired to work in an enterprise zone during a taxable year. The taxpayer must hire 5 or more eligible employees during the taxable year in order to qualify for the credit. The credit is taken in the taxable year following the year the employee is hired. Corporations W, X, Y and Z filed a combined Illinois return for calendar year 1990. Corporation Z was sold to an unrelated purchaser on December 31, 1990. Corporations W, X and Y filed a combined return for 1991. During 1990, WXYZ hired 5 eligible employees to work in an enterprise zone, 3 of whom were actually hired by Corporation Z. Combined group WXY may claim a Jobs Tax Credit of $2,500 for 1991 because it hired 5 eligible employees during 1990. The fact that Corporation Z, which hired 3 of the employees, left the combined group at the beginning of 1991 does not alter the fact that the combined group earned the Jobs Tax Credit nor entitle Corporation Z to any portion of the credit for its separate company return for 1991.
5) The research and development credit provided in IITA Section 203(j) is based on increasing research activities in this State (see Section 100.2160). For purposes of determining entitlement to the credit during a combined-return year, the increase in research activities shall be determined with respect to research activities conducted by all members of the combined group in Illinois and not an individual member's research activities. The following series of examples illustrate the application of the research and development credit in combined return situations involving Corporations A, B and C that incurred the following expenses for qualified research activities in Illinois:
|
|
1990 |
1991 |
1992 |
1993 |
|
Corp. A |
50,000 |
50,000 |
50,000 |
0 |
|
Corp. B |
25,000 |
25,000 |
100,000 |
200,000 |
|
Corp. C |
75,000 |
125,000 |
100,000 |
100,000 |
|
|
150,000 |
200,000 |
250,000 |
300,000 |
EXAMPLE 1: A, B, and C filed combined returns for the years ending December 31, 1990, December 31, 1991, December 31, 1992 and December 31, 1993. The proper amount of the Research and Development Credit for the year ending December 31, 1993 is determined based upon the combined activities on the combined return and is calculated as follows:
Total qualified expenditures for 1993................................ 300,000
Average qualified expenditures for 1990-92..................... 200,000
Excess of 1993 expenditures over base period.................. 100,000
Research and development credit for 1993............................ 6,500
EXAMPLE 2: A and B filed a combined return for the year ending December 31, 1990. C filed a separate return for the year ending December 31, 1990. A purchased the common stock of C on January 1, 1991. A, B and C filed combined returns for the years ending December 31, 1991, December 31, 1992 and December 31, 1993. The $75,000 of expenses for qualified research activities in Illinois incurred by C for the year ending December 31, 1990 should be included in the calculation of the average qualified expenditures for the base period. The credit for the combined return is calculated as follows:
Total qualified expenditures for 1993................................ 300,000
Average qualified expenditures for 1990-92..................... 200,000
Excess of 1993 expenditures over base period.................. 100,000
Research & Development Credit for 1993............................. 6,500
EXAMPLE 3: A, B and C filed combined returns for the years ending December 31, 1990, December 31, 1991 and December 31, 1992. On January 1, 1993, A sold the common stock of C to P (an unrelated corporation). For the year ending December 31, 1993, C was included in the combined return filed by P. In determining the proper amount of the Research and Development Credit for the combined return filed by A and B for the year ending December 31, 1993, the expenses for qualified research activities in Illinois incurred by C of $75,000, $125,000 and $100,000 for the years ending December 31, 1990, December 31, 1991 and December 31, 1992, respectively, shall not be included in the calculation of the average qualified expenditures for the base period for A and B for the year ending December 31, 1993. The credit for the combined return for A and B for the year ending December 31, 1993 is calculated as follows:
Total qualified expenditures for 1993................................ 200,000
Average qualified expenditures for 1990-92..................... 100,000
Excess of 1993 expenditures over base period.................. 100,000
Research & Development Credit for 1993............................. 6,500
6) Credit Carryforward. Any combined credit carryforward shall be available to the combined group for the next combined-return year. For purposes of the credits allowed with respect to certain qualifying property under IITA Sections 201(e), (f), and (h) and 206(b), when a member becomes ineligible to join in the election, or is no longer required to be part of the combined return, the credit carryforward shall be available to the remaining members if those members continue to both own and use the property for which the credit was claimed in a qualifying manner for 48 months after the placed-in-service date. The credit carryforward shall be available to the former member that has become ineligible if that former member both owns and uses the property for which the credit was claimed in a qualifying manner for the remainder of the 48-month period after the placed-in-service date. If a credit carryforward is available to the former member that has become ineligible, the amount of the carryforward is equal to the combined unused credit multiplied by a fraction, the numerator of which shall be the credit attributable to the qualified property of that former member for the combined unused credit year, and the denominator of which shall be the qualified property of the combined group for the unused credit year.
EXAMPLE: In 1985, Corporation A purchased $300,000 of eligible property, $200,000 of which was used by A and $100,000 of which was transferred to and used by Corporation B. A and B filed a combined return for the year that showed an income tax liability of $1,000 and an investment credit of $1,500. The group's unused credit was $500. In 1987, B left the group, and during that year it owned and continued to use the $100,000 of eligible property. Its credit carryforward would be computed as follows:
$500 x $100,000/$300,000 = $166.67
7) Recapture. For purposes of credits that are recaptured when property ceases to be qualified property or is moved out of Illinois or when property is moved outside of an enterprise zone within 48 months after the placed-in-service date, the members of the combined group are responsible for the recapture of any personal property replacement tax or income tax.
EXAMPLE: Same facts as in the Example in subsection (d)(6) except in 1987 Corporation A transferred its eligible property (originally purchased for $200,000 in 1985) to Corporation B. Corporation B was acquired by Corporation C in 1987 and, immediately afterward, B sold all the eligible property (originally purchased for a total of $300,000) to an unrelated third party. B and C file a combined return for that year and their tax liability is increased by $1,000 due to the credit that was allowed on the combined return filed by A and B in 1985 and recaptured in 1987.
e) Ineligible Members. If a unitary business group contains one or more ineligible members (e.g., a partnership that is not required to apply the apportionment method prescribed in Section 100.3380(d), a subchapter S corporation or, for years ending prior to December 31, 1987, a corporation with a different taxable year), the ineligible members shall file separate unitary returns. In the separate unitary return, the apportionment percentage of that ineligible member shall be determined by dividing the Illinois factor or factors of that member by the combined everywhere factor or factors of all members of the unitary business group. The apportionment percentage shall then be multiplied by the combined business income of the unitary business group to determine the business income of that ineligible member apportionable to Illinois. The taxable income of the members shall be their combined taxable income as determined under subsection (a)(1). If a corporation is ineligible because it has a different taxable year, either method of accounting available to part-year members and set forth in subsection (f)(2) may be used to determine the combined taxable income. If two or more corporations are ineligible because they have an accounting period that is different from other members making the election, they may elect to file their own combined return if they have the same taxable year. The foregoing rule also applies in the case of erroneous inclusion of a member in a group otherwise required to file a combined return.
f) Part-year Members
1) General Rule. If a corporation becomes a member of a unitary business group after the beginning of the combined return year or ceases to be a member of the unitary business group during the combined return year, two tax returns will be affected for that taxable year. The combined return shall include the separate company items of that corporation for the part of the year it was a member of the unitary business group. Separate company items of a part-year member for any portion of its taxable year prior to the date it joins or after the date it leaves the unitary business group shall either be reported in a short-year separate return filed by that part-year member (if it is subject to Illinois income tax during that period) or included in any combined return filed on behalf of a unitary business group to which that part-year member belongs during that portion of the year.
2) Accounting. The part-year member shall use either Method 1 or Method 2 (described in Section 100.5265(b)) to determine its separate company items for the portion of the year before it becomes a member and the portion of the year after it becomes a member of the combined group.
(Source: Amended at 43 Ill. Reg. 10124, effective August 27, 2019)
Section 100.5280 Combined Return Issues Related to Audits
a) If, on audit, the Department determines that two or more corporations are members of a unitary business group for which no combined return was filed:
1) For taxable years ending on or after December 31, 1985 and before December 31, 1993, any audit liabilities determined by the Department will be proposed and processed on a separate unitary return basis. If Notices of Deficiency are issued, they will be issued to each Illinois taxpayer and will reflect that taxpayer's Illinois income tax liability computed on a separate return basis.
2) For taxable years ending on or after December 31, 1993, any audit liabilities determined by the Department will be processed on a combined return basis. Because each member of a combined group is jointly and severally liable for the tax liability of the entire group, if any Notices of Deficiency are issued:
A) the Notices of Deficiency shall reflect the combined return income and liability of the entire combined group; and
B) a separate Notice of Deficiency will be issued to each Illinois taxpayer, unless a designated agent has been appointed under Section 100.5220(g) of this Part, in which case the Department may issue a Notice of Deficiency solely to the designated agent and to any corporation which has requested the Department to be allowed to represent itself pursuant to Section 100.5220(f)(2) of this Part.
b) If two or more corporations have filed a combined return and, on audit, the Department determines that one or more additional corporations belonged to the combined group and should have joined in the filing of the combined return, any audit liabilities shall be proposed and processed as follows:
1) If, prior to the issuance of a Notice of Deficiency, any of the corporations which did not join in the combined return and the designated agent of the combined group agree that such corporation is a member of the combined group or the designated agent pays all audit deficiencies, the audit liabilities related to that corporation and the combined group will be proposed and processed on a combined return basis. In this instance, the designated agent will be treated as having corrected the combined return in accordance with Section 100.5210(b) of this Part.
2) If the designated agent of the combined group, or any corporation which did not join in the combined return, does not agree that such corporation is a member of the combined group prior to the issuance of a Notice of Deficiency, the audit liabilities for that corporation will nevertheless be proposed and processed on a combined return basis. Because each member of a combined group is jointly and severally liable for the tax liability of the entire group, if any Notices of Deficiency are issued:
A) the Notices of Deficiency shall reflect the combined return income and liability of the entire combined group; and
B) a separate Notice of Deficiency will be issued to the designated agent and to each corporation which did not join in the filing of the combined return, but which the Department is asserting is a member of the combined group. Each Notice of Deficiency shall state that the designated agent shall represent each corporation whose membership in the combined group is in dispute unless such corporation requests the Department to be allowed to represent itself pursuant to Section 100.5220(f)(2) of this Part.
(Source: Amended at 22 Ill. Reg. 19033, effective October 1, 1998)
SUBPART R: PAYMENTS
Section 100.6000 Payment on Due Date of Return (IITA Section 601)
a) Except as provided in subsection (b), every taxpayer required to file a return under the IITA shall, without assessment, notice or demand, pay any tax due thereon to the Department on or before the date fixed for filing such return (determined without regard to any extension of time for filing the return). (IITA Section 601(a))
b) If the due date for payment of a taxpayer's federal income tax liability for a tax year (as provided in the Internal Revenue Code or by Treasury regulation, or as extended by the Internal Revenue Service) is later than the date fixed for filing the taxpayer's Illinois income tax return for that tax year, the due date for payment of the Illinois income tax liability due on that return shall be the extended due date for payment of the taxpayer's federal income tax liability. (IITA Section 601(a)) Pursuant to this provision, if the due date for payment of any federal income tax liability is extended for any reason (for example, as the result of a holiday, including a holiday not observed in this State such as the Emancipation Day holiday observed in Washington, D.C., or because of natural disaster under IRC section 7508A), the payment of any Illinois income tax liability on or before the extended federal due date for payment of the equivalent federal liability shall be timely.
(Source: Added at 38 Ill. Reg. 18568, effective August 20, 2014)
SUBPART S: REQUIREMENT AND AMOUNT OF WITHHOLDING
Section 100.7000 Requirement of Withholding (IITA Section 701)
a) General rules. Every employer maintaining an office or transacting business within this State and required under the provisions of 26 USC 3401 through 3404 to withhold and pay federal income tax on compensation paid in this State (see Section 100.7010 of this Part) to an individual is required to deduct and withhold from such compensation for each payroll period (as defined in 26 USC 3401), an amount computed in accordance with IITA Section 701 and 702. Illinois income tax is not required to be withheld on any compensation paid in this State of a character which is not subject to federal income tax withholding (whether or not such compensation is subject to withholding for federal taxes other than income tax, e.g., F.I.C.A. (Social Security taxes). (As to what constitutes "transacting business within this State", see Section 100.7020 of this Part.)
b) Example. This section may be illustrated by the following examples:
1) Example 1: A is a typist in the offices of B corporation, where she has worked regularly for two months. A is, however, supplied to B corporation by C, a temporary help agency located in Illinois. C renders a weekly bill to B corporation for A's services, and C then pays A. B corporation is not A's "employer" within 26 USC 3401(d) and B corporation is therefore not required by the Internal Revenue Code to withhold a tax on A's compensation. Since B corporation is not required to withhold a tax for federal purposes on A's compensation, it is not required to do so for Illinois purposes. The temporary help agency, however, is required to withhold from A's compensation for federal purposes and must similarly do so for Illinois purposes.
2) Example 2: A is employed as a cook by Mr. and Mrs. B. The B's are required to withhold FICA (i.e., Social Security) tax from compensation paid to A, but are not required to withhold from such compensation for income tax under the Internal Revenue Code because, under 26 USC 3401(a)(3), A's compensation does not constitute "wages". Since the B's are not required to withhold income tax for federal purposes, they are not required to do so for Illinois purposes.
3) Example 3: A is a full time worker on B's wheat farm. A's duties include soil cultivation, raising and harvesting wheat, and maintenance of farm tools and equipment. B is not required to withhold from A's compensation for federal income tax purposes since, under 26 USC 3401(a)(2), A's compensation does not constitute "wages". Therefore B is not required to withhold for Illinois tax purposes.
4) Example 4: A is a factory worker for B corporation. When A reaches retirement age, he begins receiving a pension from B corporation's qualified pension trust. Under 26 USC 3401(a)(12)(A), A's pension payments do not constitute "wages". Therefore, neither B nor the pension trust is required to withhold income tax for federal purposes and, accordingly, neither would withhold for Illinois tax purposes.
5) Example 5: A is a corporate executive. On January 1, 1965, A entered into an agreement with B corporation under which he was to be employed by B in an executive capacity for a period of 5 years. Under the contract, A is entitled to a stated annual salary and to additional compensation of $10,000 for each year, the additional compensation to be credited to a bookkeeping reserve account and deferred, accumulated and paid in annual installments of $5,000 on A's retirement beginning January 1, 1970. In the event of A's death prior to exhaustion of the account, the balance is to be paid to A's personal representative. A is not required to render any service to B after December 31, 1969. During 1970, A is paid $5,000 while a resident of Illinois. The $5,000 is not excluded from "wages" under 26 USC 3401(a); therefore, B is required to withhold federal income tax, and, since it is compensation "paid in this State" (see Section 100.7010(g) of this Part), B must withhold Illinois income tax on A's deferred compensation.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.7010 Compensation Paid in this State (IITA Section 701)
a) Except as provided in this Section, or in Section 100.7090 with respect to reciprocal withholding exemption agreements for employees residing in certain states, withholding is required with respect to "compensation paid in this State" under Section 100.3120.
b) Withholding from Nonresident Employees. For taxable years beginning on or after January 1, 2020, in determining compensation paid in this State under IITA Section 304(a)(2)(B) for purposes of this Section:
1) If an employer maintains a time and attendance system that tracks where employees perform services on a daily basis, then data from the time and attendance system shall be used. (IITA Section 701(a-5)(1)) For purposes of this subsection (b)(1), "time and attendance system" means a system:
A) in which the employee is required, on a contemporaneous basis, to record the work location for every day worked outside of the State where the employment duties are primarily performed (IITA Section 701(a-5)(1)(A)); and
B) that is designed to allow the employer to allocate the employee's wages for income tax purposes among all states in which the employee performs services (IITA Section 701(a-5)(1)(B)).
2) In all other cases, the employer shall obtain a written statement from the employee of the number of days reasonably expected to be spent performing services in this State during the taxable year. Absent the employer's actual knowledge of fraud or gross negligence by the employee in making the determination or collusion between the employer and the employee to evade tax, the certification made by the employee and maintained in the employer's books and records shall be prima facie evidence and constitute a rebuttable presumption of the number of days spent performing services in this State. (IITA Section 701(a-5)(2))
3) The provisions of this subsection (b) are relevant only to the issue of whether or not the employer has withheld the proper amount of Illinois income tax from the compensation of an employee. The amount of an employee's compensation "paid in this State" for all other purposes must be determined by using the actual working days within and outside of this State.
c) Deferred Compensation
1) Under deferred compensation agreements, payments are made by an employer to an employee for service rendered at an earlier date. In many agreements, the employee receiving deferred compensation payments is not required to render any current service whatsoever, whereas in others he may be required to hold himself available to render advisory and consultative service, if called upon to do so, and to refrain from competition, but in either case, the amount of compensation is unrelated to any service being currently rendered. Payments made under that kind of deferred compensation agreement will be deemed to meet the tests set forth in Section 100.3120 for compensation paid in Illinois if paid to the individual while a resident of this State. Conversely, payments made under that kind of agreement will not be subject to withholding if paid to the individual while a nonresident. Amounts paid to nonresidents under deferred compensation agreements may be allocated to Illinois under IITA Section 302(a) in accordance with Section 100.3120 notwithstanding the fact that those amounts are not subject to withholding.
2) This subsection (c) may be illustrated by the following example:
EXAMPLE: A is a corporate executive. On January 1, 1965, A entered into an agreement with B corporation under which A was to be employed by B in an executive capacity for a period of 5 years. Under the contract A is entitled to a stated annual salary and to additional compensation to be credited to a bookkeeping reserve account and deferred, accumulated and paid in annual installments of $5,000 on A's retirement beginning January 1, 1970. In the event of A's death prior to exhaustion of the account, the balance is to be paid to A's personal representative. A is not required to render any service to B after December 31, 1969. During 1970, A is paid $5,000 while a resident of Illinois. This amount will be subject to withholding, because A's prior service will be deemed to have met one of the tests for compensation paid in Illinois.
(Source: Amended at 44 Ill. Reg. 10907, effective June 10, 2020)
Section 100.7020 Transacting Business Within This State (IITA Section 701)
a) General rules. The phrase "employer transacting business within this State" includes any employer having or maintaining within this State, directly or by a subsidiary, an office, distribution house, sales house, warehouse or other place of business, or any agent or other representative operating within this State under the authority of the employer or its subsidiary, irrespective of whether such place of business or agent or other representative is located here permanently or temporarily, or whether such employer or subsidiary is licensed to do business in this State.
b) Agents. It does not matter that an agent may engage in business on his own account in other transactions, nor that such agent may act as agent for other persons in other transactions, nor that he is not an employee but is an independent contractor acting as agent. The term "agent" is broader than the term "employee". "Agent" includes anyone acting under the principal's authority in an agency capacity.
Section 100.7030 Payments to Residents (IITA Section 701)
a) In General
1) Any payment to an Illinois resident as an employee or otherwise by any payer maintaining an office or transacting business in this State shall be subject to withholding of Illinois income tax if those payments are subject to withholding of federal income tax. Any payer maintaining an office or transacting business in this State making these payments shall be considered an "employer" for purposes of IITA Article 7 and these regulations and, accordingly, will be subject to the same rules and procedures governing employers withholding tax on compensation paid in Illinois. For example, these payers will be required to register as withholding agents, and shall be subject to the reporting (and payment) requirements of IITA Sections 703 and 704. Also, these payers will be subject to the penalties prescribed in Article 10 of the Act.
2) Payments to an Illinois resident by a payer transacting business or maintaining an office in Illinois on which federal withholding is required shall be considered "compensation paid in Illinois" for purposes of IITA Article 7 and this Part. Illinois residents receiving these payments shall be considered "employees" for purposes of IITA Article 7 and this Part. Thus, for example, the computation of the amount of tax to be deducted and withheld shall be made pursuant to Section 100.7050 and the payee shall be entitled to a withholding exemption pursuant to Section 100.7100.
3) Withholding shall be required on the first payment on which withholding of federal income tax is required and shall continue to be required in respect of all these payments until withholding of federal income tax on the payments terminates pursuant to the Internal Revenue Code and the regulations thereunder.
b) Payments Subject to Federal Withholding
Withholding of Illinois income tax is required on all payments to Illinois residents on which withholding of tax is required under the Internal Revenue Code. This applies not only to compensation but to any other type of payment on which federal withholding of income tax is required. Withholding shall be considered required under the Internal Revenue Code if the payee is authorized either by the Internal Revenue Code or the regulations thereunder to request withholding of federal income tax on a particular type of payment and the payee and payer have entered into an agreement for withholding. No authorization from the payee for Illinois withholding is necessary in this situation; the requirement of federal withholding even though voluntarily elected shall automatically impose Illinois withholding.
c) Exceptions
1) Withholding will not be required under this Section on any payment to the extent the payment is not includable in the recipient's base income. Thus, if a payment consists partially of a return of capital, only that part of the payment that is not a return of capital and, hence, is income would be subject to withholding. Also annuity payments from qualified employee benefit plans, which are not includable in Illinois base income under IITA Section 203(a)(2)(E), would not be subject to withholding under this Section notwithstanding an agreement between the payor and the payee for the withholding of federal income tax on those payments. Similarly, if a payment consists of an amount that is exempt from taxation by this State either by reason of its Constitution or by reason of the Constitution, treaties or statutes of the United States (i.e., interest on obligations of the United States), the payment would not be subject to withholding under this Section.
2) Withholding will not be required on any payment under this Section, except "compensation paid in Illinois", as defined in Section 100.7010(a), to the extent that the payment is subjected to withholding by another state. A signed declaration by the payee to the effect that another state is withholding income tax on a payment shall relieve the payer of the requirement to withhold Illinois tax on the payment.
(Source: Amended at 45 Ill. Reg. 2006, effective January 29, 2021)
Section 100.7034 Investment Partnership Withholding (IITA Section 709.5)
a) In General. For taxable years ending on and after December 31, 2023, a taxpayer that is an investment partnership, as defined in IITA Section 1501 and Section 100.9730, and is a member of one or more other partnerships (as defined in Section 100.9750(d)) with income allocable or apportionable to Illinois shall withhold from each nonresident partner an amount as calculated in subsection (c).
b) Exemption from Withholding.
1) An investment partnership is not required to withhold an amount from a nonresident partner:
A) Who is exempt from tax under IRC Section 501(a) or IITA Section 205. Under the provisions of IITA Section 709.5(d), an investment partnership is required to withhold an amount with respect to a partner that is itself a partnership or S corporation.
B) Who is a retired partner, to the extent that partner's distributions are exempt from tax under IITA Section 203(a)(2)(F).
2) The provisions of IITA Section 709.5(c), allowing for exemption from withholding, shall not apply for purposes of this Section. (IITA Section 709.5(d))
3) No nonresident partner has any right of action against an investment partnership for withholding tax from that partner despite exemption under this subsection. (See IITA Section 712.) Instead, the investment partnership may file a claim for credit or refund as provided in subsection (h).
c) Withholding Tax Computation.
1) The amount of withholding tax due from the investment partnership is equal to:
A) The sum of:
i) the investment partnership's distributable share of income from other partnerships that, but for the provisions of IITA Sections 205(b) and 305(c-5), would be apportioned to Illinois by the investment partnership under IITA Section 305(a); and
ii) the investment partnership's distributable share of income from other partnerships that, but for the provisions of IITA Sections 205(b) and 305(c-5), would be allocated to Illinois by the investment partnership under IITA Sections 305(b) and 303 (other than nonbusiness income that is allocated based on commercial domicile) that is distributable to each nonresident partner of the investment partnership under IRC Sections 702 and 704 (whether or not distributed);
B) Multiplied by the applicable rates of tax for that partner under IITA Section 201(a) through (d), net of the investment partnership's distributive share of any IITA Article 2 credit passed through from other partnerships and first allowable against the tax liability of that partner for a taxable year ending on or after December 31, 2023. (IITA Section 709.5(d)(1) through (3))
2) In computing the required amount of withholding tax, an investment partnership's distributive share of Illinois source losses from other partnerships, to the extent distributable to its nonresident partners, may be netted against its distributive share of Illinois source income distributable to nonresident partners.
3) Losses and deductions from other investments of the investment partnership may not be netted against income subject to withholding for purposes of computing the amount of withholding tax owed.
4) Only credits and losses passed through in the current year of the investment partnership may reduce the required withholding amount. Any excess credits and losses from other years may not be carried over in determining the amount of withholding tax owed.
5) If an investment partnership invests in a partnership that makes the Pass-through Entity tax election, the investment partnership may use the credit allowed under IITA Section 201(p) to reduce its amount of withholding tax owed, to the extent that such credit would otherwise be distributable to its nonresident partners.
d) Withholding Tax Rate. If the nonresident partner is a partnership or subchapter S corporation, the applicable withholding tax rate in subsection (c)(1)(B) is equal to the individual tax rate under IITA Section 201(b). (IITA Section 709.5(d)(2))
e) Time for Filing Return and Paying Tax Withheld. An investment partnership required to withhold tax under IITA Section 709.5(d) shall report the amounts withheld and the owners from whom the amounts were withheld, and pay over the amounts withheld, no later than the due date (without regard to extensions) of the tax return for the taxable year of a partnership. (IITA Section 711(a-5)) For purposes of abatement of penalties under Section 3-8 of the Uniform Penalty and Interest Act, an investment partnership shall be deemed to have reasonable cause for not filing the report by the due date required under this subsection if the report is filed no later than the due date under IITA Section 505 (including extensions) of the return for the taxable year.
f) Credit for Taxes Withheld.
1) Except as provided in this Section, no credit for taxes withheld shall be allowed to the nonresident partners of an investment partnership under IITA Section 709.5(b) for amounts withheld under this Section by the investment partnership. (IITA Section 709.5(d))
2) A nonresident partner is entitled to a credit as provided in IITA Section 709.5(b) and Section 100.7035(d) if the nonresident partner's share of the income of an investment partnership is business income under IITA Section 305(c-5).
3) If an investment partnership is itself a member of a second investment partnership and the second investment partnership is subject to nonresident partner withholding, as required in this Section, the first investment partnership is allowed a credit against its withholding requirement under this Section for the withholding amount paid by the second investment partnership on income distributable to the nonresident partners of the first investment partnership.
4) If one of the partners of an investment partnership is itself a partnership, subchapter S corporation, or trust, with Illinois resident partners, shareholders, or beneficiaries, the Illinois resident partners, shareholders, or beneficiaries may claim a credit for their shares of withholding tax paid by the investment partnership, less their shares of any amount applied by the partnership against its own liability for tax, against their liability under IITA Section 201 for the taxable year in which that income is included in base income.
5) Nonresident taxpayers (other than individuals) that are commercially domiciled in Illinois and have income from an investment partnership are allowed a credit for their shares of withholding tax paid by the investment partnership.
6) The total amount of credit claimed under this subsection (f) may not exceed the amount of tax withheld by the investment partnership with respect to the partner.
g) Pass-through Entity Tax Election. An investment partnership may elect to be subject to Pass-through Entity tax under IITA Section 201(p) (PTE tax). Any investment partnership that elects to pay PTE tax is not exempt from the withholding requirement under this Section. However, an investment partnership may elect to subtract its income subject to the withholding requirement when computing its PTE tax under IITA Section 201(p).
h) Overpayments. An investment partnership may claim a refund or credit for any overpayment of withholding due under this Section, except to the extent the overpayment is attributable to tax withheld on the distributive share of a partner who is allowed a credit for such withholding under subsection (f). In addition, no partner has any right of action against an investment partnership for overpayment of withholding. (See IITA Section 712.) With respect to an overpayment of withholding that is attributable to tax withheld on the distributive share of a partner who is allowed a credit for such withholding under subsection (f), the remedy is for the partner to file a timely claim for credit or refund for any amount withheld under this Section.
i) Underpayments. If an investment partnership fails to timely pay the full amount of withholding due under this Section, the investment partnership is not relieved of its obligation to pay any amount due with respect to a partner, except to the extent such underpayment is attributable to withholding required on a partner's distributive share of income which, under the provisions of IITA Section 305(c-5), is business income or is allocable to Illinois and if the partner has paid its liability under the IITA on the income from which withholding was required without claiming the credit otherwise allowed under subsection (f). In addition, the investment partnership is not relieved of any penalty or interest otherwise applicable with respect to its failure to timely pay the withholding. (See IITA Section 713.)
j) Examples. The following examples may be used to illustrate the provisions of this Section.
EXAMPLE 1. Assume Partnership A, an investment partnership, consists of equal partners B and C. Partner B is a partnership and Partner C is a nonresident individual. In addition, assume that both Partnership A and Partner B are commercially domiciled in Illinois and that neither Partnership A nor Partner B has made the election under IITA Section 201(p) to be subject to PTE tax. For its taxable year ending December 31, 2023, Partnership A's income consists of the following:
|
Dividends |
$200 |
|
Capital gains |
$1,200 |
|
Distributive share income: Business income apportioned to Illinois (305(a)) |
$600 |
|
Nonbusiness rent income from IL real estate (303) |
$400 |
|
|
$1,000 |
|
Total |
$2,400 |
Partnership A computes withholding tax of $49.50. Tax is computed on the sum of $600 apportioned to Illinois under IITA Section 305(a) and the $400 allocated to Illinois under IITA Section 305(b), multiplied by the 4.95% individual rate of its partners (including Partner B). Partner C may not claim credit under IITA Section 709.5(b) for its respective share of withholding tax.
Because Partner B is not an investment partnership, it is not subject to withholding tax under IITA Section 709.5(d). However, as Partner B is commercially domiciled in Illinois, it is subject to replacement tax on its $500 distributive share (along with any other sources of Illinois net income) and may be subject to withholding under IITA Section 709.5(a) with respect to other sources of income. Under the provisions of IITA Section 305(c-5), Partner B's distributive share is deemed nonbusiness income and allocable to the taxpayer's commercial domicile. Therefore, all of Partner B's distributive share is subject to replacement tax and not just its share of $500 on which Partnership A paid withholding tax. Under subsection (f)(5), Partner B may claim a credit for the tax withheld on its distributive share. IITA Section 709.5(b) and Section 100.7035(d)(1) allow Partner B to claim a credit against its withholding obligation under IITA Section 709.5(a) in lieu of claiming the credit against its liability under IITA Section 201. If Partner B has Illinois resident partners, those partners may not claim credit under subsection (f)(4) for any amount claimed as a credit by Partner B against its liability as provided in Section 100.7035(d)(1).
EXAMPLE 2. Assume the same facts as in Example 1, except that Partnership A also has distributive share of nonbusiness rental losses of $200 from Illinois real estate under IITA Sections 305(b) and 303. In computing the required amount of withholding, Partnership A's distributive share of Illinois source losses distributable to its nonresident partners may be netted against its distributive share of Illinois source income distributable to its nonresident partners. Therefore, Partnership A computes withholding tax of $39.60. Tax is computed on the sum of $600 apportioned to Illinois under IITA Section 305(a) and the $400 allocated to Illinois under IITA Section 305(b), less the $200 allocated to Illinois under IITA Section 305(b), multiplied by the 4.95% individual rate of its partners (including Partner B). Partner C may not claim credit under IITA Section 709.5(b) for its respective share of withholding tax.
EXAMPLE 3. Assume the same facts as in Example 1, except that Partnership A has $5 of an IITA Article 2 credit passed through from Partnership Z, which is first allowable against the tax liability of Partnership A for its tax year ending on December 31, 2023, and $200 of an Article 2 credit passed through from Partnership Z carried over from its tax year ending on December 31, 2022. Partnership A computes withholding tax of $44.50, the $49.50 determined as provided in Example 1 less the $5 Article 2 credit passed through from Partnership Z.
EXAMPLE 4. Assume the same facts as in Example 1, except that Partnership A has $3,000 of an Article 2 credit passed through from Partnership Z which is first allowable against the tax liability of Partnership A for its tax year ending on December 31, 2023. Partnership A would compute no withholding tax. Partnership A may not use the excess credit amount against any future withholding tax obligation.
EXAMPLE 5. Assume Partnership A, an investment partnership, consists of equal partners B, C, and D. Partner B is itself an investment partnership, whose partners include resident individuals E and F, and nonresident individual G. Partners C and D are nonresident individuals. In addition, assume that both Partnership A and Partner B are commercially domiciled in Illinois and that neither Partnership A nor Partner B has made the election under IITA Section 201(p) to be subject to PTE tax. For its taxable year ending December 31, 2023, Partnership A's income consists of the following:
|
Dividends |
$500 |
|
Capital gains |
$1,000 |
|
Distributive share income: Business income apportioned to Illinois (305(a)) |
$800 |
|
Nonbusiness dividend income (305(b), 301(c)(2)) |
$100 |
|
Nonbusiness rent income from IL real estate (303) |
$400 |
|
|
$1,300 |
|
Total |
$2,800 |
Partnership A computes withholding tax of $59.40. Tax is computed on the sum of $800 apportioned to Illinois under IITA Section 305(a) and the $400 allocated to Illinois under IITA Section 305(b), multiplied by the 4.95% individual rate of its partners (including Partner B). Partners C and D may not claim credit under IITA Section 709.5(b) for their respective shares of withholding tax.
Partner B, an investment partnership, owes no withholding tax. Although Partner B, but for the provisions of IITA Section 305(c-5), has total income apportioned to Illinois under IITA Section 305(a) and (b) of $400, $133.33 of which is distributable to nonresident individual G, resulting in a withholding tax of $6.60, Partner B is allowed a credit under subsection (f)(3) against its withholding obligation under this Section of $6.60. In addition, resident individuals E and F may each claim a credit under subsection (f)(4) of $6.60 against their liability under IITA Section 201 for their taxable year in which their distributive shares of Partner B's income is included in base income. The credit shall be applied as provided in IITA Section 709.5(b).
EXAMPLE 6. Assume the same facts as in Example 5, except that Partnership A makes the election under IITA Section 201(p) to be subject to PTE tax for its tax year ending December 31, 2023. Making the election does not exempt Partnership A from the requirement to withhold under IITA Section 709.5(d). However, Partnership A may elect to subtract its income subject to withholding in computing its base income under IITA Section 201(p)(3). Therefore, Partnership A's base income for purposes of computing PTE tax is $1,600 ($2,800 - $1,200). If Partner B also makes the election under IITA Section 201(p), it subtracts its distributive share of Partnership A's income in computing its base income under IITA Section 201(p)(3).
EXAMPLE 7. Assume the same facts as in Example 5, except that Partner B is a corporation that is commercially domiciled outside of Illinois. In addition, assume that Partner B makes the election under IITA Section 1501(a)(1) to treat all of its income as business income. Partnership A computes withholding tax of $77.60. Tax is computed on the sum of $800 apportioned to Illinois under IITA Section 305(a) and the $400 allocated to Illinois under IITA Section 305(b), multiplied by the 9.5% rate applicable to Partner B's distributive share and the 4.95% rate applicable to Partners C and D's distributive shares. Partners C and D are not allowed a credit under IITA Section 709.5(b) for their respective shares of withholding tax. Under IITA Section 305(c-5), Partner B's distributive share is treated as business income and apportioned as if Partner B received the income directly (rather than as a distributive share of Partnership A's income). Therefore, Partner B's Illinois net income includes its $267 distributive share of Partnership A's distributive share of business income (one-third of $800). Partner B may treat its $38 share of tax withheld by Partnership A as a credit as provided in IITA Section 709.5(b) and Section 100.7035(d). Partner B's distributive share of Partnership A's other items of income is deemed business income and apportioned using Partner's apportionment factor.
EXAMPLE 8. Assume Partnership A is an investment partnership and has income subject to withholding of $1,000. Investment Partnership A consists of Partner B, who is itself an investment partnership and whose partners include Partner C, a corporation. Investment Partnership A is not required to withhold with respect to Investment Partnership B's share, but if it does withhold at the 4.95% rate, then Investment Partnership B may use that amount as a credit against its own withholding tax liability. In this scenario, Investment Partnership B has income subject to withholding with respect to its distributive share of Investment Partnership A's income subject to withholding. Under IITA Section 709.5(d)(1) and Section 100.3500(b)(3) of this Part, Investment Partnership B has income that would, but for the provisions of IITA Section 305(c-5), be apportioned or allocated under IITA Section 305(a) or (b). Therefore, Investment Partnership B owes withholding tax of 9.5% on Corporate Partner C's distributive share less any credit for the share of withholding tax paid by Investment Partnership A.
(Source: Added at 48 Ill. Reg. 10846, effective July 11, 2024)
Section 100.7035 Nonresident Partners, Subchapter S Corporation Shareholders, and Trust Beneficiaries (IITA Section 709.5)
a) In General. For each taxable year ending on or after December 31, 2008, every pass-through entity must withhold from each nonresident owner an amount equal to the distributive share of that owner under sections 702 and 704 and subchapter S of the Internal Revenue Code, whether or not distributed, of: the business income of the pass-through entity that is apportionable to Illinois plus, for taxable years ending on or after December 31, 2014, the nonbusiness income of the partnership, subchapter S corporation, or trust allocated to Illinois under IITA Section 303 (other than an amount allocated to the commercial domicile of the taxpayer under IITA Section 303), multiplied by the applicable tax rate for that owner under IITA Section 201(a) through (d). For taxable years ending on or after December 31, 2014, the liability for each nonresident owner shall be reduced (but not below zero) by any credit under IITA Article 2 that is distributable by the partnership, subchapter S corporation, or trust to that owner for the taxable year. (See IITA Section 709.5.)
b) Definitions. For purposes of this Section:
1) Certificate of Exemption. A certificate of exemption is a statement made in the form and manner prescribed by the Department that the owner completing the certificate undertakes to:
A) file all returns required to be filed under IITA Section 502;
B) timely pay all tax imposed under IITA Section 201 or required to be withheld under IITA Section 709.5; and
C) submit to the jurisdiction of the State of Illinois for purposes of collecting any amount owed in income tax, interest or penalties. (See IITA Section 709.5.)
2) Owner. The term "owner" of a pass-through entity means a partner in the partnership, a shareholder in the subchapter S corporation or a beneficiary of the trust.
3) Pass-through Entity. The term "pass-through entity" means a partnership (other than a publicly traded partnership under IRC section 7704 or an investment partnership under Section 100.9370), subchapter S corporation or trust.
c) Time for Filing Return and Paying Tax Withheld. A pass-through entity shall report the amounts withheld and the owners from whom the amounts were withheld, and pay over the amounts withheld, no later than the due date (without regard to extensions) of the tax return of the pass-through entity for the taxable year. (See IITA Section 711(a-5).) For purposes of abatement of penalties under UPIA Section 3-8, for taxable years ending on or after December 31, 2014, a pass-through entity shall be deemed to have reasonable cause for not filing the report by the due date required under this subsection if the report is filed no later than the due date under IITA Section 505 (including extensions) of the return of the pass-through entity for the taxable year.
d) Credit for Taxes Withheld. An owner from whom an amount of tax was withheld under subsection (a) with respect to its share of the income of a pass-through entity and paid to the Department is entitled to a credit equal to that amount against its liability under IITA Section 201 for the taxable year in which that business income is included in its base income. (See IITA Section 709.5(b).)
1) If the owner is a pass-through entity, it may claim some or all of that amount as a credit against the amount it is required to withhold from its owners under this Section, in lieu of claiming the credit against its liability under IITA Section 201. (See IITA Section 709.5(b).) Once a return claiming an amount of credit against the owner's liability under this Section or under IITA Section 201 has been filed, the owner may not claim that amount as a credit against any other liability.
2) For purposes of computing penalty and interest on late payment of tax due by an owner, the amount withheld and paid to the Department with respect to that owner is treated as paid no later than the last day of the taxable year of the pass-through entity withholding that amount. (See IITA Section 804(g)(2).)
e) Overpayments. A pass-through entity may not claim a refund or credit for any overpayment of withholding due under subsection (a) with respect to any owner. In addition, an owner has no right of action against the pass-through entity for overpayment of withholding. (See IITA Section 712.) In the case of any overpayment, the remedy is for the owner to file a timely claim for credit or refund for any amount withheld under subsection (a) with respect to it.
f) Underpayments. If a pass-through entity fails to timely pay the full amount of withholding due under this Section:
1) The pass-through entity is relieved of its obligation to pay any amount due with respect to an owner, if the owner has paid its liability under the IITA on the income from which withholding was required. However, the pass-through entity is not relieved of any penalty or interest otherwise applicable with respect to its failure to timely pay the withholding. (See IITA Section 713.)
2) No penalty or interest may be assessed against an owner for failure to timely pay a liability under the IITA (including a liability under this Section), to the extent that failure is the result of the failure of a pass-through entity to withhold and timely pay tax under this Section with respect to income of that owner, except when that pass-through entity's failure to timely pay the tax was caused by the owner and only to the extent the Department has not collected payment of interest or penalties from the pass-through entity with respect to that underpayment.
g) Exemption from withholding.
1) Pass-through entities are not required to withhold tax under this Section from any owner:
A) who is exempt from taxation under IRC section 501(a) or under IITA Section 205;
B) who is included on a composite return filed by the entity for the taxable year under IITA Section 502(f); or
C) who is not an individual and, on the date withholding is required to be reported and paid for a taxable year, the pass-through entity has in its possession a valid certificate of exemption for that owner.
2) No owner has any right of action against a pass-through entity for withholding tax from that owner despite exemption under this subsection (g). (See IITA Section 712.) Instead, the owner must file a timely claim for refund of the withholding.
h) Certificates of Exemption
1) For purposes of this Section, a certificate of exemption is valid if it:
A) is completed using the form prescribed by the Department; and
B) has not been revoked.
2) Recordkeeping. Certificates of Exemption shall be retained by the pass-through entity and made available to the Department in the same manner as other records required to be maintained under IITA Section 501.
3) Revocation. If an owner that has provided a pass-through entity with a Certificate of Exemption fails to timely file a return that reports its share of the income allocated or apportioned to Illinois by the pass-through entity or to timely pay the tax shown due on a return that reports its share of the business income apportioned to Illinois by the pass-through entity, the Department may at any time thereafter revoke the Certificate of Exemption by serving notice upon the pass-through entity at its usual place of business or by mail to the pass-through entity's last-known address. The revocation is effective with respect to all payments and returns of withholding due more than 60 days after the date the notification is issued by the Department. Once a notification has been issued by the Department with respect to a particular owner, the pass-through entity may not treat a Certificate of Exemption from the same owner as valid unless the pass-through entity has been notified by the Department, in writing, that it may again accept a Certificate of Exemption from that owner. Because revocation of a Certificate of Exemption imposes no additional tax liability, but merely affects the timing and method of payment, and no provision is made in the IITA for protest or review of a revocation, neither the owner nor the pass-through entity has any right to protest or seek review by the courts of a revocation.
(Source: Amended at 40 Ill. Reg. 15575, effective November 2, 2016)
Section 100.7036 Withholding of Lottery, Gambling and Sports Wagering Winnings (IITA Section 710)
a) In General
1) Any person making a payment to a resident or nonresident of winnings under the Illinois Lottery Law and not required to withhold Illinois income tax from the payment under IITA Section 701(b) because those winnings are not subject to federal income tax withholding must withhold Illinois income tax from that payment at a rate equal to the percentage tax rate for individuals provided in IITA Section 201(b), provided that withhold is not required if the payment of winnings is less than $1,000. (IITA Section 710(a)(1))
2) In the case of an assignment of a lottery prize under Section 13.1 of the Illinois Lottery Law [20 ILCS 1605], any person making a payment of the purchase price after December 31, 2013 shall withhold from the amount of each payment at a rate equal to the percentage tax rate for individuals provided in IITA Section 201(b). (IITA Section 710(a)(2))
3) Any person making a payment after December 31, 2019 to a resident or nonresident of winnings from pari-mutual wagering conducted at a wagering facility licensed under the Illinois Horse Racing Act of 1975 [230 ILCS 5] or from gambling games conducted on a riverboat or in a casino or organization gaming facility licensed under the Illinois Gambling Act [230 ILCS 10] must withhold Illinois income tax from the payment at a rate equal to the percentage tax rate for individuals provided in IITA Section 201(b), provided that the person making the payment is required to withhold under 26 U.S.C. 3402(q). (IITA Section 710(a)(3)) For more specific information, and precise details regarding actual federal withholding requirements, see 26 U.S.C. 3402(q) and the instructions for U.S. Form 5754 available from the Internal Revenue Service.
4) Any person making a payment after December 31, 2021 to a resident or nonresident of winnings from sports wagering conducted in accordance with the Sports Wagering Act [230 ILCS 45] must withhold Illinois income tax from such payment at a rate equal to the percentage tax rate for individuals provided in subsection (b) of Section 201, provided that the person making the payment is required to withhold under Section 3402(q) of the Internal Revenue Code. (IITA Section 710 (a)(4)). For more specific information, and precise details regarding actual federal withholding requirements, see 26 U.S.C. 3402(q) and the instructions for U.S. Form 5754 available from the Internal Revenue Service.
(Source: Amended at 47 Ill. Reg. 13669, effective September 11, 2023)
Section 100.7040 Employer Registration (IITA Section 701)
Every employer required to deduct and withhold Illinois income tax must register with the Department of Revenue. Each registration application of an employer that has been assigned a federal identification number must contain the employer's federal identification number. If an employer has not been issued a federal employer's identification number, the employer must notify the Department within a reasonable time after its federal employer's identification number has been issued.
(Source: Amended at 32 Ill. Reg. 17492, effective October 24, 2008)
Section 100.7050 Computation of Amount Withheld (IITA Section 702)
a) Amount Withheld. Every employer required to deduct and withhold a tax on compensation paid in Illinois to an individual shall deduct and withhold for each payroll period an amount equal to the tax rate in effect for the date the compensation is paid times the amount by which that individual's compensation exceeds the proportionate part of his or her withholding exemption attributable to the payroll period for which that compensation is payable. "Payroll period" for Illinois withholding purposes shall have the same definition as in 26 USC 3401 and shall include "miscellaneous payroll period" as that term is defined and used in that section and the regulations thereunder.
b) Methods of Computations
1) General Rules. Employers required to withhold Illinois income tax on compensation paid in this State shall compute the amount of tax to be withheld for each payroll period pursuant to the methods and rules provided for withholding on that compensation under the Internal Revenue Code.
2) Direct Percentage Computations
A) An employer may elect a direct percentage computation to determine the amount of withholding utilizing the following allowances per claimed exemption (see Section 100.7150) for the appropriate payroll period. A tax rate in effect for the date the compensation is paid is to be used in the determination of the amount of tax to be withheld. For compensation paid in years prior to 1998, the exemption is:
|
Weekly |
$ 19.23 |
|
Bi-Weekly |
38.46 |
|
Semi-monthly |
41.67 |
|
Monthly |
83.33 |
|
Quarterly |
250.00 |
|
Semi-annually |
500.00 |
|
Annually |
1,000.00 |
|
Daily or Miscellaneous |
2.74 |
For years after 1997, the basic amount of the exemption is changed from $1,000. For those years, the amount of an exemption allocable to a period of less than a year should be taken from the applicable version of Booklet IL-700-T, Illinois Withholding Tax Tables, available from the Department. If the Booklet IL-700-T is not available, these amounts can be computed by multiplying the above amounts by a fraction equal to the amount of exemption allowed for the year divided by $1,000.
B) The steps in computing the amount to be withheld under the percentage method of withholding are as follows:
i) Step 1: Determine the amount of one withholding exemption for the particular payroll period from the preceding table;
ii) Step 2: Multiply the amount determined in Step 1 by the number of exemptions claimed by the employee;
iii) Step 3: Subtract the amount determined in Step 2 from the employee's compensation;
iv) Step 4: Multiply the difference determined in Step 3 by the tax rate in effect for the date the compensation is paid. The result is the amount of tax to be withheld for the particular payroll period.
C) If an employee has claimed no withholding exemptions, either by filing a withholding exemption certificate claiming zero exemptions or by not filing a withholding exemption certificate, the amount to be withheld is the tax rate in effect for the date the compensation is paid times the compensation payable for each payroll period.
3) Tables. An employer may elect to use the withholding tables set out in the Booklet IL-700-T, Illinois Withholding Tax Tables, available from the Department.
4) Other Methods
A) An employer may use any other method for computing the amount of tax to be deducted and withheld for each payroll period that is permitted for withholding for federal income tax purposes.
B) If the method for the computation of the amount of tax to be deducted and withheld for federal income tax purposes required prior approval of the Commissioner of Internal Revenue, then the Department shall be notified of that federal approval by the submission of a copy of the employer's request and the Commissioner's approval.
c) Supplemental Wage Payments. An employee's compensation may consist of wages paid for a payroll period and supplemental wages, such as bonuses, commissions, and overtime pay, paid for the same or a different period or without regard to a particular period. When supplemental wages are paid, the amount of tax required to be withheld shall be determined in accordance with the same methods provided for withholding on those wages under the Internal Revenue Code and the regulations thereunder. However, an employer may elect to compute the amount of tax to be withheld using the tax rate in effect for the date the compensation is paid.
d) Vacation Pay. An amount of so-called "vacation allowances" shall be subject to withholding as though they were regular wage payments made for the period covered by the vacation. If the vacation allowance is paid in addition to the regular wage payment for that period, the allowance shall be treated as a supplemental wage payment.
(Source: Amended at 41 Ill. Reg. 14217, effective November 7, 2017)
Section 100.7060 Additional Withholding (IITA Section 701)
a) General rule. If an employee has other income subject to the Illinois income tax in addition to compensation subject to withholding, he may wish to increase his withholding in order to avoid the necessity of being required to file a declaration of estimated tax. (See IITA Section 801 and the regulations thereunder.) In addition to the tax required to be deducted and withheld in accordance with IITA Section 701, an employer and employee may agree that an additional amount shall be withheld from the employee's wages.
b) Written agreement required. The agreement to withhold an additional amount shall be in writing and shall be in such form as the employer may prescribe. The agreement shall be effective for such period as the employer and employee mutually agree upon. However, unless the agreement provides for an earlier termination, either the employer or the employee, by furnishing a written notice to the other, may terminate the agreement effective with respect to the first payment of wages made on or after the first status determination date (January 1 and July 1 of each year) which occurs at least 30 days after the date on which such notice is furnished.
c) Liability for additional withholding. The amount deducted and withheld pursuant to an agreement between the employer and the employee shall be considered as tax required to be deducted and withheld under IITA Section 701. All provisions of the Act and regulations applicable with respect to the tax required to be deducted and withheld under Article 7 shall be applicable with respect to any amount deducted and withheld pursuant to the agreement.
d) Examples. 86 Ill. Adm. Code 100.7060 may be illustrated by the following examples:
1) Example 1: Taxpayer B, a resident of Illinois, earns a salary of $20,000. He also receives income of $10,000 from his chicken farm in Texas and $8,000 from a gold mine in Alaska. The income from the chicken farm and the gold mine is taxable in Illinois since B is an Illinois resident. If B so desires, he may request his employer to withhold that amount for each payroll period which, for the entire taxable year, would reasonably be expected to approximate his total Illinois income tax liability for that year and would obviate the necessity of having to file an estimated tax declaration.
2) Example 2: A and B, husband and wife, are residents of Illinois and file a joint return. A is employed by F Company, a foreign corporation, and works at F's office located in State X for an annual wage of $15,000. F is not required to deduct and withhold an amount for Illinois tax from A's compensation even though A's compensation is subject to the Illinois income tax. Accordingly, A may be required to file a declaration of estimated tax. B is employed by an Illinois corporation and is paid compensation in Illinois of $10,000 per year. B's compensation is subject to withholding for Illinois income tax. B may enter into an agreement with her employer to withhold an additional amount from her compensation to cover the amount of Illinois tax due on A's compensation. Thus, the withholding on B's compensation when credited against A and B's joint and several tax liability may eliminate the necessity for the filing of any declaration of estimated tax.
Section 100.7070 Voluntary Withholding (IITA Section 701)
Any individual receiving periodic payments may enter into an agreement with the payor to provide for withholding of Illinois income tax on those payments. An agreement under this section between the payor and the individual shall be in writing and shall be governed by the provisions of Section 100.7060(b). The amount of tax to be deducted and withheld from each payment shall be equal to an amount mutually agreed upon in the written agreement or computed using the tax rate in effect for the date the compensation is paid and shall be considered as a tax withheld from compensation for the purposes of IITA Article 6 and Article 7. A payor who has entered into an agreement under this Section shall be considered an employer required to deduct and withhold tax for the purposes of IITA Article 7 and IITA Section 1002 and shall accordingly be required to register as a withholding agent and file the reports and returns required of all employers withholding tax.
(Source: Amended at 41 Ill. Reg. 14217, effective November 7, 2017)
Section 100.7080 Correction of Underwithholding or Overwithholding (IITA Section 701)
a) Underwithholding. If an employer erroneously underwithholds an amount of Illinois income tax required to be deducted and withheld from compensation paid to an employee within a payroll period, he should correct the error within the same calendar year by deducting the difference between the amount withheld and the amount required to be withheld from any compensation still owed the employee, even though such compensation may not be subject to withholding. If the error is discovered in a subsequent calendar year, no correction shall be made by the employer. (See IITA Section 706.)
b) Overwithholding. If an employer erroneously overwithholds an amount of tax required to be deducted and withheld from compensation paid to an employee, repayment of such overwithheld amount shall be made in the same calendar year. Repayment may be made in either of two ways: the amount of overwithholding may be repaid directly to the employee, in which case the employer must obtain written receipt showing the date and amount of the repayment, or the employer may reimburse the employee by applying the overcollection against the tax required to be deducted and withheld on compensation to be paid in the same calendar year in which the overcollection occurred. If the error is discovered in a subsequent calendar year, no repayment shall be made.
c) Cross reference. For effect on reporting and remitting taxes deducted and withheld when there is an erroneous underwithholding or overwithholding, see 86 Ill. Adm. Code 100.7340.
Section 100.7090 Reciprocal Agreement (IITA Section 701)
a) General rule. The Director may enter into an agreement with the taxing authorities of any state which imposes a tax on or measured by income to provide that compensation paid in such state to residents of Illinois shall be exempt from withholding of such tax; in such case, any compensation paid in Illinois to residents of such state shall be exempt from withholding of Illinois income tax. Pursuant to such reciprocal agreements, the employer in Illinois should, upon request by an employee residing in such other state, withhold tax on his compensation for the state of his residence. (See IITA Section 302(b) which provides for agreements exempting compensation of nonresidents from Illinois income tax.)
b) Example. This Section may be illustrated by the following example: A, a resident of State X is employed by X Retail Clothing Store, an Illinois corporation, and works each day in Chicago at X's store as a sales clerk. A's wages are "compensation paid in Illinois" as defined in IITA Section 304(a)(2)(B). However, pursuant to a reciprocal agreement with State X, A's compensation is not subject to withholding under the Illinois Income Tax Act. Accordingly, X Company is not required to withhold Illinois income tax on the compensation paid to A. However, X Company should, at A's request, withhold the State X income tax due on A's compensation pursuant to the State X withholding requirements on compensation paid to State X residents.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.7095 Cross References
See IITA Sections 1002(c) and 1002(d), the UPIA and 86 Ill. Adm. Code 700 for penalties relating to the failure to deduct and withhold a tax as required by IITA Section 701. See 86 Ill. Adm. Code 100.7120 for provisions relating to claiming exemption from withholding pursuant to a reciprocal agreement.
(Source: Amended at 18 Ill. Reg. 1510, effective January 13, 1994)
SUBPART T: AMOUNT EXEMPT FROM WITHHOLDING
Section 100.7100 Withholding Exemption (IITA Section 702)
a) General Rules. An employee is entitled to a withholding exemption equal to the basic amount under IITA Section 204 and Section 100.2055 of this Part multiplied by the number of withholding exemptions to which he or she is entitled for federal income tax withholding purposes plus additional exemptions in the amounts allowed under IITA Section 204 and Section 100.2055. Since the Act does not provide for itemized deductions for individuals in the computation of net income, no additional withholding allowances based on those deductions (as provided under 26 USC 3402(m)) are permitted.
b) Married Employees. A married employee may not claim a withholding exemption for any dependent (as defined in 26 USC 152) unless, if he or she filed a separate federal income tax return, he or she could claim that dependent on that separate return. He or she may claim any withholding exemption to which his or her spouse may be entitled (except for dependents) for federal withholding purposes if the spouse has not claimed that exemption on an Illinois withholding exemption certificate. However, a married employee is not entitled to claim any withholding exemption in respect of a spouse unless they expect to file a joint Illinois income tax return.
c) Examples. Section 100.7100(a) and (b) may be illustrated by the following examples:
1) EXAMPLE 1: A and B are married and intend to file separate federal returns. A and B are residents of Illinois. A, is employed and works for a company in State X. None of the compensation received from his employer is subject to Illinois withholding (see Section 100.7010). B works in Illinois and her salary is subject to Illinois withholding. For federal withholding purposes, A claims no exemption and B claims two exemptions, one for herself and one for her spouse, who has not claimed a withholding exemption for himself on a federal withholding exemption certificate filed with his employer. Under IITA Section 502(c), A and B must file a return in Illinois on a separate basis. B may claim only one withholding exemption for Illinois withholding purposes (i.e., her own exemption) even though she is entitled to claim two exemptions for federal withholding purposes.
2) EXAMPLE 2: Assume the same facts as Example 1, except that A and B have both attained the age of 65. Accordingly, B claims four withholding exemptions for federal purposes. However, for Illinois withholding purposes B may claim only her own two exemptions; one exemption equal to the basic amount for herself and one additional $1,000 exemption for having attained the age of 65.
3) EXAMPLE 3: Assume the same facts as Example 1, except that A and not B claims the two exemptions on a federal withholding exemption certificate. B is entitled to claim one withholding exemption (her own) for Illinois withholding purposes. However, if A and B expect to file a joint federal return and accordingly a joint Illinois return, B may claim two withholding exemptions for Illinois withholding purposes.
4) EXAMPLE 4: Assume the same facts as Example 1, except that A has two dependents who qualify as his dependents under 26 USC 152. Only A may claim these dependents as withholding exemptions for both federal and Illinois purposes.
(Source: Amended at 41 Ill. Reg. 14217, effective November 7, 2017)
Section 100.7110 Withholding Exemption Certificate (IITA Section 702)
a) In general. On or before the date on which an individual commences employment with an employer, the individual shall furnish the employer with a signed Illinois withholding exemption certificate relating to the number of withholding exemptions he or she claims, which in no event shall exceed the number to which he or she is entitled. If an individual has claimed total exemption from federal income tax withholding for the current taxable year under 26 CFR 31.3402(n)-1, i.e., if the individual has furnished his or her employer with a federal exemption certificate stating that he or she incurred no federal income tax liability for the preceding taxable year, and the individual anticipates that he or she will not incur a federal income tax liability for the current taxable year, then the individual may, solely on that basis, claim total exemption from Illinois income tax withholding for the current taxable year on a signed Illinois withholding exemption certificate. If an employee attempts to claim total exemption from withholding on the Illinois certificate but does not simultaneously file or have on file with his or her employer a federal certificate claiming total exemption from federal withholding, or if the employee subsequently files a federal certificate that does not claim total exemption, then the employer shall disregard the Illinois certificate as invalid and shall withhold Illinois income tax at the full rate from the employee's total compensation until a valid certificate is furnished by the employee. The employer is required to request a withholding exemption certificate from each employee, but if the employee fails to furnish the certificate, the employee shall be considered as claiming no withholding exemptions. If the employee is a resident of a state with which Illinois has entered into a reciprocal agreement, he or she may file an IL-W-5, Employee's Statement of Non-Residence in Illinois, to claim an exemption from Illinois withholding. See 86 Ill. Adm. Code 100.7120.
b) Form and content. Form IL-W-4, Employee's Illinois Withholding Exemption Certificate, is the form prescribed for the certificate required to be filed under this Section. A withholding exemption certificate on Form IL-W-4 shall be prepared in accordance with the instructions applicable to that form, and shall set forth fully and clearly the data required in the form. An alteration of or unauthorized addition to a withholding exemption certificate shall cause the certificate to be invalid. An alteration of a withholding exemption certificate is any deletion of the language by which the employee certifies or affirms the correctness of the completed certificate, or any material defacing the certificate. An unauthorized addition to a withholding exemption certificate is any writing on the certificate other than the entries requested (e.g., name, address, and number of exemptions claimed). Form IL-W-4 will be supplied to employers upon request to the Department. In lieu of the prescribed form of certificate, employers may prepare and use a written form the provisions of which are identical to those of the prescribed form. Alternatively, an employer may use any software application that will allow employees to prepare the IL-W-4 electronically, provided that any such electronic system meets the requirements of 26 CFR 31.3402(f)(5)-1(c) and requires the production and retention of the same information required on the written Form IL-W-4.
c) Change in status that affects the current calendar year.
1) Decrease in the number of exemptions.
A) Employee notification. If, on any day during the calendar year, the number of withholding exemptions to which an employee is entitled is less than the number of withholding exemptions claimed on a withholding certificate then in effect, the employee must, within 10 days after the change occurs, furnish the employer with a new Illinois withholding exemption certificate relating to the number of withholding exemptions the employee then claims, which must in no event exceed the number to which the employee is entitled on the day the form is submitted.
B) Internal Revenue Service notification. If an employer receives a notice from the Internal Revenue Service relative to a particular employee's withholding exemption certificate that necessitates the employer disregarding an employee's claim to total exemption or to the full amount of exemptions shown on the Form W-4 under 26 CFR 31.3402(f)(2)-1(g) or 31.3402(f)(2)-1T(g), then the employer shall withhold Illinois income tax from the employee as follows:
i) if the employee's Form IL-W-4 claims total exemption from Illinois withholding, on the basis of the maximum number of exemptions specified by the Internal Revenue Service in the notice; or
ii) if the employee's Form IL-W-4 claims a certain number of exemptions, on the basis of the number of exemptions claimed by the employee or on the basis of the maximum number of exemptions specified by the Internal Revenue Service in the notice, whichever is less.
2) Increase in the number of exemptions. If, on any day during the calendar year, the number of withholding exemptions to which an employee is entitled is more than the number of withholding exemptions claimed on the withholding exemption certificate then in effect, the employee may furnish the employer with a new Illinois withholding exemption certificate on which the employee must in no event claim more than the number of withholding exemptions to which he or she is entitled on that day.
3) Change in circumstances relative to a total exemption from Illinois income tax withholding.
A) Change entitling the employee to a total exemption. If, on any day during the calendar year, the employee furnishes his or her employer with a new federal withholding exemption certificate for the current taxable year claiming total exemption from federal income tax withholding under 26 CFR 31.3402(n)-1, then the employee may also furnish the employer with a new Illinois withholding exemption certificate claiming total exemption from Illinois income tax withholding for the current taxable year.
B) Change depriving the employee of a total exemption. If, on any day during the calendar year, the employee furnishes his or her employer with a new federal withholding exemption certificate withdrawing his or her claim of total exemption for federal income tax withholding for the current taxable year under 26 CFR 31.3402(n)-1, then the employee must simultaneously furnish the employer with a new Illinois withholding exemption certificate specifying the number of withholding exemptions he or she claims.
d) Change in status that affects next calendar year.
1) Increase or decrease in the number of exemptions. If, on any day during the calendar year, the number of withholding exemptions to which the employee will be, or may reasonably be expected to be, entitled to for the taxable year that begins in, or with, the next calendar year is different from the number to which the employee is entitled on that day, the following shall apply:
A) If the number is less than the number of withholding exemptions claimed by the employee on an Illinois withholding exemption certificate in effect on that day, the employee must, on or before December 1 of the year in which the change occurs, unless the change occurs in December, furnish his or her employer with a new withholding exemption certificate reflecting the decrease. If the change occurs in December, the new certificate must be furnished within 10 days after the change occurs.
B) If the number is greater than the number of withholding exemptions claimed by the employee on an Illinois withholding exemption certificate in effect on that day, the employee may, on or before December 1 of the year in which the change occurs, unless the change occurs in December, furnish his or her employer with a new withholding exemption certificate reflecting the increase. If the change occurs in December, the certificate may be furnished on or after the date on which the change occurs.
2) Change in circumstances relative to the total exemption. If an employee, having in effect a federal withholding exemption certificate claiming total exemption from federal income withholding, furnishes his or her employer with a new federal withholding exemption certificate stating a specific number of withholding exemptions for the taxable year beginning with or including the following January 1, then the employee must also have on file with the employer, not later than the date on which the new federal withholding exemption certificate was submitted, an Illinois withholding exemption certificate stating a specific number of Illinois withholding exemptions not to exceed the total number to which the employee is entitled under IITA Section 702 and Section 100.7100 of this Part.
e) Annual determination. On or before December 1 of each year, those employees whose Illinois withholding exemption will change in the succeeding year should file a new Illinois withholding exemption certificate (IL-W-4) reflecting the change.
f) Effective date of exemption certificate. An Illinois withholding exemption certificate furnished an employer, when no previous certificate is in effect for the employee, shall take effect as of the beginning of the first payroll period ending, or the first payment of compensation without regard to a payroll period, on or after the date on which the certificate is so furnished. In any case in which an Illinois withholding exemption certificate is in effect for an employee, the furnishing of a new withholding exemption certificate shall take effect with respect to the first payment of compensation made on or after the first status determination date (January 1, May 1, July 1 and October 1 of each year) that occurs at least 30 days after the date on which the new certificate is furnished. However, at the election of the employer, except for Illinois withholding exemption certificates provided under subsection (d) of this Section, the certificate may be effective with respect to any earlier payment of compensation made after the certificate is furnished.
g) Period during which withholding exemption certificate remains in effect.
1) Certificates claiming total exemption. An Illinois withholding exemption certificate that claims total exemption from Illinois income tax withholding remains in effect for the same period as the federal withholding exemption certificate on which it is based. This period is defined in 26 CFR 31.3402(f)(4)-1(c).
2) Certificates claiming a specific number of withholding exemptions. An Illinois withholding exemption certificate that claims a specific number of withholding exemptions and that is in effect pursuant to this Section shall continue in effect until another withholding exemption certificate takes effect.
h) Employer referral of certain Illinois withholding exemption certificates to the Department.
1) When required.
A) Any Illinois withholding exemption certificate meeting all of the following criteria must be referred by the employer to whom it is submitted to the Department of Revenue not later than the day on which the next quarterly return of withholding is due. The criteria for referral are:
i) that the certificate claims more withholding exemptions than the simultaneously effective federal withholding certificate;
ii) that the certificate claims in excess of 14 exemptions; and
iii) that the employer has no obligation to submit a simultaneously effective federal certificate to the Internal Revenue Service under 26 CFR 31.3402(f)(2)-1(g).
B) In addition to the foregoing, an Illinois withholding certificate must be referred by the employer to the Department of Revenue as directed in a written notice to the employer from the Department or as directed in published guidance. A notice to the employer may relate either to one or more named employees; to one or more reasonably segregable units of the employer; or to withholding exemptions under certain specified criteria. Employers may also be required to submit copies of withholding exemption certificates under certain specified criteria when directed to do so by the Department in published guidance. "Published guidance," in this case, includes but is not limited to Department of Revenue bulletins, circulars, publications and form instructions.
C) Referral under this subsection (h) shall be accomplished by mailing or delivering a copy of the certificate to be referred to:
Illinois Department of Revenue
Taxpayer Correspondence Section
Post Office Box 4565
Springfield, Illinois 62708
Alternatively, upon notice from the Department, the employer must make withholding exemption certificates received from one or more named employees, from one or more reasonably segregable units of the employer, or from employees who have furnished withholding exemption certificates under certain specified criteria available for inspection by a Department employee (e.g., a compliance check).
2) Results of referral.
A) The withholding exemption certificate remains effective even though it has been referred to the Department under this subsection (h), unless and until the Department notifies the employer in writing:
i) that the certificate claims exemptions in excess of the number to which the employee is entitled, in which case the notice shall specify either the number of exemptions to which the employee is entitled if that number can be determined or, if that number cannot be determined, that the employee is not entitled to any exemptions; or
ii) that the Department has attempted to verify the certificate by correspondence with the employee but has been unsuccessful, in which case the employer shall withhold Illinois income tax from the employee as though no certificate were on file, i.e., as though the employee claimed no exemptions.
B) As part of this notice, the Department may advise the employer of the reasons why it has determined that the certificate should not be effective.
3) Employer's action in response to the Department's notice rendering a certificate ineffective. The employer shall promptly furnish the employee who files the certificate, if still in his or her employ, with a copy of the written notice received from the Department under subsection (h)(2) relative to the certificate. The employer shall withhold amounts from the employee on the basis of the maximum number of exemptions specified in the notice. If the employee files a new certificate after the employer has received the notice relative to an earlier referred certificate, the employer shall withhold on the basis of that new certificate only if it does not claim a number of exemptions in excess of the maximum number specified in the notice. The employer shall disregard any new certificate from the employee that does claim exemptions in excess of the maximum number specified in the notice. The employer shall not submit such a new certificate to the Department under this subsection (h) and the employer shall continue to withhold amounts from the employee on the basis of the maximum number of exemptions specified in the notice. However, the employee may detail, in a written statement attached to the new certificate, any circumstances of the employee that have changed since the date of the Department's notice and that justify or support the number of exemptions claimed by the employee on the new certificate. The employee may then submit that new certificate and written statement either to the Department at the address indicated in subsection (h)(1)(C), or to the employer who must then promptly submit a copy of the new certificate and the attached written statement to the Department at the address indicated in subsection (h)(1)(C). Even though the employer has submitted the new certificate to the Department, the employer shall continue to disregard the new certificate and shall continue to withhold amounts from the employee on the basis of the maximum number of exemptions specified in the notice unless and until the Department, by a second written notice, advises the employer to withhold on the basis of the new certificate.
(Source: Amended at 31 Ill. Reg. 16240, effective November 26, 2007)
Section 100.7120 Exempt Withholding Under Reciprocal Agreements (IITA Section 702)
a) In general. Employees who are residents of a state with which a reciprocal agreement is in effect exempting residents of that state from withholding of Illinois tax on compensation paid in Illinois must file a signed certificate of their residency in order to receive the benefit of the exemption.
b) Form of residency certificate. Form IL-W-5-NR, Employee's Statement of Non-Residence in Illinois, is the form prescribed for the certificate required to be filed under this Section. The certificate shall be prepared in accordance with the instructions, and shall set forth fully and clearly the required data. Form IL-W-5-NR will be supplied to employers upon request to the Department. In lieu of the prescribed form of certificate, employers may prepare and use a form that contains the same information required in the prescribed form and, if not maintained in hardcopy, that meets the requirements of 86 Ill. Adm. Code 100.9530(d).
c) Change in residency. An employee must notify his or her employer and file a new residency certificate or Illinois withholding exemption certificate, whichever is applicable, within ten days after his or her state of residency changes from the one named on the certificate.
d) Annual determination: effective date; duration of residency certificate. A certificate described under this Section shall be subject to the same rules applicable to a withholding exemption certificate under Section 100.7110(e), (f) and (g).
(Source: Amended at 33 Ill. Reg. 2306, effective January 23, 2009)
SUBPART U: INFORMATION STATEMENT
Section 100.7200 Reports For Employee (IITA Section 703)
a) In general. Every employer required to deduct and withhold tax under the Act from compensation of an employee, or who would have been required to deduct and withhold tax if the employee's properly claimed withholding exemption had not been in excess of compensation subject to withholding, must furnish to each such employee with respect to the compensation paid in Illinois by such employer during the calendar year, a statement in duplicate containing the following information:
1) The name, address and federal employer identification number of the employer;
2) The name, address and social security number of the employee;
3) The total amount of compensation paid in Illinois;
4) The total amount deducted and withheld as tax under IITA Section 701.
b) Form of statement. The information required to be furnished an employee under the preceding paragraph shall be furnished on an Internal Revenue Service combined Wage and Tax Statement, Form W-2, W-2g or 1099-R, hereinafter referred to as "combined W-2". Any reproduction, modification or substitution for a combined W-2 by the employer must be approved by the Department.
c) Time for furnishing statement.
1) In general. Each statement required by this section to be furnished for a calendar year, and each corrected statement required for any prior year shall be furnished to the employee on or before January 31 of the year succeeding such calendar year, or if an employee's employment is terminated before the close of a calendar year, without expectation that it will resume during the same calendar year, within 30 days from the day on which the last payment of compensation is made.
2) Extension of time. An extension of time, not exceeding 30 days, for furnishing the statements required by this section will be granted without request upon the granting of a similar extension by the Internal Revenue Service or by regulation under the Internal Revenue Code. Any extension of time granted by reason of an extension by the Internal Revenue Service shall be substantiated by the employer maintaining a copy of such federal extension for inspection by the Department.
d) Corrections. An employer must furnish a corrected combined W-2 to an employee if, after the original statement has been furnished, an error is discovered in either the amount of compensation shown to have been paid in Illinois for the prior year or the amount of tax shown to have been deducted and withheld in the prior year. Such statement shall be marked "corrected by the employer".
e) Undelivered combined W-2. Any employee's copy of the combined W-2 which, after reasonable effort, cannot be delivered to an employee, shall be retained by the employer for a period of three years from the date required by subsection (c)(1) above for furnishing the statement to the employee.
f) Lost or destroyed. If the combined W-2 is lost or destroyed, the employer shall furnish two substitute copies to the employee and retain one copy which shall be made available to the Department upon written request. All such copies shall be clearly marked "Reissued by Employer".
g) See Section 100.7300 below for rules concerning the recordkeeping requirements of employers.
(Source: Amended at 19 Ill. Reg. 1839, effective February 6, 1995)
SUBPART V: EMPLOYER'S RETURN AND PAYMENT OF TAX WITHHELD
Section 100.7300 Returns and Payments of Income Tax Withheld from Wages (IITA Sections 704 and 704A)
a) Quarterly Returns. Except as otherwise provided in Section 100.7310 or 100.7350, every employer required to deduct and withhold tax on compensation paid in Illinois shall make a return for the first calendar quarter in which the tax is deducted and withheld and for each subsequent calendar quarter (whether or not compensation is paid in that quarter) until a final return is filed. (See IITA Sections 704(c) and 704A(b).) Each return required under this subsection must be made in the form and manner required by the Department. (IITA Sections 704(b) and 704A(b)) With respect to taxes withheld in 2017 and subsequent calendar years, the Department may, by rule, provide that any return (including any amended return) and any W-2 Form due under this Section must be submitted on magnetic media or electronically. (IITA Section 704A(f)) The due date for submitting W-2 Forms shall be as prescribed by the Department by rule. (IITA Section 704A(f))
1) For calendar years after 2009 and prior to 2017, payroll providers who withhold Illinois income tax for employers during the year and who are required to file federal withholding returns on magnetic media under 26 CFR 301.6011-2 shall file returns due under this subsection (a) with the Department using the same magnetic media used for their federal filing.
2) For calendar years after 2016, all employers shall file returns due under this subsection (a) with the Department electronically or using the same magnetic media used for their federal filing, provided that, upon petition by an employer, the Department may waive this requirement if the employer demonstrates that it does not have access to the Internet.
3) All other returns required under this subsection (a) may be filed with the Department at the address provided on the Form IL-941, Illinois Quarterly Withholding Income Tax Return, or its instructions.
b) Filing and Retention of Copies of Combined W-2
1) For Calendar Years Prior to 2008
A) Every employer required under this Section or Section 100.7310 or 100.7350 to make a return of tax withheld from compensation for a period ending December 31, or for any period for which a return is made as a final return, shall retain a copy of each wage and tax statement on the combined W-2 required under Section 100.7200 to be furnished by the employer with respect to compensation paid during the calendar year. For calendar years prior to 2008, every employer shall maintain copies of the combined W-2 forms for three years from the due date of the IL-W-3 for that period. For each calendar year after 2007, every employer shall maintain copies of the combined W-2 forms until January 31 of the fourth year following that calendar year. If the Department makes a written request for copies of the combined W-2 forms, the copies shall be forwarded to the Department within 30 days after the written request.
B) If an employer issues a corrected copy of a combined W-2 to an employee for a prior calendar year (see Section 100.7200(d) above), a copy shall be retained for a period of four years from the date fixed for filing the employer's return of tax withheld for the period ending December 31 of the year in which the correction is made, or for any period in the year for which the return is made as a final return. A statement explaining the corrections shall also be retained and, if the Department requests, a copy of the corrected W-2 shall be submitted within 30 days after the written request.
C) Each year, the Department will contact a sample of Illinois employers and require those employers to provide copies of their employee W-2s. Employers chosen by the Department will be required to file W-2s in the same manner they are required to file W-2s federally.
i) Employers with more than 250 employees in the State of Illinois will be required to provide the W-2s on magnetic tape, diskette, or cartridge meeting the specifications required by the Social Security Administration (see 26 CFR 301.6011-2).
ii) All other employers may provide the W-2s on magnetic media or paper.
D) An extension of time for providing statements requested by the Department shall be granted upon a showing of good cause.
2) W-2s Filed Electronically or on Magnetic Media
A) The following persons shall file copies of the W-2s with the Department electronically or using the same magnetic media used for their federal filing:
i) for calendar years after 2007 and prior to 2017, payroll providers who withhold Illinois income tax for employers during the year and who are required to file copies of the W-2s on magnetic media under 26 CFR 301.6011-2;
ii) for calendar years after 2008 and prior to 2017, all employers who are required to file copies of the W-2s on magnetic media under 26 CFR 301.6011-2; and
iii) for calendar years after 2016, all employers and payroll providers who withhold Illinois income tax for employers, provided that, upon petition by an employer or payroll provider, the Department may waive the magnetic media filing requirement if the employer or payroll provider demonstrates that it does not have access to the Internet.
B) For calendar years prior to 2014, the copies of W-2s shall be filed no later than March 31 of the year following the year of the withholding, unless a later due date is prescribed under federal law for filing the copies of the W-2s, in which case filing of copies with the Department is due on the same date. For calendar years after 2013 and prior to 2017, the copies of W-2s shall be filed no later than February 15 of the year following the year of the withholding. For calendar years after 2016, the copies of W-2s shall be filed no later than January 31 of the year following the year of the withholding.
C) For all calendar years, if the IRS has granted an extension of time to file a federal information return that would otherwise be due from the employer on the due date for filing under this subsection (b)(2) because of natural disaster under IRC section 7508A, an employer who files copies of its W-2s on or before the extended due date of the federal information return is deemed to have reasonable cause for the late filing. (See IITA Sections 704(f) and 704A(f).)
3) For calendar years after 2007, with respect to copies of W-2s other than those filed electronically or on magnetic media:
A) Every employer required under this Section or Section 100.7310 or 100.7350 to make a return of tax withheld from compensation for a period ending December 31, or for any period for which a return is made as a final return, shall retain a copy of each wage and tax statement on the combined W-2 required under Section 100.7200 to be furnished by the employer with respect to compensation paid during the calendar year. Every employer shall maintain copies of the combined W-2 forms until January 31 of the fourth year following that calendar year. If the Department makes a written request for copies of the combined W-2 forms, the copies shall be forwarded to the Department within 30 days after the written request.
B) If an employer issues a corrected copy of a combined W-2 to an employee for a prior calendar year (see Section 100.7200(d)), a copy shall be retained for a period of four years from the date fixed for filing the employer's return of tax withheld for the period ending December 31 of the year in which the correction is made, or for any period in the year for which the return is made as a final return. A statement explaining the corrections shall also be retained and, if the Department requests, a copy of the corrected W-2 shall be submitted within 30 days after the written request.
C) Each year, the Department will contact a sample of Illinois employers and require those employers to provide copies of their employee W-2s.
D) An extension of time for providing statements requested by the Department shall be granted upon a showing of good cause.
c) Payments of amounts withheld prior to January 1, 2008. Except as otherwise provided in Section 100.7310 or 100.7350, with respect to amounts withheld or required to be withheld prior to January 1, 2008:
1) Quarter-monthly tax payments. Every employer required to file a quarterly return under subsection (a) shall also file a quarter-monthly tax payment form if the amount of tax deducted and withheld during any quarter-monthly period plus the amount previously withheld and not remitted to the Department exceeds $1,000. An employer need not file a quarter-monthly form if no quarter-monthly payment is due. Certain taxpayers with tax liabilities exceeding statutory thresholds are required to pay their tax liabilities by electronic funds transfer. 86 Ill. Adm. Code 750 sets forth the rules of the Department concerning payment of taxes by electronic funds transfer, as well as the statutory payment thresholds.
2) Monthly tax payments. Every employer required to file a quarterly return under subsection (a) shall also file a monthly tax payment form if the amount of tax deducted and withheld during any calendar month plus the amount previously withheld and not remitted to this Department exceeds $500 including amounts previously withheld and not remitted to the Department, but does not exceed $1,000. An employer need not file a monthly form if no monthly payment is due. No monthly form is required for the third month in any calendar quarter. The information otherwise required to be reported on the monthly form for the third month in a calendar quarter shall be reported on the quarterly return filed for that quarter and no monthly form need be filed for that month.
d) Payments of amounts withheld on or after January 1, 2008. Except as provided in Section 100.7310 or 100.7350, with respect to amounts withheld or required to be withheld on or after January 1, 2008:
1) Semi-Weekly Tax Payments
A) An employer who withheld or was required to withhold more than $12,000 during the look-back period for a calendar year must make semi-weekly payments for the entire calendar year.
B) An employer who withholds or is required to withhold more than $12,000 in any quarter of a calendar year is required to make semi‑weekly payments of amounts withheld or required to be withheld during each remaining quarter of that calendar year and for the subsequent calendar year. (See IITA Section 704A(c)(1).)
2) Monthly tax payments. An employer who is not required to make semi‑weekly payments shall make monthly payments of taxes withheld or required to be withheld. (See IITA Section 704A(c)(3).)
(Source: Amended at 42 Ill. Reg. 6451, effective March 21, 2018)
Section 100.7310 Returns Filed and Payments Made on Annual Basis (IITA Sections 704 and 704A)
a) With respect to taxes withheld or required to be withheld prior to January 1, 2008:
1) In general. Effective January 1, 2005, if an employer had no obligation to deduct and withhold Illinois income tax in the previous calendar year or if the amount of tax deducted and withheld during the previous calendar year was less than $500 and, in either case, the amount that will be deducted and withheld in the current calendar year will be less than $500, the employer may file an annual return for the current calendar year or for any period for which a return is made as a final return. No application need be made to file an annual return. The return filed for such period shall report the amount of tax deducted and withheld during the period and not previously remitted. Form IL-941 is prescribed for making the return authorized under this subsection (a). An employer shall use Form W-3 to submit the information contained on the combined Form W-2, in the same manner as required under Section 100.7300.
2) Duration of annual filing status. Authority to file a return pursuant to this Section shall remain in effect until that time during any calendar year when the amount of tax deducted and withheld equals or exceeds $500. When, during any calendar year, the amount deducted and withheld equals or exceeds $500, an employer must file a quarterly return, as required under Section 100.7300(a), for the quarter in which that event occurs and for all subsequent quarters until the requirements of subsection (a)(1) are again met by the employer.
b) With respect to any calendar year beginning on or after January 1, 2008 and ending prior to January 1, 2012:
1) An
employer who has timely filed all returns due under IITA Sections 704 or 704A
during the look-back period for a calendar year, reporting on those returns a
total liability of $1,000 or less, and who timely paid the amounts reported,
may file a single annual return for that calendar year and pay the tax required
to be withheld during that calendar year when that return is due. An employer
who was not required to file returns during the look-back period is not
eligible under this subsection (b)(1) to make annual filings or payments. (See IITA
Section 704A(d)(1).)
2) Any employer that is eligible to make an annual filing and payment for a calendar year under subsection (b)(1) and who withholds or is required to withhold more than $12,000 in any quarter of that year must:
A) make a quarterly return for that quarter, reporting and paying all amounts withheld or required to be withheld during the year through the end of that quarter with that return;
B) make a quarterly return for each subsequent quarter of that calendar year and for each quarter of the following calendar year; and
C) make semi-weekly payments of taxes withheld or required to be withheld during the remaining quarters of that calendar year and during the following calendar year. (See IITA Section 704A(c)(2).)
3) An employer that is eligible to make an annual filing and payment under subsection (b)(1) for any calendar year after 2008 may elect to file quarterly returns under Section 100.7300(a) and make monthly payments under Section 100.7300(d)(2) by filing a return for any quarter of that year. Payment of all amounts withheld or required to be withheld through the end of that quarter shall be due with the filing of that return, and the employer shall be required to make monthly payments and quarterly returns for the remainder of that year, unless Section 100.7300(d)(1)(B) requires semi-weekly payments.
c) With respect to any calendar year beginning on or after January 1, 2012 and ending prior to January 1, 2017:
1) An employer who has timely filed all returns due under IITA Section 704A during the look-back period for a calendar year, reporting on those returns a total liability of $12,000 or less, and who timely paid the amounts reported, may file a single annual return for that calendar year. An employer who was not required to file returns during the look-back period is not eligible under this subsection (c)(1) to make annual filings. (See IITA Section 704A(d)(1).)
2) An
employer who is allowed to file an annual return for a calendar year under
subsection (c)(1) and who reported a total liability of $1,000 or less on
returns filed during the look-back period for that year may pay the tax
required to be withheld during that calendar year when that return is due.
(See IITA Section 704A(d)(1).)
3) Any employer who is eligible to make an annual filing for a calendar year under subsection (c)(1) and who withholds or is required to withhold more than $12,000 in any quarter of that year must:
A) make a quarterly return for that quarter, reporting and paying all amounts withheld or required to be withheld during the year through the end of that quarter with that return;
B) make a quarterly return for each subsequent quarter of that calendar year and for each quarter of the following calendar year; and
C) make semi-weekly payments of taxes withheld or required to be withheld during the remaining quarters of that calendar year and during the following calendar year. (See IITA Section 704A(c)(2).)
4) An employer who is eligible to make an annual filing under subsection (c)(1) for any calendar year after 2011 may elect to file quarterly returns under Section 100.7300(a) by filing a return for any quarter of that year. Payment of all amounts withheld or required to be withheld through the end of that quarter shall be due with the filing of that return, and the employer shall be required to make monthly payments and file quarterly returns for the remainder of that year, unless Section 100.7300(d)(1)(B) requires semi-weekly payments.
5) An employer who is eligible to make an annual payment under subsection (c)(2) for any calendar year after 2011 may make payments during that calendar year and, unless an election to file quarterly returns is made under subsection (c)(4) for that year, file an annual return for that year.
d) With respect to any calendar year beginning on or after January 1, 2017, no annual filings or payments made on an annual basis are permitted, except as provided in Section 100.7350.
(Source: Amended at 41 Ill. Reg. 4193, effective March 27, 2017)
Section 100.7320 Time for Filing Returns and Making Payments for Taxes Required to Be Withheld Prior to January 1, 2008 (IITA Section 704)
a) Quarterly return. Each return required under Section 100.7300(a) shall be filed on or before the last day of the first calendar month following the calendar quarter for which the return is made.
b) Quarter-monthly tax payments. Quarter-monthly periods end on the 7th, 15th, 22nd, and last day of each month. Quarter-monthly forms required under Section 100.7300(c)(1) shall be filed on or before the third banking day following the close of the quarter-monthly period. Whenever a quarter-monthly payment is due that includes amounts withheld in a prior calendar quarter, separate quarter-monthly forms must be submitted. See the note in the example in subsection (d).
c) Monthly tax payments. Monthly returns and payments required by Section 100.7300(c)(2) shall be made on or before the 15th day of the second and third months of each calendar quarter for amounts withheld during the first and second months of the quarter, respectively, and on or before the due date prescribed in subsection (a) for filing the return for the quarter for amounts withheld during the third month of the quarter. (See IITA Section 704(c).)
d) Example. The provisions of this Section with respect to taxes required to be withheld prior to January 1, 2008 can be partially illustrated as follows:
|
Withholding Period |
Amount Withheld |
Amount of Payment/Due Date |
|
|
|
|
|
Feb. 1-7 |
$ 900 |
Add to next period |
|
Feb. 8-15 |
900 |
$1,800 by Feb. 18* |
|
Feb. 16-22 |
1,010 |
$1,010 by Feb. 25* |
|
Feb. 23-28 |
900 |
Add to next period |
|
Mar. 1-7 |
0 |
$900 by Mar. 15* |
|
Mar. 8-15 |
600 |
Add to next period |
|
Mar. 16-22 |
600 |
$1,200 by Mar. 25* |
|
Mar. 23-31 |
400 |
Add to next period |
|
Apr. 1-7 |
800 |
$1,200 by Apr. 10* |
|
|
|
NOTE: separate IL-501s must be used; one to report the $400 withheld for the last quarter-monthly period of March, and the other to report the $800 withheld for the first quarter-monthly period of April. |
|
Apr. 8-15 |
700 |
Add to next period |
|
Apr. 16-22 |
200 |
Add to next period |
|
April 23-30** |
0 |
$900 to next period |
|
May 1-7 |
110 |
$1,010 by May 10* |
|
|
||
|
* With Form IL-501 (employee withholding). |
||
|
** Form IL-941 (employee withholding) due April 30. |
||
e) Extension of time for filing returns. An extension of time for filing the statements and returns required to be filed under this subsection shall be granted upon approval of a similar extension granted by the Internal Revenue Service (but in no event to exceed six months) for filing the federal statements. The extension shall be for the same period as granted by the Internal Revenue Service and shall be granted by the Department upon submission of a copy of the federal application and approval of an extension.
(Source: Amended at 32 Ill. Reg. 17492, effective October 24, 2008)
Section 100.7325 Time for Filing Returns and Making Payments for Taxes Required to Be Withheld On or After January 1, 2008 (IITA Section 704A)
a) Quarterly return. Each return required under Section 100.7300(a) shall be filed on or before the last day of the first calendar month following the calendar quarter for which the return is made. (See IITA Section 704A(b).)
b) Monthly payments. Monthly payments required under Section 100.7300(d)(2) are due on or before the 15th day of the month following the month in which the tax was withheld or required to be withheld. (See IITA Section 704A(c)(3).)
c) Semi-weekly payments.
1) Semi-weekly payments required under Section 100.7300(d)(1) or 100.7310(b)(2)(B) are due:
A) on or before each Friday of the calendar year, for taxes withheld or required to be withheld on the immediately preceding Saturday, Sunday, Monday or Tuesday;
B) on or before each Wednesday of the calendar year, for taxes withheld or required to be withheld on the immediately preceding Wednesday, Thursday or Friday. (See IITA Section 704A(c)(1).)
2) If a payment due on a Friday or Wednesday under this subsection (c) would include amounts withheld in two different quarters, a separate payment must be made for the amounts withheld in each quarter.
3) Under 26 CFR 31.6302-1(c)(2)(iii), semi-weekly depositors are given at least three banking days following the close of the semi-weekly period by which to deposit taxes during the semi-weekly period. Thus, if any of the three weekdays following the close of a semi-weekly period is a holiday on which banks are closed, the employer has an additional banking day by which to make the required deposit. For example, if the Monday following the close of a Wednesday to Friday semi-weekly period is a holiday on which banks are closed, the required deposit for the semi-weekly period may be made by the following Thursday rather than the following Wednesday. Under IITA Section 704A(d)(2), the Department may provide by regulation that any payment due under this subsection (c) is deemed to be timely to the extent paid by electronic funds transfer on or before the due date for deposit of federal income taxes withheld from, or federal employment taxes due with respect to, the wages from which the Illinois taxes were withheld. Accordingly, employers making electronic payments of taxes withheld may use the due dates prescribed in 26 CFR 31.6302-1(c)(2)(iii).
4) Beginning with calendar year 2011, semi-weekly payments required under Section 100.7300(d)(1) must be made by electronic funds transfer. (IITA Section 704A(c)(1))
d) Annual returns. Annual returns are due on or before:
1) January 31 of the year following the calendar year for which the return is made, in the case of an annual return under Section 100.7310(b)(1) (See IITA Section 704A(d)(1).); or
2) the 15th day of the 4th month following the close of the taxpayer's tax year, in the case of an annual return under Section 100.7350. (See IITA Section 704A(e).)
3) Except as provided in Section 100.7350, annual filings are not permitted for calendar years beginning on or after January 1, 2017.
(Source: Amended at 41 Ill. Reg. 4193, effective March 27, 2017)
Section 100.7330 Payment of Tax Required to be Shown Due on a Return (IITA Sections 704 and 704A)
The amount of tax required to be shown to be due on each return required to be filed under IITA Section 704 or 704A shall be due on or before the date on which the return is required to be filed, except to the extent that amount has been paid to the Department pursuant to a provision requiring payment prior to that date.
(Source: Amended at 32 Ill. Reg. 17492, effective October 24, 2008)
Section 100.7340 Correction of Underwithholding or Overwithholding (IITA Section 704)
a) Underwithholding. If, as a result of underwithholding, a return is filed for a return period under this section and less than the correct amount of tax required to be deducted and withheld is reported on the return and paid to the Department, the employer shall report and pay the additional amount due by reason of the underwithholding on a return for any period in the calendar year in which the underwithholding occurred. An explanation must be attached to the return for the period in which the undercollection is corrected.
b) Overwithholding. If an employer deducts and withholds more than the correct amount of tax for a return period under this section and does not repay the overcollection before the time for filing the required return for the period and before the end of the calendar year, he must include the overcollection on the return required to be filed for the period in which the overcollection occurred. If the overwithholding is discovered in a subsequent return period under this section and within the same calendar year of the overwithholding, the employer may correct the error on a return to be filed for a period within the same calendar year if the amount of the overcollection is repaid during that period. An explanation must be attached to the return on which the error is corrected. Any repayment of an amount of overwithholding must be substantiated by a receipt from the employee showing the date and amount of repayment and kept as a part of the employer's records. (See 86 Ill. Adm. Code 100.7080(b) for methods of repayment.)
Section 100.7350 Domestic Service Employment (IITA Sections 704 and 704A)
a) On and after January 1, 1998, every employer who deducts and withholds or is required to deduct and withhold tax from a person engaged in domestic service employment, as that term is defined in IRC section 3510, may comply with the payment and reporting requirements of IITA Section 704 by filing an annual return and paying the taxes required to be deducted and withheld on or before the 15th day of the fourth month following the close of the employer's taxable year. (IITA Sections 704(e-5) and 704A(e))
b) All taxes withheld from compensation of domestic employees may be paid and reported under this provision, regardless of the amount of taxes withheld and regardless of whether the employer has other employees and must pay and report taxes withheld from their compensation under other provisions of IITA Sections 704 and 704A.
c) Employers wishing to pay and report on an annual basis taxes withheld from domestic employees must use the Form IL-1040, Illinois Individual Income Tax Return, or such other form as may be required by the Department to report the Illinois income taxes withheld.
(Source: Amended at 38 Ill. Reg. 15994, effective July 9, 2014)
Section 100.7360 Definitions and Special Provisions Relating to Reporting and Payment of Income Tax Withheld (IITA Sections 704 and 704A)
For purposes of the provisions of IITA Sections 704 and 704A:
a) Date of withholding. Income tax is withheld on the date payment of compensation is made to the employee. (See IRS Revenue Ruling 74-126.)
EXAMPLE: An employer pays employees bi-monthly on the last day of the month for services rendered through the 15th of the month and on the 15th of the month for services rendered from the 16th of the previous month through the end of the previous month. Taxes withheld from compensation earned in the second half of May and paid on June 15 are withheld on June 15 for purposes of determining when the taxes must be reported and paid over to the Department.
b) Quarter-monthly period. A quarter-monthly period ends on the 7th, 15th, 22nd and last day of each calendar month. (IITA Section 704(b)) These dates are not affected by weekends or holidays. That is, the 7th of a month is the end of a quarter-monthly period, even if it is a Saturday, Sunday or holiday.
c) Banking day. Saturdays, Sundays, legal holidays and local bank holidays are not banking days. (IITA Section 704(b))
d) Employer, employee and compensation. The term "employer" includes all persons required to withhold Illinois income tax; "employee" includes all persons from whom Illinois income tax is required to be withheld; and "compensation" includes all payments from which Illinois income tax is withheld or required to be withheld under IITA Section 711(a). For purposes of determining when monthly, quarter-monthly or semi-weekly payments must be made and whether an employer is required to pay by electronic funds transfer, the amount of tax withheld or required to be withheld by the employer shall include all taxes withheld or required to be withheld under Article 7 of the IITA, other than taxes withheld from domestic employees that are reported and paid pursuant to Section 100.7350. (See IITA Section 711(a) and Section 2505-210 of the Department of Revenue Law [20 ILCS 2505/2505-210].)
e) Look-back period. The term "look-back period" for a calendar year means the 12-month period ending June 30 of the preceding calendar year. For example, the look-back period for calendar 2008 is the period from July 1, 2006 through June 30, 2007.
(Source: Added at 32 Ill. Reg. 17492, effective October 24, 2008)
Section 100.7370 Penalty and Interest Provisions Relating to Reporting and Payment of Income Tax Withheld (IITA Sections 704 and 704A)
a) Failure to file returns. In addition to any other penalties imposed by the IITA, an employer failing to file a quarterly return or the annual transmittal form for wage and tax statements required by IITA Section 704 or regulations promulgated under the statute shall incur a penalty for each such failure as prescribed by UPIA Section 3-3 [35 ILCS 735/3-3]. (IITA Section 1104) See 86 Ill. Adm. Code 700.300 for more guidance on the penalty for failure to file quarterly and annual returns.
b) Failure to pay. UPIA Section 3-3(b), (b-5), (b-10), (b-15) and (b-20) provides for penalties for failure to pay amounts shown due on a return on or before the due date for payment. Pursuant to 86 Ill. Adm. Code 700.500(c), any payment of taxes withheld during a quarter shall be applied against the earliest unpaid liability for that quarter under Section 100.7320(b) or (c) or 100.7325(b) or (c).
EXAMPLE 1: An employer required to make semi-weekly payments is required to deposit $500 on the 10th, 18th and 25th day of a month and on the 3rd day of the following month. Employer makes a payment of $700 on the 15th of the month and pays the remaining $1,300 of the liability on the 15th of the following month. No other payments are made during that period. $500 of the payment on the 15th of the month is applied in satisfaction of the amount due on the 10th, and the remaining $200 is applied toward the amount due on the 18th. The remainder of the amount due on the 18th and the remaining amounts due are unpaid until the 15th of the following month. Any amount withheld in the following month and due on or before the 15th of that month is subject to late payment penalty because the payment made on the 15th is applied to amounts due in the first month.
EXAMPLE 2: The employer in Example 1 makes payments of $500 on the 18th and 25th days of the month and on the 3rd of the following month. The balance is paid on the 15th of the following month. The payment made on the 18th is applied to the amount due on the 10th, the payment made on the 25th is applied to the amount due on the 18th, and the payment made on the 3rd is applied to the amount due on the 25th. The penalty for late payment will therefore apply to all four amounts.
c) Failure to withhold. If an employer fails to deduct and withhold any amount of tax as required under Article 7 of the IITA, and thereafter the tax on account of which such amount was required to be deducted and withheld is paid, such amount of tax shall not be collected from the employer, but the employer shall not be relieved from liability for penalties or interest otherwise applicable in respect of such failure to deduct and withhold. (IITA Sections 706 and 713) The amount required to be deducted and withheld during a year shall be considered paid by the employee if the employee pays his or her entire Illinois income tax liability for that year, even if that liability is less than the amount required to be deducted and withheld by the employer. Any employer who fails to deduct and withhold the required amount of tax shall be liable for any underpayment of tax by the employee (excluding interest and penalties imposed on the employee), up to the amount the employer improperly failed to deduct and withhold, together with interest and penalties for failure to deduct and withhold; provided that the amount of tax due from the employee shall not be collected more than once under this provision.
d) Personal liability penalty. Any person required to collect, truthfully account for, and pay over the tax required to be paid over under Article 7 of the IITA who willfully fails to collect such tax or truthfully account for and pay over such tax or willfully attempts in any manner to evade or defeat the tax or the payment thereof shall, in addition to other penalties provided by law, be liable for the penalty imposed by UPIA Section 3-7. (IITA Section 1002(d)) (See 86 Ill. Adm. Code 700.340.)
(Source: Added at 32 Ill. Reg. 17492, effective October 24, 2008)
Section 100.7380 Economic Development for a Growing Economy (EDGE) and Small Business Job Creation Credit (IITA Section 704A(g) and (h))
a) EDGE Credit. An eligible taxpayer who makes an election under this subsection (a) shall be allowed a credit against payments required under IITA Section 704A equal to the credits not previously claimed and allowed to be carried forward under IITA Section 211(4) as provided in Section 5-15(f) of the Economic Development for a Growing Economy Tax Credit Act (EDGETCA). (IITA Section 704A(g)) A taxpayer may make an election under this subsection (a) for taxable years ending on and after December 31, 2009. Only an eligible taxpayer, as defined in subsection (a)(2), may make the election.
1) Effect of Election. When an election under this subsection (a) is made, the amount of the credit awarded to the taxpayer under EDGETCA Section 5-15 for the taxable year of the election shall be allowed as a credit against payments due under IITA Section 704A for the first quarterly reporting period beginning after the end of the quarterly reporting period in which the credit is awarded. (See EDGETCA Section 5-15(f)(2).) No credit awarded in a taxable year for which the election is made shall be allowed under IITA Section 211.
EXAMPLE: Taxpayer is an eligible taxpayer and makes the election under this subsection (a)(1) for its taxable year ending June 30, 2023. For its taxable year ending June 30, 2023, Taxpayer is awarded a credit under IITA Section 211 of $10,000. In addition, Taxpayer has credit carryovers under Section 211(4) of $5000 from 2021, and $7000 from 2022. Under Section 704A(g) and this subsection (a)(1), Taxpayer is allowed a credit of $10,000 against withholding payments due under IITA 704A(c) in its first quarterly reporting period that begins after the end of the quarterly reporting period in which the tax credit certificate is awarded to the Taxpayer. Taxpayer may not claim a credit against the tax imposed under IITA Section 201(a) and (b) for its taxable year ending June 30, 2023, for the $10,000 credit awarded in that taxable year, but may claim a credit for the amounts carried forward from 2021 and 2022.
2) Eligible Taxpayer Defined. The term "eligible taxpayer" means, with respect to the taxable year for which the election under this subsection (a) is otherwise available:
A) A taxpayer who is primarily engaged (more than 50%) in one of the following business activities: water purification and treatment, motor vehicle metal stamping, automobile manufacturing, automobile and light duty motor vehicle manufacturing, motor vehicle manufacturing, light truck and utility vehicle manufacturing, heavy duty truck manufacturing, motor vehicle body manufacturing, cable television infrastructure design or manufacturing, or wireless telecommunication or computing terminal device design or manufacturing for use on public networks (EDGETCA Section 5-15(f)(1)) and the taxpayer meets one of the following requirements:
i) the taxpayer has an Illinois net loss or net loss deduction under IITA Section 207 for the taxable year, employed no less than 1,000 full-time employees (as defined in 35 ILCS 10/5-5) in Illinois on each day of the taxable year, has an "Agreement" (as defined in 35 ILCS 10/5-5) in effect as of December 14, 2009, and is in compliance with all provisions of that Agreement (see EDGETCA Section 5-15(f)(1)(A));
ii) the taxpayer has an Illinois net loss or net loss deduction under IITA Section 207 for the taxable year, employed no less than 1,000 full time employees (as defined in 35 ILCS 10/5-5) in Illinois on each day of the taxable year, applied for the "Agreement" (as defined in 35 ILCS 10/5-5) resulting in the credit with respect to which the election is made within 365 days after December 14, 2009 (EDGETCA Section 5-15(f)(1)(B));
iii) the taxpayer had an Illinois net operating loss carryforward under IITA Section 207 in a taxable year ending during calendar year 2008, has applied for an "Agreement" (as defined in 35 ILCS 10/5-5) by November 1, 2010 (150 days after the June 4, 2010 effective date of Public Act 96-905), creates at least 400 new jobs in Illinois, retains at least 2,000 jobs in Illinois that would have been at risk of relocation out of Illinois over a 10-year period, and makes a capital investment of at least $75,000,000 (EDGETCA Section 5-15(f)(1)(C));
iv) the taxpayer has an Illinois net operating loss carryforward under IITA Section 207 in a taxable year ending during calendar year 2009, has applied for an "Agreement" (as defined in 35 ILCS 10/5-5) by August 1, 2011 (150 days after the March 4, 2011 effective date of Public Act 96-1534), creates at least 150 new jobs, retains at least 1,000 jobs in Illinois that would have been at risk of relocation out of Illinois over a 10-year period, and makes a capital investment of at least $57,000,000 (EDGETCA Section 5-15(f)(1)(D)); or
v) the taxpayer employed at least 2,500 full-time employees in the State during the year in which the credit is awarded, commits to make at least $500,000,000 in combined capital improvements and project costs under the Agreement, applies for an Agreement between January 1, 2011 and June 30, 2011, executes an "Agreement" (as defined in 35 ILCS 10/5-5) for the credit during calendar year 2011, and was incorporated no more than 5 years before the filing of an application for the Agreement. (EDGETCA Section 5-15(f)(1)(E)); or
B) A taxpayer whose "Agreement" (as defined in 35 ILCS 10/5-5) was executed between January 1, 2011 and June 30, 2011 and who is primarily engaged in the manufacture of inner tubes or tires, or both, from natural and synthetic rubber, employs a minimum of 2,400 full-time employees in Illinois at the time of application, creates at least 350 full-time jobs and retains at least 250 full-time jobs in Illinois that would have been at risk of being created or retained outside of Illinois, and makes a capital investment of at least $200,000,000 at the project location (EDGETCA Section 5-15(f)(1.5)); or
C) A taxpayer whose "Agreement" (as defined in 35 ILCS 10/5-5) was executed by May 14, 2012 (150 days after the December 16, 2011 effective date of Public Act 97-636), and who is primarily engaged in the operation of a discount department store, maintains its corporate headquarters in Illinois, employs a minimum of 4,250 full-time employees at its corporate headquarters in Illinois at the time of application, retains at least 4,250 full-time jobs in Illinois that would have been at risk of being relocated outside of Illinois, had a minimum of $40,000,000,000 in total revenue in 2010, and makes a capital investment of at least $300,000,000 at the project location (EDGETCA Section 5-15(f)(1.6)); or
D) A taxpayer whose "Agreement" (as defined in 35 ILCS 10/5-5) was executed or applied for on or after July 1, 2011 and on or before March 31, 2012, and who is primarily engaged in the manufacture of original and aftermarket filtration parts and products for automobiles, motor vehicles, light duty motor vehicles, light trucks and utility vehicles, and heavy duty trucks, employs a minimum of 1,000 full-time employees in Illinois at the time of application, creates at least 250 full-time jobs in Illinois, relocates its corporate headquarters to Illinois from another state, and makes a capital investment of at least $4,000,000 at the project location (EDGETCA Section 5-15(f)(1.7)); or
E) A startup taxpayer whose "Agreement" (as defined in 35 ILCS 10/5-5) was executed on or after April 19, 2022 (the effective date of Public Act 102-0700). Any election under this subsection shall be effective unless and until such startup taxpayer has any Illinois income tax liability. Any election under this subsection shall automatically terminate when the startup taxpayer has any Illinois income tax liability at the end of any taxable year during the term of the Agreement. Thereafter, the startup taxpayer may receive an income tax credit under IITA Section 211 (see Section 100.2110), taking into account any benefits previously enjoyed or received by way of the election under this subsection, so long as the startup taxpayer remains in compliance with the terms and conditions of the Agreement (EDGETCA Section 5-15(f)(1.8)). "Startup taxpayer" shall have the same meaning as defined in the EDGETCA.
EXAMPLE: Taxpayer is an eligible startup taxpayer and makes the election under subsection (a)(1) for its taxable year ending December 31, 2024. The startup taxpayer was allowed a credit against withholding payments due for each quarter in 2024. At the end of 2024, the startup taxpayer determined it will have an Illinois income tax liability for that taxable year. The election will automatically terminate on December 31, 2024 – the end of the startup taxpayer's taxable year. No credits against withholding payments due under IITA 704A(c) will be permitted for this startup taxpayer beginning with the first withholding quarter of 2025. The startup taxpayer may be eligible to claim an income tax credit under IITA Section 211 for its taxable year ending December 31, 2025, for any credits awarded in 2025.
F) An applicant's project qualified under EDGETCA Section 5-20(b)(1.7) and whose "Agreement" (as defined in 35 ILCS 10/5 was executed on or after June 26, 2024 (the effective date of Public Act 103-0595). Any election under this subsection shall be effective unless and until such taxpayer has any Illinois income tax liability. Any election under this subsection shall automatically terminate when the taxpayer has any Illinois income tax liability at the end of any taxable year during the term of the Agreement. Thereafter, the taxpayer may receive an income tax credit under IITA Section 211 (see Section 100.2110), taking into account any benefits previously enjoyed or received by way of the election under this subsection, so long as the taxpayer remains in compliance with the terms and conditions of the Agreement (EDGETCA Section 5-15(f)(1.9))
EXAMPLE: Taxpayer is an eligible applicant and makes the election under subsection (a)(1) for its taxable year ending December 31, 2025. The taxpayer was allowed a credit against withholding payments due for each quarter in 2025. At the end of 2025, the taxpayer determined it will have an Illinois income tax liability for that taxable year. The election will automatically terminate on December 31, 2025 – the end of the taxpayer's taxable year. No credits against withholding payments due under IITA 704A(c) will be permitted for this taxpayer beginning with the first withholding quarter of 2026. The taxpayer may be eligible to claim an income tax credit under IITA Section 211 for its taxable year ending December 31, 2026, for any credits awarded in 2026.
3) Manner of Making Election. The election shall be made in the form and manner required by the Department and, once made, shall be irrevocable (EDGETCA Section 5-15(f)(3)). The election shall be made by claiming the credit on the withholding return due under IITA Section 704A for the first quarterly reporting period of the calendar year beginning after the end of the quarterly reporting period in which the credit is awarded (EDGETCA Section 5-15(f)(2)). The election applies to the entire credit awarded for the taxable year under IITA Section 211.
4) Partnerships and S Corporations. A partnership or Subchapter S corporation may be an eligible taxpayer and make an election under this subsection (a). When a partnership or S corporation makes an election under this subsection (a), no credit shall pass through to the partners or shareholders for the taxable year under IITA Section 211.
5) The credit or credits may not reduce the taxpayer's obligation for any payment due under IITA Section 704A to less than zero. If the amount of the credit or credits exceeds the total payments due under Section 704A with respect to amounts withheld during the calendar year, the excess may be carried forward and applied against the taxpayer's liability under Section 704A in the 5 succeeding calendar years, as allowed to be carried forward under IITA Section 211(4), or until it has been fully utilized, whichever occurs first. The credit or credits shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one taxable year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 704A(g))
EXAMPLE: Taxpayer is an eligible taxpayer and makes an election under this subsection (a) for its taxable year ending June 30, 2023. For its taxable year ending June 30, 2023, Taxpayer is awarded a tax credit certificate under IITA Section 211 of $10,000 during its withholding quarterly reporting period ending June 30, 2023. Under Section 704A(g) and this subsection (a)(5), Taxpayer is allowed a credit of $10,000 against withholding payments due under IITA 704A(c) in its quarterly reporting period ending September 30, 2023. Taxpayer withheld tax during its withholding quarter ending September 30, 2023 of $4,000. Under Section 704(A)(g) and this subsection (a)(5), Taxpayer's credit may not exceed $4,000. Taxpayer is allowed to carry forward the $6,000 excess credit for application against its withholding liability in the succeeding quarterly reporting periods in the 5 succeeding calendar years.
6) No credit shall be allowed under IITA Section 704A(g) and this subsection with respect to any amount that would be disallowed as a credit under IITA Section 211(5) due to a Noncompliance Date. (See Section 100.2110(d).)
7) No credit awarded under the EDGETCA for agreements entered into on or after January 1, 2015, except for credits awarded pursuant to Agreements entered into by a startup taxpayer on or after April 19, 2022, under EDGETCA Section 5-15(f)(1.8), and for credits awarded pursuant to Agreements entered into by a taxpayer on or after June 26, 2024, under EDGETCA Section 5-15(f)(1.9) may be credited against payments due under this Section. (IITA Section 704A(g))
b) Small Business Job Creation Credit. A taxpayer may claim a credit against payments due under IITA Section 704A for the first calendar year ending after the date on which a tax credit certificate was issued under Section 35 of the Small Business Job Creation Tax Credit Act (SBJCTCA). The credit shall be equal to the amount shown on the certificate, but may not reduce the taxpayer's obligation for any payment due under Section 704A to less than zero. (IITA Section 704A(h))
1) If the amount of the credit exceeds the total payments due under Section 704A with respect to amounts withheld during the calendar year, the excess may be carried forward and applied against the taxpayer's liability under Section 704A in the 5 succeeding calendar years or until it has been fully utilized, whichever occurs first. The credit shall be applied to the earliest year for which there is a tax liability. If there are credits from more than one calendar year that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 704A(h))
2) No credit shall be allowed under IITA Section 704A(h) and this subsection (b) with respect to any payment due under IITA Section 704A after the date a notice of noncompliance is issued to the Department under Section 45 of the Small Business Job Creation Tax Credit Act, as stated in the notification. If any credit has been allowed for a payment due after the date of notice of noncompliance, any refund paid to the taxpayer for that taxable year shall, to the extent of the credit allowed, be an erroneous refund within the meaning of IITA Section 912.
c) For purposes of this Section, the term "taxpayer" shall include members of the taxpayer's unitary business group. (IITA Section 704A(g) and SBJCTCA Section 10)
d) The credits allowed under this Section are exempt from the sunset provisions of IITA Section 250. (IITA Section 704A(g) and (h))
(Source: Amended at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.7381 REV Tax Credit (IITA Section 704A(g-1))
a) On or after January 1, 2025, with respect to the portion of a REV Illinois Credit that is calculated based on the incremental income tax attributable to new employees and retained employees, a taxpayer may elect, in accordance with the Reimagining Energy and Vehicles in Illinois Act (REV Illinois Act) [20 ILCS 686], to claim a REV tax credit against its obligation to pay over withholding under the Illinois Income Tax Act (IITA) Section 704A instead of claiming the credit against the taxes imposed under IITA Section 201(a) and (b). (IITA Section 236(b)(6))
b) For amounts deducted or withheld after December 31, 2024, a taxpayer who makes an election under the REV Illinois Act and this Section shall be allowed a credit against payments due under IITA Section 704A and this Section for amounts withheld during the first quarterly reporting period beginning after the certificate is issued equal to the portion of the REV Illinois Credit attributable to the incremental income tax attributable to new employees and retained employees as certified by the Department of Commerce and Economic Opportunity (DCEO) pursuant to an agreement with the taxpayer under the REV Illinois Act for the taxable year. (IITA Section 704A(g-1))
c) The credit may be in the form of a REV Illinois Credit. (IITA Section 236(b)(1))
d) Taxpayer Defined. A taxpayer who meets the definition of "applicant" in Section 10 of the REV Illinois Act, as determined by DCEO, and has been issued a tax credit certificate by DCEO may make the election under this Section. For purposes of this Section, the term "taxpayer" shall also include taxpayer and members of the taxpayer's unitary business group as defined in IITA Section 1501(a)(27). (IITA Section 704A(g-1))
e) Effect of Election. When an election under this Section is made, the amount of the credit awarded to the taxpayer under Section 30 of the REV Illinois Act for the taxable year of the election shall be allowed as a credit against payments due under IITA Section 704A for the first quarterly reporting period beginning after the end of the quarterly reporting period in which the credit is awarded. No credit awarded in a taxable year for which the election is made shall be allowed under IITA Section 236 and Section 100.2111.
EXAMPLE: Taxpayer makes the election under this Section for its taxable year ending June 30, 2026. For its taxable year ending June 30, 2026, Taxpayer is awarded a tax credit certificate under IITA Section 236 of $15,000. This amount has been certified by DCEO as equal to the incremental income tax attributable to new employees and retained employees. In addition, Taxpayer has a credit carryover under IITA Section 236(b)(4) of $5,000 from 2025. Under IITA Section 704A(g-1) and this subsection, Taxpayer is allowed a credit of $15,000 against withholding payments due under IITA Section 704A(c) in its first quarterly reporting period that begins after the end of the quarterly reporting period in which the tax credit certificate is awarded to the Taxpayer. Taxpayer may not claim a credit against the tax imposed under IITA Section 201(a) and (b) for its taxable year ending June 30, 2026, for the $15,000 credit awarded in that taxable year, but may claim a credit for the $5,000 carried forward from 2025.
f) Manner of Making Election. The election shall be made in the manner prescribed by the Department and once made shall be irrevocable. (REV Illinois Act Section 30(h)) The election shall be made by claiming the credit on the withholding return due under IITA Section 704A for the first quarterly reporting period of the calendar year beginning after the end of the quarterly reporting period in which the tax credit certificate is awarded. The election applies to the amount of the REV Illinois Credit that is calculated based on the incremental income tax attributable to new employees and retained employees as shown on the tax credit certificate issued by DCEO to the taxpayer.
g) Partnerships and S Corporations. A partnership or Subchapter S corporation may make an election under this subsection. When a partnership or S corporation makes an election under this subsection, no credit shall pass through to the partners or shareholders for the taxable year under IITA Section 236 and Section 100.2111.
h) The credit or credits may not reduce the taxpayer's obligation for any payment due under IITA Section 704A to less than zero. If the amount of the credit or credits exceeds the total payments due under IITA Section 704A with respect to amounts withheld during the quarterly reporting period, the excess may be carried forward and applied against the taxpayer's liability under IITA Section 704A in succeeding quarterly reporting periods for the 20 quarterly reporting periods following the initial excess credit period, as allowed to be carried forward under IITA Section 211(4), or until it has been fully utilized, whichever occurs first. The credit or credits shall be applied to the earliest quarterly reporting period for which there is a tax liability. If there are credits from more than one quarterly reporting period that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 704A(g-1))
EXAMPLE: Taxpayer makes an election under this Section for its taxable year ending December 31, 2026. For its taxable year ending December 31, 2026, Taxpayer is awarded a tax credit certificate under IITA Section 236 of $10,000 during its withholding quarterly reporting period ending June 30, 2026. This amount has been certified by DCEO as equal to the incremental income tax attributable to new employees and retained employees. Under Section 704A(g-1) and this Section, Taxpayer is allowed a credit of $10,000 against withholding payments due under IITA 704A(c) in its quarterly reporting period ending September 30, 2026. Taxpayer withheld tax during its withholding quarter ending September 30, 2026, of $4,000. Under Section 704(A)(g-1) and this Section, Taxpayer's credit may not exceed $4,000. Taxpayer is allowed to carry forward the $6,000 excess credit for application against its withholding liability in the succeeding quarterly reporting periods for 20 quarterly reporting periods following the initial excess credit period, or until the first succeeding quarterly reporting period that utilizes the remaining excess credit, whichever occurs first. If Taxpayer withheld tax during its withholding quarter ending December 31, 2026, of $1,000, then Taxpayer is allowed to carry forward the $5,000 excess credit to its withholding liability for the March 31, 2027, reporting period.
i) No credit shall be allowed under IITA Section 704A(g-1) and this Section with respect to any payment due under IITA Section 704A after the date a notice of noncompliance is issued to the Department under Section 70 of the REV Illinois Act, as stated in the notification. If any credit has been allowed for a payment due after the date of the notice of noncompliance, any refund paid to the taxpayer for that taxable year shall, to the extent of the credit allowed, be an erroneous refund within the meaning of IITA Section 912. (IITA Section 236(b)(5))
j) For purposes of this Section, the terms "Agreement," "applicant," "incremental income tax," "new employee," "noncompliance date," "retained employee," and "REV Illinois Credit," shall have the same meaning as when used in the REV Illinois Act.
k) This credit is exempt from the sunset provisions of IITA Section 250. (IITA Section 704A(g-1))
(Source: Added at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.7382 MICRO Tax Credit (IITA Section 704A(g-2))
a) On or after January 1, 2025, with respect to any portion of a Manufacturing Illinois Chips for Real Opportunity (MICRO) Illinois Credit that is based on the incremental income tax attributable to new employees or retained employees, a taxpayer may elect to claim a MICRO Tax Credit against its obligation to pay over withholding under the Illinois Income Tax Act (IITA) Section 704A instead of claiming the credit against the taxes imposed under IITA Section 201(a) and (b). (35 ILCS 45/110-30(h))
b) For amounts deducted or withheld after December 31, 2024, a taxpayer who makes an election under the MICRO Act and this Section shall be allowed a credit against payments due under IITA Section 704A and this Section for amounts withheld during the first quarterly reporting period beginning after the certificate is issued equal to the portion of the MICRO Illinois Credit attributable to the incremental income tax attributable to new employees and retained employees as certified by the Department of Commerce and Economic Opportunity (DCEO) pursuant to an agreement with the taxpayer under the MICRO Act for the taxable year. (IITA Section 704A(g-2))
c) The credit may be in the form of a MICRO Illinois Credit. (IITA Section 238(b)(1))
d) Taxpayer Defined. A taxpayer who meets the definition of "applicant" in Section 110-10 of the MICRO Act, as determined by DCEO, and has been issued a tax credit certificate by DCEO may make the election under this Section. For purposes of this section, the term "taxpayer" shall also include taxpayer and members of the taxpayer's unitary business group as defined in IITA Section 1501(a)(27). (IITA Section 704A(g-2))
e) Effect of Election. When an election under this Section is made, the amount of the credit awarded to the taxpayer under Section 110-30 of the MICRO Act for the taxable year of the election shall be allowed as a credit against payments due under IITA Section 704A for the first quarterly reporting period beginning after the end of the quarterly reporting period in which the credit is awarded. No credit awarded in a taxable year for which the election is made shall be allowed under IITA Section 238 and Section 100.2112.
EXAMPLE: Taxpayer makes the election under this Section for its taxable year ending June 30, 2026. For its taxable year ending June 30, 2026, Taxpayer is awarded a tax credit certificate under IITA Section 238 in the amount of $15,000. This amount has been certified by DCEO as equal to the incremental income tax attributable to new employees and retained employees. In addition, Taxpayer has a credit carryover under IITA Section 238(b)(4) of $5,000 from 2025. Under IITA Section 704A(g-2) and this subsection, Taxpayer is allowed a credit of $15,000 against withholding payments due under IITA Section 704A(c) in its first quarterly reporting period that begins after the end of the quarterly reporting period in which the tax credit certificate is awarded to the Taxpayer. Taxpayer may not claim a credit against the tax imposed under IITA Section 201(a) and (b) for its taxable year ending June 30, 2026, for the $15,000 credit awarded in that taxable year, but may claim a credit for the $5,000 carried forward from 2025.
f) Manner of Making Election. The election shall be made in the manner prescribed by the Department and once made shall be irrevocable. (MICRO Act Section 110-30(h)) The election shall be made by claiming the credit on the withholding return due under IITA Section 704A for the first quarterly reporting period of the calendar year beginning after the end of the quarterly reporting period in which the tax credit certificate is awarded. The election applies to the amount of the MICRO Illinois Credit that is calculated based on the incremental income tax attributable to new employees and retained employees as shown on the tax credit certificate issued by DCEO to the taxpayer.
g) Partnerships and S Corporations. A partnership or Subchapter S corporation may make an election under this subsection. When a partnership or S corporation makes an election under this subsection, no credit shall pass through to the partners or shareholders for the taxable year under IITA Section 238 and Section 100.2112.
h) The credit or credits may not reduce the taxpayer's obligation for any payment due under IITA Section 704A to less than zero. If the amount of the credit or credits exceeds the total payments due under IITA Section 704A with respect to amounts withheld during the quarterly reporting period, the excess may be carried forward and applied against the taxpayer's liability under IITA Section 704A in succeeding quarterly reporting periods for the 20 quarterly reporting periods following the initial excess credit period, as allowed to be carried forward under IITA Section 211(4), or until it has been fully utilized, whichever occurs first. The credit or credits shall be applied to the earliest quarterly reporting period for which there is a tax liability. If there are credits from more than one quarterly reporting period that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 704A(g-2))
EXAMPLE: Taxpayer makes an election under this Section for its taxable year ending December 31, 2026. For its taxable year ending December 31, 2026, Taxpayer is awarded a tax credit certificate under IITA Section 238 of $10,000 during its withholding quarterly reporting period ending June 30, 2026. This amount has been certified by DCEO as equal to the incremental income tax attributable to new employees and retained employees. Under Section 704A(g-2) and this Section, Taxpayer is allowed a credit of $10,000 against withholding payments due under IITA 704A(c) in its quarterly reporting period ending September 30, 2026. Taxpayer withheld tax during its withholding quarter ending September 30, 2026, of $4,000. Under Section 704(A)(g-2) and this Section, Taxpayer's credit may not exceed $4,000. Taxpayer is allowed to carry forward the $6,000 excess credit for application against its withholding liability in the succeeding quarterly reporting periods for 20 quarterly reporting periods following the initial excess credit period, or until the first succeeding quarterly reporting period that utilizes the remaining excess credit, whichever occurs first. If Taxpayer withheld tax during its withholding quarter ending December 31, 2026, of $1,000, then Taxpayer is allowed to carry forward the $5,000 excess credit to its withholding liability for the March 31, 2027, reporting period.
i) No credit shall be allowed under IITA Section 704A(g-2) and this Section with respect to any payment due under IITA Section 704A after the date a notice of noncompliance is issued to the Department under Section 110-70 of the MICRO Act, as stated in the notification. If any credit has been allowed for a payment due after the date of the notice of noncompliance, any refund paid to the taxpayer for that taxable year shall, to the extent of the credit allowed, be an erroneous refund within the meaning of IITA Section 912. (IITA Section 238(b)(5))
j) For purposes of this Section, the terms "Agreement," "applicant," "incremental income tax," "new employee," "noncompliance date," "retained employee," and "MICRO Illinois Credit," shall have the same meaning as when used in the MICRO Act.
k) This credit is exempt from the sunset provisions of IITA Section 250. (IITA Section 704A(g-2))
(Source: Added at 49 Ill. Reg. 3115, effective February 26, 2025)
Section 100.7385 Live Theater Production Tax Credit (IITA Section 704A(k))
a) An employer may claim a Live Theater Production Tax Credit against withholding payments due under IITA Section 704A(c) for a non-profit theater production. (IITA Section 704A(k))
b) For purposes of the Live Theater Production Tax Credit, the term "non-profit theater production" shall have the same meaning as when used in Section 10-10 of the Live Theater Production Tax Credit Act [35 ILCS 17].
c) The amount of the credit shall be determined by the Department of Commerce and Economic Opportunity (DCEO) and shall be the amount shown on the tax credit certificate issued by DCEO to the taxpayer.
d) The credit may be taken against payments due for withholding reporting periods beginning on or after January 1, 2025, and ending before January 1, 2027. (IITA Section 704A(k))
1) For purposes of this Section, "reporting period" means the quarter for which a withholding tax return is required to be filed under IITA Section 704A(b).
2) The credit shall be applied to the first quarterly reporting period beginning after the end of the quarterly reporting period in which the tax credit certificate is issued by DCEO and begins on or after January 1, 2025. (IITA Section 704A(k))
EXAMPLE: The taxpayer is issued a tax credit certificate by DCEO in the amount of $25,000. The tax credit certificate is dated March 17, 2025. The taxpayer is allowed a credit of $25,000 against withholding payments due under IITA Section 704A(c) in its first quarterly reporting period that begins after the end of the quarterly reporting period in which the tax credit certificate is issued to the taxpayer. Since the tax credit certificate was issued to the taxpayer during the first withholding quarter of 2025, the taxpayer may claim the credit against any payments due in the second withholding quarter of 2025.
e) A copy of the tax credit certificate shall be attached to the taxpayer's quarterly withholding tax return.
f) The credit may not be transferred or sold.
g) A taxpayer who has been issued a tax credit certificate by DCEO for a non-profit theater production shall not be allowed to claim that credit amount against the tax imposed under IITA Section 201(a) and (b).
h) The credit may not reduce the taxpayer's obligation for any payment due under IITA Section 704A to less than zero. If the amount of the credit exceeds the total amount due under IITA Section 704A with respect to amounts withheld during the quarterly reporting period, the excess may be carried forward and applied against the taxpayer's liability under IITA Section 704A in succeeding quarterly reporting periods for the 20 quarterly reporting periods following the initial excess credit period, or until it has been fully utilized, whichever occurs first. The credit shall be applied to the earliest quarterly reporting period for which there is a payment due under IITA Section 704A. If there are credits from more than one quarterly reporting period that are available to offset a liability, the earlier credit shall be applied first. (IITA Section 704A(k))
EXAMPLE: The taxpayer is issued a tax credit certificate by DCEO in the amount of $25,000 during its withholding quarterly reporting period ending June 30, 2025. Under IITA Section 704A(k) and this Section, the taxpayer is allowed a credit of $25,000 against withholding payments due under IITA Section 704A(c) in its quarterly reporting period ending September 30, 2025. The taxpayer withheld tax during its withholding quarter ending September 30, 2025, of $4,000. Under IITA Section 704A(k) and this Section, the taxpayer's credit may not exceed $4,000. The taxpayer is allowed to carry forward the $21,000 excess credit for application against its withholding liability in the succeeding quarterly reporting periods for 20 quarterly reporting periods following the initial excess credit period, or until the first succeeding quarterly reporting period that utilizes the remaining excess credit, whichever occurs first. If the taxpayer withheld tax during its withholding quarter ending December 31, 2025, of $1,000, then the taxpayer is allowed to carry forward the $20,000 excess credit to its withholding liability for the March 31, 2026, reporting period.
(Source: Added at 49 Ill. Reg. 1861, effective January 31, 2025)
Section 100.7386 Local Journalism Sustainability Tax Credit (IITA Section 704A(k))
a) A taxpayer who is issued a tax credit certificate under the Local Journalism Sustainability Act for a taxable year shall be allowed a credit against payments due under IITA Section 704A(c). (IITA Section 704A(k))
b) Employers that maintain tax status under Section 501(c)(3) of the federal Internal Revenue Code, that are local news organizations and that are required to deduct and withhold taxes as provided in IITA Section 704A, may claim a Local Journalism Sustainability Tax Credit against withholding payments due under IITA Section 704A(c). (35 ILCS 18/40-10)
c) For purposes of the Local Journalism Sustainability Tax Credit, the term "local news organization" shall have the same meaning as when used in Section 40-5 of the Local Journalism Sustainability Act [35 ILCS 18].
d) The amount of the credit shall be determined by the Department of Commerce and Economic Opportunity (DCEO) and shall be the amount shown on the tax credit certificate issued by DCEO to the taxpayer.
e) The credit may be taken against payments due for withholding reporting periods that begin on or after January 1, 2025, and end before January 1, 2030. (35 ILCS 18/40-10)
1) For purposes of this Section, "reporting period" means the quarter for which a withholding tax return is required to be filed under IITA Section 704A(b).
2) The credit shall be applied to the first quarterly reporting period beginning after the end of the quarterly reporting period in which the tax credit certificate is issued by DCEO and begins on or after January 1, 2025. (35 ILCS 18/40-10)
EXAMPLE: The taxpayer is issued a tax credit certificate by DCEO in the amount of $25,000. The tax credit certificate is dated March 17, 2025. The taxpayer is allowed a credit of $25,000 against withholding payments due under IITA Section 704A(c) in its first quarterly reporting period that begins after the end of the quarterly reporting period in which the tax credit certificate is issued to the taxpayer. Since the tax credit certificate was issued to the taxpayer during the first withholding quarter of 2025, the taxpayer may claim the credit against any payments due in the second withholding quarter of 2025.
f) A copy of the tax credit certificate shall be attached to the taxpayer's quarterly withholding tax return. (35 ILCS 18/40-10)
g) The credit may not be transferred or sold.
h) No carryover of excess credit is allowed. If the amount of the credit exceeds the liability for the reporting period, the excess credit shall be refunded to the taxpayer. (35 ILCS 18/40-10)
(Source: Added at 49 Ill. Reg. 1861, effective January 31, 2025)
Section 100.7390 Minimum Wage Tax Credit (IITA Section 704A(i))
a) Minimum Wage Credit. Each employer with 50 or fewer full-time equivalent employees during the current reporting period may claim a credit against the payments due under IITA Section 704A in an amount equal to the maximum credit allowable. The credit may be taken against payments due for reporting periods that begin on or after January 1, 2020 and end on or before December 31, 2027. In no event may the credit exceed the employer's liability for the reporting period. (IITA Section 704A(i)) No carryover of excess credit is allowed.
b) Definitions Applicable to this Section
"Applicable Percentage" means:
25% for reporting periods beginning on or after January 1, 2020 and ending on or before December 31, 2020;
21% for reporting periods beginning on or after January 1, 2021 and ending on or before December 31, 2021;
17% for reporting periods beginning on or after January 1, 2022 and ending on or before December 31, 2022;
13% for reporting periods beginning on or after January 1, 2023 and ending on or before December 31, 2023;
9% for reporting periods beginning on or after January 1, 2024 and ending on or before December 31, 2024;
5% for reporting periods beginning on or after January 1, 2025 and ending on or before:
December 31, 2026, for employers with more than 5 employees; and
December 31, 2027, for employers with no more than 5 employees. (IITA Section 704A(i))
"Base Compensation" for a reporting period means the total compensation paid in Illinois, during the fourth quarter of the calendar year prior to the reporting period, to employees who earned less than the current minimum wage during that fourth quarter. Compensation or wages "Paid in Illinois" has the meaning ascribed to that term under IITA Section 304(a)(2)(B). If an employee's compensation is not subject to tax in another state, the compensation is presumed, subject to rebuttal, to be paid in Illinois.
"Current Compensation" for a reporting period means the sum of:
the total compensation paid in Illinois to eligible employees who earned no more than the current minimum wage during the reporting period, plus
for eligible employees who earned more than the current minimum wage at any time during the reporting period, the total hours worked in Illinois times the current minimum wage.
"Current Employee" means an employee who was employed by the taxpayer during the current reporting period.
"Current Minimum Wage" means the minimum or reduced wage applicable to an employee under the Minimum Wage Law [820 ILCS 105] for the current reporting period.
"Current Reporting Period" means the reporting period for which the taxpayer is calculating the minimum wage credit under this Section.
"Eligible Employee" means any employee who earned no more than the current minimum wage for hours worked in Illinois for the employer during the reporting period and any employee who earned more than the current minimum wage for hours worked in Illinois for the employer at any time during the reporting period, but who earned less than the current minimum wage for hours worked in Illinois for the employer during the calendar year prior to the effective date of the current minimum wage. A recently hired employee is not an eligible employee. The total number of eligible employees for a current reporting period may not exceed the total number of employees who earned less than the current minimum wage for hours worked in Illinois for the employer at any time during the fourth quarter of the preceding calendar year.
"Employer" and "Employee" have the meaning ascribed to those terms in the Minimum Wage Law except that "employee" also includes employees who work for an employer with fewer than 4 employees. (IITA Section 704A(i)) Members of a limited liability company who are treated as partners for federal and Illinois income tax purposes, but are employees within the meaning of the Minimum Wage Law, are employees for purposes of this credit.
"Full-time Equivalent Employees" means the ratio of the number of paid hours during the reporting period and the number of working hours in that period. (IITA Section 704A(i)) A full-time equivalent employee shall be assumed to work 40 hours per week for 13 weeks for a total of 520 hours during a reporting period. The number of full-time equivalent employees for a reporting period means the number of employees working 40 hours per week that would be required to work the number of paid hours actually worked by all employees of the employer for that reporting period.
EXAMPLE: Taxpayer employs 56 employees who work 25,480 paid hours during a reporting period. 25,480 hours divided by 520 hours equals 49. Although employer employs 56 actual employees, only 49 full-time equivalent employees would be required to work the number of paid hours worked by all of the taxpayer's employees during the reporting period.
"Hour Worked in Illinois" means an hour worked by an employee for which the compensation is paid in Illinois.
"Hourly Employee" means an employee whose working hours are tracked and recorded by the employer during the reporting period, regardless of whether the employee is paid by the hour, salary, commission or any other measure.
"Maximum Credit" for a current reporting period means the excess, if any, of the current compensation for the reporting period over the base compensation, multiplied by the applicable percentage, plus the credit for new eligible employees.
"New Eligible Employee" means an employee whose 90th consecutive day of employment for the employer occurred during the reporting period immediately preceding the current reporting period.
"Recently Hired Employee" means an employee who has been employed by the employer for less than 90 consecutive days as of the last day before the current reporting period.
"Reporting Period" means the quarter for which a return is required to be filed under IITA Section 704A(b). (IITA Section 704A(i))
"Salaried Employee" means an employee whose hours are not tracked and recorded by the employer during the reporting period. Salaried employees are deemed to have worked 40 hours per week for each week in which they were employed during a reporting period.
"Tipped Employee" has the same meaning as ascribed in 56 Ill. Adm. Code 210.110.
"Wages" means compensation, including bonus, overtime, and commission pay, of employees, but does not include fringe benefits.
"Week Worked in Illinois" means a week worked by an employee for which the majority of hours worked by the employee were worked in Illinois.
c) Eligibility for the Credit − Maximum Number of Full-Time Equivalent Employees. A credit may be claimed under this section only by an employer with 50 or fewer full-time equivalent employees during the current reporting period. (IITA Section 704A(i)) Eligibility for the credit under this subsection shall be determined as follows:
1) Determine the number of hours worked by all salaried employees. Total the weeks worked by all salaried employees during the reporting period, rounded to the nearest whole week. Multiply the resulting number of weeks by 40 hours. Round the result to the nearest hour.
2) Total the hours worked by all hourly employees during the reporting period.
3) Determine the total hours worked by all employees by adding the number of hours worked by salaried employees to the number of hours worked by all hourly employees during the reporting period.
4) Determine the number of full-time equivalent employees by dividing the total hours worked by all employees during the reporting period by the 520 hours a full-time employee would work during the reporting period. Round up the result to the next higher whole number.
EXAMPLE: During a reporting period, the taxpayer employs 10 salaried employees who worked a total of 100 weeks during the reporting period and 30 hourly employees who worked a total of 15,000 hours. The salaried employees are deemed to have worked 4,000 hours during the reporting period. All employees worked a total of 19,000 hours during the reporting period. Therefore, during the reporting period, 37 full-time equivalent employees would have been required to work all of the paid hours worked by the taxpayer's employees. ((100 weeks x 40 hours) + 15,000 hours)/520 = 36.54, rounded up to 37 full-time equivalent employees
5) If the total number of full-time equivalent employees is greater than 50, the taxpayer is not eligible for the credit.
d) Eligibility for the Credit − Increase in Compensation. An employer shall not be eligible for credits under this Section for a reporting period unless the average wage paid by the employer per employee for all employees making less than $55,000 during the reporting period is greater than the average wage paid by the employer per employee for all employees making less than $55,000 during the same reporting period of the prior calendar year. (IITA Section 704A(i)) Eligibility for the credit under this subsection shall be determined by computing the average wage paid to employees earning less than $55,000 during the current reporting period and during the same reporting period for the preceding calendar year as follows.
1) Total the actual amount of wages paid in Illinois to each employee earning less than $55,000 during the reporting period.
2) Determine the number of hours worked by all employees earning less than $55,000 during the reporting period by adding:
A) The total weeks worked by all salaried employees earning less than $55,000 during the reporting period, rounded to the nearest whole week, multiplied by 40 hours and rounded to the nearest hour, plus
B) The total hours worked by all hourly employees earning less than $55,000 during the reporting period.
3) Determine the average wage paid in Illinois during the reporting period to employees earning less than $55,000 by dividing the total wages paid to all employees earning less than $55,000 during the reporting period in subsection (d)(1), by the total number of hours worked by all employees earning less than $55,000 during the reporting period, as calculated according to subsection (d)(2).
4) If the average wage paid in Illinois to all employees earning less than $55,000 during the current reporting period is less than or equal to the amount computed for the same reporting period during the preceding calendar year, the taxpayer does not qualify for the credit.
EXAMPLE: In the fourth reporting period of 2019, the taxpayer employed 10 salaried employees who worked a total of 100 weeks and 30 hourly employees who worked a total of 15,000 hours during the reporting period. All employees earned less than $55,000 during the reporting period. The taxpayer paid a total of $183,000 in wages to all 40 employees during the reporting period. The average wage paid in Illinois to all employees earning less than $55,000 during the reporting period was $9.63 per hour. $183,000/((100 weeks x 40 hours) + 15,000 hours) = $9.63/hour. During the fourth reporting period of 2020, the taxpayer employed 8 salaried employees who worked a total of 100 weeks and 32 hourly employees who worked a total of 16,000 hours during the reporting period. All employees earned less than $55,000 during the reporting period. The taxpayer paid a total of $224,000 in wages to all 40 employees during the reporting period. The average wage paid in Illinois to all employees earning less than $55,000 during the reporting period was $11.20 per hour. $224,000/((100 weeks x 40 hours) + 16,000 hours) = $11.20 per hour. $11.20 is greater than $9.63, therefore the taxpayer is eligible for the credit for the fourth reporting period of 2020.
e) Calculation of the Credit
1) For each reporting period, the number of eligible employees may not exceed the number of employees who, during the last reporting period of the preceding calendar year, made less than the current minimum wage required by the Minimum Wage Law for the current reporting period. (IITA Section 704A(i)) If the number of employees who would be eligible employees exceeds this limitation, the employer may choose which of the otherwise-eligible employees will be treated as eligible employees.
2) Recently Hired Employees. An employer may not claim a credit for recently hired employees; however, such credits may accrue during the current reporting period and be claimed against payments under IITA Section 704A for future reporting periods after the employee has worked for the employer at least 90 consecutive days. (IITA Section 704A(i))
A) Any credits accrued during the initial 90-day employment period must be used to calculate the credit during the reporting period directly following the reporting period during which the employee reached his or her 90th day of employment. Determine if any of the current employees qualify as recently hired employees who began their employment less than 90 consecutive days immediately preceding the start of the current reporting period.
B) The wages paid to recently hired employees cannot be used to calculate the credit for the current reporting period. Taxpayer shall record the wages paid to these employees for possible use in a future reporting period. The wages paid during the employee's first 90 consecutive days of employment may only be used to calculate the minimum wage credit in the reporting period immediately following the reporting period in which the employee reaches his or her 90th consecutive day of employment. If an employee does not reach their 91st day of employment, any wages earned by the employee are ineligible to be used to calculate the credit in future reporting periods.
EXAMPLE: Employee is hired by the taxpayer on January 6, 2020 and continues to be employed through December 31, 2020. During that time, the employee earns the minimum wage required for each reporting period in 2020. The employee's 90th day of consecutive employment is April 5, 2020, which occurs during the second reporting period of 2020. Because the employee's 90th consecutive day of employment did not occur prior to the start of the second reporting period of 2020, the taxpayer must use the wages earned by the employee during his or her first 90 consecutive days of employment to calculate the credit for the third reporting period in 2020.
3) Number of Eligible Employees. Determine the number of eligible employees for a reporting period as follows:
A) Determine the number of employees who earned less than the current minimum or reduced wage at any time during the last reporting period of the preceding calendar year.
B) Determine the number of current employees who were paid no more than the current minimum wage during the reporting period plus the number of current employees who earned more than the current minimum wage at any time during the reporting period, but were employed by the taxpayer and earned less than the current minimum wage at any time during the fourth reporting period of the preceding calendar year.
C) The number of eligible employees for the reporting period is the lesser of the amounts determined in subsections (e)(3)(A) and (B).
f) Calculation of the Maximum Credit. The maximum credit for a current reporting period is comprised of two components: a credit for wages paid in the current reporting period to eligible employees, based on the increase in their wages attributable to an increase in the minimum wage, plus a credit for newly eligible employees equal to the credit that would have been earned for their increased wages in earlier reporting periods if they had been eligible employees during those reporting periods.
1) Computation of Credit for Eligible Employees. The credit for eligible employees is equal to the current compensation minus the base compensation, multiplied by the applicable percentage.
A) Current compensation is the sum of the total compensation paid in Illinois to eligible employees who earned no more than the current minimum wage during the reporting period, plus, for eligible employees who earned more than the current minimum wage at any time during the reporting period, the total hours worked in Illinois times the current minimum wage.
B) Base compensation is the total compensation paid in Illinois to employees earning less than the current minimum wage during the fourth quarter of the calendar year prior to the reporting period.
C) Applicable rate is the percentage described in subsection (b).
EXAMPLE: In the fourth reporting period of 2019, taxpayer employed 10 tipped employees who earned the reduced wage of $4.95 authorized by Section 4(c) of the Minimum Wage Law. All employees were hired more than 90 days prior to the beginning of the reporting period. The employees worked a total of 5,200 hours during that reporting period. In the first reporting period of 2020, the taxpayer employed the same 10 employees who earned the applicable subminimum wage of $5.55 authorized by Section 4(c) of the Minimum Wage Law and worked 5,200 hours. Taxpayer is entitled to a credit of $780. ((5,200 hours x $5.55) – (5,200 hours x $4.95)) x .25 = $780
2) Computation of Credit for New Eligible Employees. The credit for new eligible employees is equal to the excess, if any, of the credit for eligible employees for prior reporting periods, recomputed by determining the current compensation for each reporting period for which a new eligible employee was a recent employee as if that new eligible employee had been an eligible employee for that reporting period.
A) If treating all the new eligible employees as eligible employees for a prior reporting period would cause the number of eligible employees to exceed the maximum number determined under subsection (e)(3) for that reporting period, the employer shall determine the current compensation for that reporting period by including only the maximum number. For this purpose, the employer may choose which employees will be treated as eligible employees without regard to which employees were treated as eligible employees in the original computation of the credit for the reporting period.
B) The recomputed credit for a prior reporting period may not exceed the employer's liability for that reporting period.
C) The base compensation is not recomputed for purposes of computing this component of the maximum credit.
g) Each employer who deducts and withholds, or is required to deduct and withhold, tax under the IITA and who retains income tax withholdings as a result of the credit allowed under IITA Section 704A(i) and this Section must make a return with respect to those taxes and retained amounts in the form and manner that the Department, by rule, requires and pay to the Department or to a depositary designated by the Department those withheld taxes not retained by the employer. (IITA Section 704A(i)) The amount of taxes withheld, and the credit claimed under this Section for a current withholding period shall be reported on the taxpayer's Form IL-941 (Illinois Withholding Income Tax Return) for the current reporting period.
(Source: Added at 44 Ill. Reg. 17414, effective October 13, 2020)
SUBPART W: ESTIMATED TAX PAYMENTS
Section 100.8000 Payment of Estimated Tax (IITA Section 803)
a) Requirement to Pay Estimated Tax. Every taxpayer other than an estate, trust, partnership, subchapter S corporation or farmer is required to pay estimated tax for the taxable year, in such amount and with such forms as the Department shall prescribe, if the amount payable as estimated tax can reasonably be expected to be more than:
1) $250 for taxable years ending before December 31, 2001 and $500 for taxable years ending on or after December 31, 2001; or
2) $400 for corporations. (IITA Section 803(a))
b) Definitions. For purposes of this Section:
1) The term "estimated tax" means the excess of the total regular income tax and replacement taxes expected to be imposed for the taxable year under IITA Section 201, including the amount of any credit required to be recaptured under the IITA, over the sum of:
A) the total amount expected to be withheld against that tax under IITA Article 7; plus
B) the total estimated credits against those taxes allowable for the taxable year.
2) The term "farmer" means an individual whose gross income from farming for the taxable year is at least ⅔ of total gross income for that year. (IITA Section 803(e)) A taxpayer has "gross income from farming" for the taxable year to the extent the taxpayer has gross income from farming for the current taxable year under Internal Revenue Code section 6654(i)(2).
3) The term "nursing home" means a skilled nursing or intermediate long term care facility that is subject to licensure by the Illinois Department of Public Health under the Nursing Home Care Act [210 ILCS 45]. (IITA Section 806)
c) Exceptions
1) Farmers. The requirement to make payments of estimated tax expressly excludes farmers from its application. (See IITA Section 803(a).)
2) Nursing Homes. No estimated tax payments are required by an individual who is 65 years of age or older and is a permanent resident of a nursing home. (IITA Section 806)
3) Reasonable Expectation that the Threshold Requirement for Payment of Estimated Tax Will Not Be Met. In any case in which the amount payable as estimated tax for a taxable year exceeds $500 for an individual ($250 for taxable years ending on or before December 31, 2001) or $400 for a corporation, the taxpayer shall be required to pay estimated tax unless it can show, by clear and convincing evidence, that its basis for expecting to owe a smaller amount was reasonable. A reasonable expectation at the beginning of the taxable year does not exempt the taxpayer from the obligation to make estimated tax payments if circumstances change during the year. A taxpayer may have reasonable cause for failing to make an estimated payment early in the taxable year and not have reasonable cause for failure to make estimated payments later in the same taxable year, after circumstances have changed.
d) Due Dates for Payment of Estimated Tax. Installments of estimated tax shall be paid on or before the dates prescribed under Section 100.8010. The payment of any installment may be made in advance of the applicable due date. Payments of estimated tax shall be applied as set forth under Section 100.8010 and 86 Ill. Adm. Code 700.500.
e) Joint Payment of Estimated Tax. If they are eligible to do so for federal tax purposes, a husband and wife may pay estimated tax as if they were one taxpayer, in which case the liability with respect to the estimated tax shall be joint and several. If a joint payment is made but the husband and wife elect to determine their taxes under the IITA separately, the estimated tax for such year may be treated as the estimated tax of either husband or wife, or may be divided between them, as they may elect. (IITA Section 803(c))
1) The Department will accept any allocation between spouses of joint estimated payments made by them, provided only that the total of the amounts so allocated equals the total amount paid. In the absence of proof of an agreed allocation between the spouses, the joint estimated tax payments shall be allocated between the husband and wife in accordance with this subsection (e)(1). The portion of those payments to be allocated to a spouse shall be that portion of the aggregate of all those payments that bears the same ratio to the whole of the tax that the amount of tax (as defined under Section 100.8010(b)(2)) shown on the separate return of the taxpayer bears to the sum of the tax shown on the separate returns of the spouses.
2) When one of the spouses dies during the taxable year and joint estimated tax payments were made, but a joint return is not subsequently filed, estimated tax payments (including any joint payments made after the death of the spouse) may be divided between the decedent and the surviving spouse in the proportion to which the surviving spouse and the legal representative of the decedent may agree. The Department will accept any allocation between the surviving spouse and the decedent, provided only that the total of the amounts so allocated equals the total amount paid. In the event the surviving spouse and legal representative fail to agree, the estimated tax shall be allocated between the surviving spouse and decedent in the same manner as the estimated tax of husband and wife who fail to agree to an allocation of estimated tax to separate returns in accordance with subsection (e)(1).
3) The exemption from payment of estimated tax for farmers under IITA Section 803(a) and subsection (c)(1) of this Section shall apply to a couple filing a joint return only if ⅔ of the total gross income of the couple is from farming.
4) No estimated tax payment is required by a couple filing a joint return if either spouse is 65 years of age or older and a permanent resident of a nursing home, and therefore is exempt from payment of estimated tax under IITA Section 806 and subsection (c)(2) of this Section.
f) Cross References. For payment of estimated tax by electronic funds transfer, see 86 Ill. Adm. Code 750.
(Source: Added at 34 Ill. Reg. 12891, effective August 19, 2010)
Section 100.8010 Failure to Pay Estimated Tax (IITA Sections 804 and 806)
a) Penalty Imposed. Except as otherwise provided, IITA Section 804(a) imposes a penalty, computed in the manner and at the rate prescribed under Section 3-3 of the Uniform Penalty and Interest Act, upon an underpayment of an installment of estimated tax. See 86 Ill. Adm. Code 700.300 for the penalty rates applicable to a particular taxable year.
b) Definitions. For purposes of this Section:
1) Underpayment. An underpayment of an installment of estimated tax means the excess of the required installment (as determined under subsection (d)) over the amount of that installment paid on or before the due date for that installment.
2) Tax. For purposes of this Section, the term "tax" means the total regular income tax and replacement tax imposed under IITA Section 201 for the taxable year, includiv44ng the amount of any credit required to be recaptured under the IITA, less the amount of any credit allowed against that tax for the taxable year. Amounts withheld pursuant to IITA Article 7, or paid by or on behalf of the taxpayer on account of that tax, including a payment of estimated tax, shall not be considered a credit against that tax for purposes of this Section. (See IITA Section 804(g).)
3) The "tax shown on the taxpayer's return" shall be the amount of tax as shown on the original tax return for the taxable year (including any corrected return for the taxable year filed on or before the due date of the original return, including extensions). The "tax shown on the taxpayer's return" does not include the tax shown on an amended return filed subsequent to the due date of the original return for the taxable year, including extensions.
c) Installment Due Dates
1) In General
A) Individuals. When the taxable year consists of a calendar year, IITA Section 803(d) requires installments of estimated tax to be made on or before each of the following dates:
i) The 1st installment is due April 15 of that taxable year;
ii) The 2nd installment is due June 15 of that taxable year;
iii) The 3rd installment is due September 15 of that taxable year; and
iv) The 4th installment is due January 15 of the immediately succeeding taxable year.
B) Corporations. The due dates prescribed for the payment of an installment of estimated tax by a calendar year corporation shall be the same as in the case of an individual under subsection (c)(1)(A), except that the 4th installment is due December 15 of the taxable year rather than January 15 of the immediately succeeding taxable year. (See IITA Section 803(d).)
C) Fiscal Year. When the taxable year consists of a fiscal year (i.e., a 12-month taxable year commencing on any date other than January 1), IITA Section 803(g) requires installments of estimated tax to be made on or before each of the following dates:
i) The 1st installment is due on the 15th day of the 4th month of that taxable year;
ii) The 2nd installment is due on the 15th day of the 6th month of that taxable year;
iii) The 3rd installment is due on the 15th day of the 9th month of that taxable year; and
iv) The 4th installment is due the 15th day of the 12th month of that taxable year (in the case of a corporation) or of the 1st month of the immediately succeeding taxable year (in the case of an individual).
2) Due Date of Required Installment on a Saturday, Sunday or Holiday. See Section 100.5000(b) if the due date of a required installment of estimated tax occurs on a Saturday, Sunday or Holiday.
d) Amount of Required Installment
1) General Rule. Except as otherwise provided by this Section, the amount of any required installment shall be 25% of the required annual payment (as defined by subsection (d)(1)(A)). (IITA Section 804(c)(1)(A))
A) Required Annual Payment. The required annual payment means the lesser of:
i) 90% of the tax shown on the taxpayer's return for the taxable year or, if no return is filed, 90% of the tax for that year; or
ii) if a return showing a liability for tax was filed for the preceding taxable year, and that taxable year consisted of a period of 12 months,100% of the tax shown on the taxpayer's return for that preceding taxable year. (IITA Section 804(c)(1)(B))
B) When an individual taxpayer filed a joint return for the preceding taxable year but does not file a joint return with the same spouse for the current taxable year, the individual's tax shown on the return for the preceding taxable year under this subsection (d)(1) shall be that portion of the tax shown on the joint return that bears the same ratio to the whole of the tax that the amount of the tax for which the taxpayer would have been liable had a separate return been filed for the preceding taxable year bears to the sum of the taxes for which the taxpayer and his spouse would have been liable had each spouse filed a separate return for the preceding taxable year.
C) When a married couple files a joint return for the current taxable year, but did not file a joint return with each other for the preceding taxable year, the tax shown on the return for the preceding taxable year shall be the sum of the taxes shown on the separate returns of each spouse for that preceding taxable year or of the amount determined under subsection (d)(1)(B) for each spouse that filed a joint return in the preceding taxable year.
2) Annualized Income Installment
A) Annualized Income Installment as Required Installment. With respect to any required installment, if the taxpayer establishes that the annualized income installment (determined in accordance with this subsection (d)(2)) is less than the required installment computed under subsection (d)(1), then the annualized income installment shall be deemed to be the required installment. (IITA Section 804(c)(2)(A))
B) For purposes of this subsection (d)(2), any reduction in a required installment resulting from the application of this subsection (d)(2)(B) shall be recaptured by increasing the amount of the next required installment determined under subsection (d)(2)(A) by the amount of that reduction, and by increasing subsequent required installments to the extent that the reduction has not previously been recaptured under this subsection (d)(2)(B). (IITA Section 804(c)(2)(A)(ii))
EXAMPLE 1
Taxpayer, an individual whose taxable year is the calendar year, determines his or her required annual payment under subsection (d)(1) to be $13,648. Accordingly, the required installment under subsection (d)(1) for the 1st installment due April 15 of the taxable year equals $3,412 (i.e., 25% of $13,648). Taxpayer determines that his or her annualized income installment for that 1st installment period under this subsection (d)(2) is only $1,278. Accordingly, Taxpayer pays $1,278 as the required installment on April 15.
When Taxpayer determines the required installment for the 2nd installment due June 15, Taxpayer must increase the required installment determined under subsection (d)(1) by the excess of the required installment computed under that subsection for the 1st period over the annualized income installment for that period, or $2,134 (i.e., $3,412 - $1,278). Hence, the required installment computed under subsection (d)(1) for the 2nd installment due June 15 of the taxable year equals $5,546 (i.e., $3,412 + $2,134).
In determining the required installment due June 15, Taxpayer computes his or her annualized income installment for that period to be $1,660. Because the annualized income installment is less than the required installment for that period under subsection (d)(1) of $5,546, Taxpayer pays $1,660 as the required installment on June 15.
EXAMPLE 2
Assuming the same facts as in Example 1, when Taxpayer determines the required installment for the 3rd period due September 15, he or she must increase the required installment computed under subsection (d)(1) by $3,886, which is the excess of the required installment due on June 15 as computed in Example 1 over the annualized income installment for that period (i.e., $5,546 - $1,660). Hence, the required installment computed under subsection (d)(1) for the 3rd installment due September 15 is $7,298 (i.e., $3,412 + $3,886).
In determining his or her required installment due September 15, Taxpayer computes his or her annualized income installment for that period to be $3,414. Because the annualized income installment is less than the required installment for that period under subsection (d)(1) of $7,298, Taxpayer pays $3,414 as the required installment on September 15.
EXAMPLE 3
Assuming the same facts as in Example 2, when Taxpayer determines the required installment due January 15 of the next taxable year, he or she must increase the required installment computed under subsection (d)(1) by $3,884, which is the excess of the required installment for the 3rd installment period over the annualized income installment for that period (i.e., $7,298 - $3,414). Hence, the required installment under subsection (d)(1) for the installment due on January 15 is $7,296 (i.e., $3,412 + $3,884).
C) Computation of Annualized Income Installment. The "annualized income installment" for a particular installment due date is computed as follows:
i) Compute year-to-date net income under subsection (d)(2)(E).
ii) Use year-to-date income to compute annualized Illinois net income under subsection (d)(2)(F).
iii) Compute the tax due on annualized Illinois net income under subsection (d)(2)(G).
iv) Subtract any credits allowed under subsection (d)(2)(H).
v) Multiply the result by the applicable percentage for the installment due date, as provided in subsection (d)(2)(I).
vi) Subtract the total of all prior required installments for the taxable year.
D) Applicable Period. Year-to-date net income shall be computed for the applicable period as if that period comprised a separate taxable year. Under IITA Section 804(c)(2)(D), the applicable period for an individual is all the months of the taxable year that end prior to the installment due date for which the annualized net income installment is computed. Under IITA Section 804(c)(2)(E), the applicable period for a corporation is:
i) For the installment due on the 15th day of the 4th month of the taxable year, the 1st 3 months of the taxable year.
ii) For the installment due on the 15th day of the 6th month of the taxable year, the 1st 5 months of the taxable year or, at the election of the taxpayer, the 1st 3 months of the taxable year.
iii) For the installment due on the 15th day of the 9th month of the taxable year, the 1st 8 months of the taxable year or, at the election of the taxpayer, the 1st 6 months of the taxable year.
iv) For the installment due on the 15th day of the 12th month of the taxable year, the 1st 11 months of the taxable year or, at the election of the taxpayer, the 1st 9 months of the taxable year.
E) Year-to-date Net Income. Year-to-date net income is computed by treating the applicable period as a short taxable year, using the following principles:
i) The determination of whether an item income or expense is recognized in the applicable period shall be made according to the taxpayer's method of accounting used for federal income tax purposes. (IITA Section 402(a))
ii) In applying the allocation and apportionment provisions of IITA Article 3, the taxpayer shall take into account only the items that would be taken into account for allocation and apportionment purposes if the months ending prior to the installment date constituted the taxable year. For example, in computing the apportionment factor under IITA Section
304(a), a nonresident taxpayer takes into account only its actual gross receipts for the months in the taxable year ending prior to the installment date.
iii) Items of income and deduction received from a partnership, subchapter S corporation, trust or estate shall be treated as received or incurred by the taxpayer during the applicable period only if the last day of the taxable year of the partnership, subchapter S corporation, trust or estate falls within that applicable period. (See IRC sections 706(a) and 1366(a)(1).)
F) Annualized Illinois Net Income. Annualized Illinois net income is equal to the Illinois net income determined under subsection (d)(2)(E), multiplied by 12 and divided by the number of months in the applicable period, and minus:
i) any Illinois net loss deduction under IITA Section 207 available for deduction in the taxable year; provided that, in the case of a unitary business group filing a combined return when a person becomes a member of the group during the taxable year, no net loss carryover of that member may be taken into account in any applicable period ending before that person became a member; and
ii) the exemptions allowed under IITA Section 204 based on the facts and circumstances as of the last day of the applicable period.
G) Tax Due on Annualized Illinois Net Income. The tax due on the annualized Illinois net income shall be computed by multiplying the annualized Illinois net income by the applicable rate or rates under IITA Section 201, and by adding to the product of that calculation the amount of any credit required under the IITA to be recaptured based on events occurring during the applicable period.
H) Credits. The credits allowed against the tax due on the annualized Illinois net income shall include any credits allowed under the IITA based on events occurring during the applicable period. For purposes of this subsection (d)(2)(H), "credits" do not include any amount withheld from the taxpayer or any overpayment shown on the taxpayer's return for the prior taxable year for which an election was made to apply the overpayment against the estimated tax obligation for the present year. These amounts are treated as payments of estimated tax under subsection (e). In determining the credits allowed against the tax under this subsection (d)(2)(H):
i) Credits shall not be annualized, but shall be computed on the facts and circumstances of the applicable period, except to the extent that the credit, or a limitation on the amount of any credit, is based upon the amount of Illinois net income, or the amount of any item of income or expenditure taken into account in computing Illinois net income. In that case, the credit or limitation shall be determined on the basis of the Illinois net income or other item earned, received or incurred during the applicable period and annualized in accordance with this subsection (d)(2). For example, the credit under IITA Section 201(h) for property placed in service during the taxable year by a high impact business shall be based on the amount of qualifying investment made during the applicable period, without annualizing that investment. However, the limitation on the amount of the IITA 201(h) credit shall be based on the tax imposed by IITA Section 201(a) and (b), as annualized under this subsection (d)(2). In contrast, the credit allowed under IITA Section 201(k) is based upon the amount of Illinois research and development expenses deducted from gross income in the computation of taxable income. Accordingly, the credit shall be based on the annualized amount of qualifying expenses for the calendar months of the taxable year ending prior to the installment date.
ii) The entire amount of any credit carried forward from a prior year and available for use in the taxable year may be applied to reduce the tax on the annualized Illinois net income; provided that, in the case of a unitary business group filing a combined return when a person becomes a member of the group during the taxable year, no credit carryover of that member may be taken into account in any applicable period ending before that person became a member.
I) Applicable Percentage. The applicable percentage with respect to each required installment date shall be as follows:
|
Installment |
Applicable % |
|
|
|
|
1st |
22.5% |
|
2nd |
45% |
|
3rd |
67.5% |
|
4th |
90% |
e) Application of Payments to Required Installments
1) Unless expressly directed by the taxpayer to apply a payment to some other installment, each payment received by the Department will be applied first to any unpaid balance of the 1st estimated tax installment due and any excess of the payment over that unpaid balance will be applied to any unpaid balance of the 2nd estimated tax installment, and then the 3rd and 4th, in order. Amounts withheld by a partnership, subchapter S corporation or trust on behalf of the taxpayer under IITA Section 709.5 are treated as payments received by the Department on the last day of the taxable year of the partnership, subchapter S corporation or trust and applied in accordance with this subsection (e)(1). (See IITA Section 709.5(b).)
2) In the case of an individual, the amount of tax withheld under IITA Article 7 shall be deemed a payment of estimated tax. An equal part of the amount so withheld for the taxable year shall be deemed paid on each installment due date prescribed by this Section, unless the taxpayer establishes the dates on which all amounts were actually withheld. In the latter case, all amounts withheld shall be considered as payments of estimated tax on the dates those amounts were actually withheld. (IITA Section 804(g)) When more than one taxable year begins in any calendar year, no portion of the amount withheld during the calendar year will be treated as a payment of estimated tax for any taxable year other than the last taxable year beginning in that calendar year.
3) An individual having amounts withheld under Section 4(10) of the State Salary and Annuity Withholding Act [5 ILCS 365/4(10)] may elect to have amounts withheld treated as estimated tax payments made on the dates those amounts were actually withheld. (IITA 804(g-5)) The election shall be made according to Department forms. In the absence of an election, an equal part of the amount withheld shall be deemed paid on each installment due date prescribed by this Section that falls within the designated period for which the withholding was made.
4) Application of Credit for Overpayment Reported on a Return or Amended Return for the Prior Taxable Year.
A) The amount credited against estimated tax pursuant to an election to do so under IITA Section 909(b) made on a timely filed original return shall be applied to each installment, beginning with the 1st installment due (or, in the case of an overpayment that results from a payment made after the unextended due date of the return, on or after the date of the overpayment, beginning with the 1st installment due on or after the date of payment), to the extent necessary to satisfy the taxpayer's obligation or to minimize the penalty due under IITA Section 804 with respect to that installment, provided that no amount will be applied later than the date on which the return on which the election is made was filed.
B) The amount credited against estimated tax pursuant to an election under IITA Section 909(b) made by any means other than a timely filed original return shall be treated as paid on the date on which the taxpayer files the return or other document on which the election is made.
C) See Section 100.9400(b) regarding the election to have the amount of any overpayment, or portion of an overpayment, credited against estimated tax.
EXAMPLE 4. Corporation uses a calendar taxable year and files its 2014 return on August 15, 2015. The return reports an overpayment of $50,000, and contains the election to apply the entire $50,000 against Corporation's 2015 estimated tax obligation. If Corporation was required to make a payment of $60,000 on the April 15, 2015 due date of the first installment for Corporation's 2015 estimated tax in order to avoid the penalty under IITA Section 804, the entire $50,000 will be treated as paid on April 15, 2015. If Corporation was required to make a payment of $20,000 on April 15, 2015 in order to avoid penalty under IITA Section 804, $20,000 of the overpayment will be treated as paid on April 15, 2015, and the remaining $30,000 shall be treated as paid on June 15, 2015, the due date of the second installment for Corporation's 2015 estimated tax, to the extent necessary to avoid or minimize the penalty under IITA Section 804. If the required payment for June 15, 2015 is also $20,000, $20,000 of the overpayment will be treated as paid on June 15, 2015, and the remaining $10,000 of the overpayment will be treated as paid on August 15, 2015, the date the return was filed.
EXAMPLE 5. Assume the same facts as in Example 4, except that Corporation had made a payment of $17,000 on July 1, 2015. Because the $17,000 payment was made after the unextended due date of the return, it cannot be applied to an estimated tax installment due before the payment was made. Accordingly, if Corporation was required to make a payment of $60,000 on each estimated tax installment due date in order to avoid overpayment, only $33,000 of the overpayment will be treated as paid on April 15, 2015, and the remaining $17,000 will be applied to the September 15, 2015 installment. If Corporation was required to make a payment of $20,000 on April 15, 2015 in order to avoid penalty under IITA Section 804, $20,000 of the overpayment will be treated as paid on April 15, 2015, and up to $13,000 shall be treated as paid on the June 15, 2015 due date, to the extent necessary to avoid or minimize the penalty under IITA Section 804, and any amount not applied to either of those installments will be applied to the September 15, 2015 installment.
EXAMPLE 6. Corporation uses a calendar taxable year and files an amended income tax return for 2012 on December 1, 2015, showing an overpayment as the result of a federal change. If Corporation elects to have the overpayment credited against its estimated tax obligation for any taxable year after 2012, the overpayment will be treated as a payment made on December 1, 2015.
f) Application of IITA Section 804 to Short Taxable Year
1) Penalty Imposed. Except as otherwise provided, the taxpayer shall be liable to a penalty, computed in the manner and at the rate prescribed under Section 3-3 of the Uniform Penalty and Interest Act [35 ILCS 735/3-3], upon an underpayment of an installment of estimated tax required under this Section with respect to a short taxable year.
2) Underpayment Defined. An underpayment of an installment of estimated tax required with respect to a short taxable year means the amount of the required installment as determined under this subsection (f) over the amount of that installment paid on or before the due date of the installment.
3) In the case of a taxable year that is terminated early, the taxpayer is required to pay the amount due on each installment due date falling on or before the end of the taxable year, determined under subsection (d) of this Section in the same manner as for a full taxable year, and both corporations and individuals shall be required to pay the full amount of the required annual payment computed under subsection (d)(1)(A) on the 15th day of the 1st month beginning after the end of the taxable year.
4) Installment Due Dates in the Case of a Taxable Year Beginning Less Than 12 Months before the Expected End of the Tax
A) Individuals. Installments of estimated tax are not required in the case of a short taxable year of less than 4 full months. When the short taxable year consists of a period of at least 4 full months, installments of estimated tax are required on or before each of the following dates:
i) The 1st installment shall be due on 15th day of the 4th full month of that taxable year;
ii) A 2nd installment shall be due on the 15th day of the 6th full month of that taxable year, unless the short taxable year ends prior to or during that 6th full month;
iii) A 3rd installment shall be due on the 15th day of the 9th full month of that taxable year, unless the short taxable year ends prior to or during that 9th full month;
iv) The full amount of the required annual payment computed under subsection (d)(1)(A) shall be due on or before the 15th day of the 1st month of the succeeding taxable year.
B) Corporations. Installments of estimated tax are not required in the case of a short taxable year of less than 4 months. When the short taxable year consists of a period of at least 4 months, installments of estimated tax are required to be paid on or before the same due dates provided in subsection (f)(4)(A) as if the taxable year was 12 months, provided that the full amount of the required annual payment computed under subsection (d)(1)(A) shall be due on or before the 15th day of the last month of the short taxable year.
C) The taxpayer shall substitute for 25% of the required annual payment under subsection (b)(1) a percentage of the required annual payment that results in an equal percentage of the required annual payment as being the amount of the required installment. That percentage shall be based on the number of installments required for the short taxable year under this subsection (f)(4).
5) Amount of Required Installment. The amount of any required installment in the case of a short taxable year shall be determined by applying the provisions of subsection (b), with the following adjustments:
A) For purposes of determining the required annual payment year under subsection (d)(1)(A) based on the tax shown on the return for the preceding taxable year, the taxpayer shall multiply the tax actually shown on the taxpayer's return for the preceding taxable year by a fraction, the numerator of which is the number of days in the short taxable year and the denominator of which is the number of days in the preceding taxable year.
B) The taxpayer shall substitute for the applicable percentage in subsection (d)(2)(I) of this Section the percentage under this subsection (f)(5)(B) that corresponds to the number of required installments determined for the short taxable year under subsection (f)(3) or (4):
|
Number of Required Installments |
Applicable % |
|
|
|
|
4 |
22.5% |
|
3 |
30% |
|
2 |
45% |
|
1 |
90% |
6) In the case of a short taxable year that does not begin on the first day of a month:
A) For purposes of determining the installment due dates under subsection (f)(3), the partial month at the beginning of the taxable year shall be ignored.
B) The "applicable period" determined in subsection (d)(2)(D) for a particular installment due date shall include the partial month plus the number of full months otherwise specified.
C) In determining the annualized Illinois net income in subsection (d)(2)(F) for a particular installment due date, the taxpayer shall multiply its year-to-date net income by the number of days in the applicable period and divide the result by the number of days in the short taxable year.
7) The provisions of this subsection (f) may be illustrated by the following examples.
A) EXAMPLE 7
X corporation uses a taxable year ending June 30. On January 15, 2011, X is acquired by a corporation using a calendar year, requiring X to terminate its June 30, 2011 year as of the acquisition date and then to use a taxable year beginning January 16, 2011 and ending December 31, 2011.
For its short taxable year ending January 15, 2011, X is required to make estimated tax payments on October 15 and December 15, 2010 and February 15, 2011. The applicable percentage of the total tax for the taxable year that is due with each installment is 30%.
If X bases its computation of its required payment on the tax due for the taxable year ending June 30, 2010, the tax due for that year is reduced by multiplying it by 199 (the number of days in the short taxable year ending January 15, 2011) and dividing the result by 365 (the number of days in the taxable year ending June 30, 2010).
B) EXAMPLE 8
Assuming the same facts as in Example 4, for its short taxable year ending December 31, 2011, X corporation is required to make estimated tax payments on May 16, July 15 and October 17, 2011, because the period from January 16 through January 31, 2011, is disregarded in determining when an installment is due. Because the taxable year terminates before the15th day of the 12th month of the taxable year, when the 4th installment would normally be due, the 4th installment is due on December 15, 2011. Because its taxable year ending January 15, 2011 is not a 12-month taxable year, X corporation cannot compute its required annual installment for its short taxable year ending December 31, 2011 using the tax shown on its return for the previous taxable year under subsection (d)(2)(A)(ii).
g) Exceptions. The penalty imposed under IITA Section 804 and this Section shall not apply to:
1) Persons who are not required to make payments of estimated tax under Section 100.8000(c):
A) Small Amount of Estimated Tax
i) No penalty shall be imposed under IITA Section 804 with respect to any installment of estimated tax required to be paid during a taxable year in which the amount payable as estimated tax (as defined under Section 100.8000(a)) is not more than the following amounts:
|
Individuals |
$250 (for tax years ending before 12/31/01) |
|
|
|
|
|
$500 (for tax years ending on or after 12/31/01) |
|
|
|
|
Corporations |
$400 |
ii) In the case of a short taxable year, the amounts in subsection (g)(1)(A) shall be multiplied by a fraction, the numerator of which is the number of days in the short taxable year and the denominator of which is 365.
B) Estates, Trusts, Partnerships, Subchapter S Corporations and Certain Other Entities
i) No penalty shall be imposed under IITA Section 804 with respect to any installment of estimated tax required to be paid during any part of the taxable year of an organization exempt under IITA Section 205.
ii) No penalty shall be imposed under IITA Section 804 with respect to any installment of estimated tax required to be paid during a taxable year of a corporation (as defined under Section 100.9750(b)) in which that corporation computes a tax under subtitle A of the Internal Revenue Code (IRC), other than the tax imposed under section 11 (including any other tax treated under the IRC as imposed under IRC section 11), IRC section 1201(a), IRC section 55, IRC section 59A, IRC section 887, or IRC subchapter L.
iii) No penalty shall be imposed under IITA Section 804 with respect to any installment of estimated tax required to be paid during any taxable year with respect to which a corporation is exempt from federal income tax under IRC section 991.
iv) Any penalty otherwise imposed upon a bankruptcy estate under IITA Section 804 shall be abated to the same extent that the penalty for failure to make estimated payments of federal income tax would be abated under IRC section 6658.
C) Farmers. See Section 100.8000 for the exemption for farmers from the requirement to make estimated tax payments.
D) Permanent Resident of Nursing Home. See Section 100.8000 for the exemption for permanent residents of nursing homes from the requirement to make estimated tax payments.
2) No Return Required for Preceding Taxable Year. No penalty shall be imposed under IITA Section 804 with respect to any installment of estimated tax required to be paid in a taxable year by a taxpayer who was not required to file an Illinois income tax return under IITA Section 502 for the preceding taxable year. (IITA Section 804(d))
3) No Tax Liability for Preceding Taxable Year. No penalty shall be imposed under IITA Section 804 with respect to any installment of estimated tax required to be paid in a taxable year by an individual taxpayer who had no tax liability for the preceding taxable year, if the preceding taxable year was a taxable year of 12 months. (IITA Section 804(d))
4) Change in Apportionment Factor. With respect to any installment of estimated tax required to be paid under this Section before December 31, 1998, no penalty shall be imposed under IITA Section 804 on any underpayment of an installment of estimated tax to the extent that underpayment is attributable solely to the taxpayer's change in apportionment from IITA Section 304(a) to IITA Section 304(h). (IITA Section 804(d))
5) Reasonable Cause. No penalty shall be imposed under IITA Section 804 to the extent that the taxpayer shows that any underpayment of estimated tax was due to reasonable cause as determined in accordance with 86 Ill. Adm. Code 700.400. (IITA Section 804(e) and Uniform Penalty and Interest Act Section 3-8)
6) Deceased Taxpayer. No penalty shall be imposed under IITA Section 804 with respect to any underpayment of estimated tax arising subsequent to the death of the taxpayer. In determining the amount of any required installment due after the death of the taxpayer, a surviving spouse shall apply the provisions of Section 100.8000(c).
7) Member of Armed Services. No penalty shall be imposed under IITA Section 804 to the extent the taxpayer is a member of the armed services serving in a combat zone who has received an extension of time to file and pay federal income taxes under IRC section 7508. (IITA Section 602(b))
8) Innocent Spouse. No penalty shall be imposed under IITA Section 804 in the case of an innocent spouse, to the extent that spouse is relieved of liability for the penalty pursuant to IITA Section 502(c)(4).
h) Changes in Tax Law During a Taxable Year. If the IITA is amended during a taxable year, and the amendment does not contain specific provisions granting relief from penalties under IITA Section 804, no penalty imposed by IITA Section 804 shall apply for late payment of an installment of estimated tax due before the amendment becomes law if, on or before the due date of that installment, the taxpayer has paid the estimated tax due under the annualized income installment method in subsection (d)(2) applied using the IITA as in effect prior to the date the amendment became law.
EXAMPLE 9
P.A. 93-840 disallows certain subtractions allowed under prior law. P.A. 93-840 did not become law until July 30, 2004, but applies to tax years ending on or after December 31, 2004. A calendar-year taxpayer who, on or before June 15, 2004, had paid the estimated tax due under subsection (d)(2), computed by allowing the subtractions subsequently disallowed by P.A. 93-840, shall not be subject to penalty under IITA Section 804 with respect to the installment due on June 15, 2004.
EXAMPLE 10
The research and development credit allowed under IITA Section 201(k) was repealed by P.A. 93-29 (effective June 20, 2003) for tax years ending on and after December 31, 2003, and an identical research and development credit was enacted in IITA Section 201(k) by P.A. 93-840 (effective July 30, 2004). A calendar-year taxpayer would not be subject to penalty under IITA Section 804 with respect to the installment of estimated tax due on June 15, 2003 if, on or before June 15, 2003, the taxpayer had the estimated tax due under subsection (d)(2) computed by allowing the research and development credit. However, in computing the estimated tax due under subsection (d)(2) for the June 15, 2004 installment, the taxpayer may not claim a research and development credit.
i) Cross References. For estimated tax requirements of members of a combined group, see Section 100.5230.
j) Effective Dates. The provisions of subsection (f) of this Section shall be effective for taxable years beginning on or after January 1, 2011.
(Source: Amended at 40 Ill. Reg. 15575, effective November 2, 2016)
SUBPART X: COLLECTION AUTHORITY
Section 100.9000 General Income Tax Procedures (IITA Section 901)
a) Collection procedure. The Illinois income tax system basically is one of self-assessment. In general, each person or taxpayer liable for tax is required to file a prescribed form of return showing the facts upon which tax liability may be determined and assessed; the taxpayer is required to compute the tax due on the return and make payment thereof on or before the due date for filing the return. If the taxpayer fails to pay all or any part of the tax when due, the Director, after assessment, issues to each person liable for any unpaid portion thereof, a notice and demand for payment at the place and time stated in the notice. The income tax is principally collected through witholding at the source or by payments of estimated tax required by law to be filed by certain individual and corporate taxpayers. Neither withholding nor payment of estimated tax relieves a taxpayer from the duty of filing an income tax return otherwise required.
1) Prior to January 1, 1994, IITA Section 1003(a) provides that interest at the rate of 9% per annum (or at such adjusted rate as is established under Section 6621(b) of the Internal Revenue Code) shall be paid on unpaid amounts of tax imposed by the Act from the due date to the date paid; however, subsection (e) thereunder provides that, if a notice and demand for payment of an amount due is issued, interest shall not be imposed for the period after the date of such issuance if such amount is paid within ten days.
2) On and after January 1, 1994, IITA Section 1003(a) provides that interest shall be paid in the manner and at the rate prescribed in Section 3-2 of the UPIA for the period from such date to the date of payment of such amount. Section 3-2(c) of the UPIA provides that if notice and demand is made for the payment of any amount of tax due and if the amount due is paid within 30 days after the date of such notice and demand, interest on the amount so paid shall not be imposed for the period after the date of the notice and demand.
b) Examination and determination of tax liability
1) Filing and examination of return. After the income tax returns are filed with the Department, they are sorted, classified, and processed (which includes inspection of the return to verify the accuracy of the tax and supporting computations therein). Errors apparent in the return are corrected (see Section 100.9200(a)(2) below) and notification of the error and the corrections are sent to the taxpayer. Thereafter, many of these returns are selected for examination which may be conducted by correspondence, office audit, or field audit. If, after examination, the return is accepted as filed, the taxpayer is notified by appropriate "no change" letter or report. If, as a result of examination, adjustments are proposed increasing the amount of the tax liability shown on the return or (with or without a claim for refund) decreasing it, and the taxpayer agrees in whole or in part with such adjustments, he may be requested to execute Illinois Form IL-870, waiving the restrictions on assessment and collection, and enabling immediate assessment upon acceptance by the Department after appropriate review of the examiner's (Revenue Auditor's) report. If adjustments are proposed with which the taxpayer does not agree, he ordinarily is afforded certain administrative appeal rights as described below which, however, do not apply in any case where criminal prosecution is under consideration or, in the discretion of the Director, the state's interest thereby would be prejudiced. Nor is appropriate action otherwise precluded where the assessment or collection of the tax is in jeopardy (see Section 1102 of the Illinois Income Tax Act).
2) Office conference with Department auditor and his supervisor. A taxpayer initiates the administrative appeal rights adverted to in subsection (b)(1) above by requesting, after the Department has proposed adjustments, an office conference to be attended by either himself or his representative (or both), the auditor, and the auditor's supervisor or other designee; the request may be by telephone or in writing. Written objections to the adjustments proposed are not required. The objectives of the office conference are to provide taxpayers an opportunity by discussion and further consideration to reach an early agreement respecting disputed items arising from the examination and to assure to the extent possible that all available pertinent facts, contentions, and viewpoints are included in the file and taken into account in the formulation of recommendations. Further objectives are to insure that the Act provisions as interpreted by regulations and rulings are properly applied and that the recommendations are consistent with any Department positions thereunder, as well as to provide a full explanation to the taxpayer and to reflect in the case file the findings and conclusions reached and the reasons therefor. If as a result of the office conference adjustments are proposed with which the taxpayer agrees in whole or part, he again ordinarily will be requested to execute the aforementioned Form IL-870 subject to the Department's review and acceptance; see Section 100.9220(a) for the effect such execution has on the running of interest.
3) Audit Review; Issuance of Notice of Deficiency. If, after the office conference, the taxpayer does not agree with the proposed adjustments, the administrative case file will then be submitted to the Department's audit review staff for technical and arithmetic review. After such review, the Audit Review staff will issue a Notice of Deficiency pursuant to IITA 904(c) for any unagreed or disputed amounts. Notices of Deficiency, although to be prepared and issued by Audit Review, due to being in the nature of pleadings, shall be subject to review before issuance by the Income Tax Legal Division.
c) Protest Procedures. Pursuant to IITA Sections 904(d) and 908(a) a taxpayer may protest the Notice of Deficiency by requesting a hearing before the Department. The taxpayer has 60 days (150 days if the taxpayer is outside the United States) after the issuance of a Notice of Deficiency to submit a proper protest to the Audit Review Division. Failure to properly protest the Notice of Deficiency within the 60 (150) day period results in the automatic assessment of the tax, and penalty shown therein. See 86 Ill. Adm. Code 200.120 for protest requirements. Upon receiving a timely protest to the adjustments proposed in the examiner's report, the administrative case file will be forwarded to the Department's Income Tax Legal Division.
d) Hearings. Department Hearings shall be conducted in accordance with the regulations provided at 86 Ill. Adm. Code 200, "Practice and Procedure for Hearings Before the Illinois Department of Revenue".
(Source: Amended at 25 Ill. Reg. 4929, effective March 23, 2001)
Section 100.9010 Collection Authority (IITA Section 901)
In general. The Department shall collect the taxes imposed by the Act and shall pay all monies received thereunder into the State Treasury as provided by IITA Section 901.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.9020 Child Support Collection (IITA Section 901)
a) Effective January 1, 1996, the Department of Revenue has been given the statutory responsibility of collecting certain child support arrearages.
b) Upon certification of past due child support amounts from the Department of Public Aid, the Department of Revenue may collect the delinquency in any manner authorized for the collection of a delinquent personal income tax liability. [20 ILCS 2505/39b52]
1) The Department of Revenue will begin collection efforts with respect to child support arrearages only after the arrearages are certified to the Department of Revenue by the Department of Public Aid.
A) Child support arrearages certified to the Department of Revenue for collection are final arrearages. In other words, referrals will not be made to the Department of Revenue until the non-custodial parent has been afforded an opportunity to contest the amount of the arrearage through administrative and judicial means. The non-custodial parent who owes the arrearage has no right of hearing before the Department of Revenue.
B) The Department of Revenue lacks the statutory authority to begin collection activities on its own initiative with respect to a child support arrearage that has not been certified to the Department of Revenue by the Department of Public Aid.
C) The Department of Revenue has no authority to accept referrals for collection of past due child support from the public, from the courts, or from any other agency of local, state, or federal government other than the Department of Public Aid.
2) Once a child support arrearage has been certified to the Department of Revenue, the Department of Revenue will use all collection methods authorized by the Illinois Income Tax Act. Article 11 of the Act [35 ILCS 5/Art. 11] sets forth various collection activities that will be utilized by the Department of Revenue.
c) The Department of Revenue shall notify the Department of Public Aid when the delinquency or any portion of the delinquency has been collected. Any child support delinquency collected by the Department of Revenue, including those amounts that result in overpayment of a child support delinquency, shall be deposited in, or transferred to, the Child Support Enforcement Trust Fund. [20 ILCS 2502/39b52]
1) The Department of Revenue is responsible only for collection of child support arrearages certified by the Department of Public Aid. Any distribution of funds that are collected and deposited in the Child Support Enforcement Trust Fund is the responsibility of the Department of Public Aid.
2) Questions concerning the allocation of child support amounts that are collected by the Department of Revenue (for example, between arrearages and current support, or between custodial parent and the Department of Public Aid) must be directed to the Department of Public Aid.
(Source: Added at 20 Ill. Reg. 6981, effective May 7, 1996)
SUBPART Y: NOTICE AND DEMAND
Section 100.9100 Notice and Demand (IITA Section 902)
a) In general
1) Notice required. Except as provided in subsection (b) below, the Director or his delegate shall issue written notice and demand for payment for any unpaid portion of taxes, penalties, and interest imposed by the Act as soon as practicable after an amount payable thereunder has been deemed assessed. The written notice (see IITA Section 1402) shall be given to the person or persons liable for the unpaid amount and shall state a time and place for payment. (Effective for taxable years ending after December 30, 1973, the written notice shall be sent by first class mail or left at the person's (or persons') usual place of business.)
2) Tax shown as due on returns. IITA Section 601(a) requires that a taxpayer pay (without notice or demand) the amount of tax shown on a return which remains unpaid after taking into account certain amounts enumerated in IITA Section 601(b).
3) Self-assessment; mathematical errors. IITA Section 903(a)(1) and (4) provides that the amount of tax shown due on a return or on an amended return increasing the tax shall be deemed assessed as of the date the return is filed but that, irrespective of other provisions, any amount paid as tax or in respect of tax paid under the Act other than amounts withheld or paid as estimated tax under Articles 7 or 8 shall be deemed assessed upon the date of receipt of payments. If as a result of a mathematical error the amount of tax shown on a return or on such amended return is understated, the Department is to notify the taxpayer that the portion of the correct amount of tax in excess of that shown on the return has been (deemed) assessed is due. Also, thereunder, the tax computed by the Department on a return properly filed without the tax computation is to be deemed assessed as of the date when payment is due.
4) Notice of deficiency as prerequisite to assessment. Inasmuch as the tax deemed assessed in each of the above instances is based on the facts reported in the return or amended return filed by the taxpayer, any notice and demand issued to effect immediate collection of the tax remaining unpaid in connection therewith is not considered to be a notice of deficiency as that term is used in IITA Section 903(a)(2). However, a notice of deficiency is a prerequisite for assessment if the taxpayer fails to file a tax return and under the authorization in IITA Section 904(b) the Department determines the amount of tax and penalties due according to its best judgment and information.
5) Interest
A) Prior to January 1, 1994, IITA Section 1003(a) and (e) provides that interest at the rate of 9% per annum (or at such adjusted rate as is established under Section 6621(b) of the Internal Revenue Code) is to be paid on any amount of tax imposed by the Act not paid on or before the date prescribed for payment thereof except that, if paid within 10 days after the date of issuance of notice and demand therefor, interest is not to be imposed for the period after the notice and demand issuance date. Interest begins with the date of issuance of the notice and demand on any penalty not paid within the 10-day period. (See IITA Sections 601(a) and 1003.)
B) On and after January 1, 1994, IITA Section 1003(a) provides that interest shall be paid in the manner and at the rate prescribed in Section 3-2 of the UPIA for the period from such date to the date of payment of such amount. Section 3-2(c) of the UPIA provides that if notice and demand is made for the payment of any amount of tax due and if the amount due is paid within 30 days after the date of such notice and demand, interest on the amount so paid shall not be imposed for the period after the date of the notice and demand.
b) Judicial review
1) In general. If a notice of deficiency has been issued and deemed assessed under IITA Section 903(a)(2) and the person (or persons) liable for the tax has filed a timely protest under IITA Section 908, notice and demand respecting such assessment shall not be made until all proceedings in court for review of the assessment have terminated or the time for taking thereof has expired without such proceedings being instituted.
2) Protest of notice of deficiency. IITA Section 908 provides that after a notice of deficiency is issued the taxpayer may file a protest against it within 60 days (150 days if the taxpayer is outside the United States). The Department's action on the protest, if no hearing was requested, becomes final 30 days after the mailing of a notice of decision. If a hearing was requested, the Department's action becomes final 30 days after the mailing of a notice of decision unless a rehearing is requested within that 30-day period. If, within that 30-day period, the taxpayer requests a rehearing on the decision, the Department's action becomes final either upon its issuance (within 10 days after the rehearing request is received) of a denial of the request or, if such denial is not issued within that 10-day period, upon the Department's issuance (as soon as practicable) of a notice of final decision. (See Section 100.9200 and this Section 100.9100.)
3) Administrative Review of decisions. IITA Section 1201 states that the provisions of the Administrative Review Act and rules adopted pursuant thereto shall apply to and govern all proceedings for the judicial review of the Department's final actions under IITA Sections 908(d) and 910(d). Section 4 of that Act states that every action to review a final administrative decision shall be commenced by the filing of a complaint and the issuance of summons within 35 days from the date of service on the party affected of a copy of the decision sought to be reviewed.
c) Action for recovery of taxes
1) In general. The Department, at any time that levy proceedings may be timely commenced under IITA Section 1109, regardless of whether a notice of lien was filed under the provisions of Section 1103 may bring an action in any court of competent jurisdiction within or without this state to recover the amount of unpaid taxes, penalties, and interest due under the Act. For purposes of such action, certification by the Department of the correctness of the amount of any deficiency, its assessment, and of its procedural compliance with all provisions of the Act shall constitute prima facie evidence of such correctness, assessment, and procedural compliance.
2) Levy and sale authorized. If tax due under the Act remains unpaid for 10 days after issuance of a notice and demand for payment and no review proceedings have been commenced, then under IITA Section 1109, the Department may institute levy and sale proceedings against real and personal property of the taxpayer within 20 years after the filing (under IITA Section 1103) of a notice of lien.
3) Liens. Under IITA Sections 1102 and 1103, the Department may file a notice of regular lien or jeopardy assessment lien respecting the amount due of unpaid tax and penalty (plus interest due and unpaid at the time the notice of lien is filed) in the office of the Recorder of Deeds in the county in which the property (real or personal) subject to the lien is located. If title to land to be affected by the lien notice is registered under the May 1, 1897 Act concerning land titles mentioned in IITA Section 1103, the notice is to be filed in the office of the Registrar of Titles of the county in which the property subject to the lien is situated. (See also IITA Section 1109.)
(Source: Amended at 25 Ill. Reg. 4929, effective March 23, 2001)
SUBPART Z: ASSESSMENT
Section 100.9200 Assessment (IITA Section 903)
a) In general.
1) Returns.
A) The amount of tax shown to be due on a taxpayer's return shall be deemed assessed on the date of the filing of the return. If upon verifying the taxpayer's properly filed return the Department finds that it contains no tax computation or, upon verifying the tax computation on the return, finds that due to a mathematical error (see subparagraph (2) below) the amount of tax shown thereon is understated, it is to notify the taxpayer that the amount of tax or the additional amount required to correct the amount shown as tax, as the case may be, has been assessed and is due. The taxpayer has no right of protest against such notice inasmuch as it does not constitute a notice of deficiency within the meaning of that term as used in IITA Section 904. (See 86 Ill. Adm. Code 100.9300.) With respect to tentative returns (Applications for Extension of Time to File (Form IL-505)) showing the amount properly estimated as the tax for the taxable year as provided in IITA Section 602(a):
i) the amount of properly estimated tax reported on a tentative return shall be deemed assessed on the filing date (the date payment is required) thereof,
ii) the payment of all or any part of such amount is in respect of and constitutes tax imposed by the Act payable into the General Revenue Fund in the State Treasury (and not a taxpayer deposit), and
iii) interest on any overpayment in accordance with 86 Ill. Adm. Code 100.9400(c)).
B) Refer to 86 Ill. Adm. Code 100.9320(f) and 100.9410(c) respecting extension by agreement at the Department's request of the limitations period for issuance of a notice of deficiency or the filing of a claim for refund by the taxpayer. An examination of a return ordinarily will not be conducted or begun until after the last day prescribed for timely filing of the final return (extensions included). Within the context and meaning of IITA Sections 505 (time and place for filing), 602(a) (tentative payments), 904(b) (no return filed), 905(a) (limitation on notices of deficiency), 911(a) (limitations on claims for refund), and 1001 (penalty for failure to file), "return", "tax return", or "any tax return" refers to the taxpayer's final return and not to a tentative return. For purposes of commencement of the limitations period for issuing notices of deficiency by the Department (see IITA Section 905(a) and (h)), and for filing claims for refund by the taxpayers (see IITA Section 911(a) and (e)), a return filed prior to the statutory due date (when no extension has been granted) is deemed filed as of the statutory due date, and a return filed prior to an extended due date is deemed filed as of the extended due date.
2) Mathematical error defined and illustrated.
A) Mathematical errors are to be distinguished from adjustments based on a Department determination of correct tax liability for the taxable year resulting from an examination (i.e., an audit) of the return (together with the taxpayer's books and records) after it is accepted and processed. (See paragraph (1) above and 86 Ill. Adm. Code 100.9300 below.)
B) The term "mathematical error", calling for informal inquiry to the taxpayer in apparently appropriate cases or for issuance of a notice of tax due in addition to the tax liability shown on or paid with the original return, is of substantial administrative importance. Its use enables the Department with a minimum of correspondence and inconvenience to taxpayers to process or to complete the processing of returns containing defects, such as:
i) arithmetic errors or incorrect computations on the return or supporting schedules;
ii) entries on the wrong lines;
iii) omission of required supporting forms or schedules or of the information in whole or part called for thereon; and
iv) an attempt to claim, exclude, deduct, or improperly report, in a manner directly contrary to the provisions of the Act and related regulations, any item of income, exemption, deduction or credit.
C) The proper response to a mathematical error notice of additional tax due is for the taxpayer promptly, within the time specified in the notice (to avoid other collection efforts and the assessment of interest thereon under IITA Section 1003), to pay the amount due unless the defect(s) can be corrected by the taxpayer's furnishing correcting information including, for example, any supporting forms or schedules indicated to have been omitted from the return. If the Department timely receives payment or correcting information which satisfactorily corrects all of the defects indicated, it shall cancel the previously issued notice of additional tax due; if the information received only partially corrects the defects indicated in the notice, an appropriately amended notice may be issued.
D) Referring to the type of defect described under subsection (B)(iv) above, if in filing the original return the taxpayer views applicable provisions of the Act as unconstitutional or otherwise disagrees with the interpretation of the Act provided in the Illinois Income Tax Regulations prescribed by the Department, the taxpayer should file the return in accord with the Act and the Department's interpretive regulations. Thereafter, the taxpayer properly can test the meaning or validity of the Act and regulations by filing an appropriate claim for refund of tax overpayment. (See 86 Ill. Adm. Code 100.9400(f), et seq.)
E) Situations illustrating defects such as those referred to in paragraph (D) above, for example, include but are not necessarily limited to a failure to report, as modifications to the taxpayer's federal adjusted gross or taxable income (provided in IITA Section 203), the additions provided for representing amounts excluded from federal taxation but taxable by Illinois or attempts to report subtractions other than those expressly provided for.
3) Notice of deficiency. If a notice of deficiency has been issued and a protest thereto is not filed, the amount of deficiency is to be deemed assessed as provided in IITA Section 903(a), which is upon the expiration of 45 days (150 days if the taxpayer is outside the United States) from the statutory notice issue date. If a notice of deficiency is issued and a protest is filed, the amount of the deficiency is to be deemed assessed when the Department's decisions thereon becomes final (see 86 Ill. Adm. Code 100.9100(b)(1) and (3)). Under IITA Section 908 the Department's action on the protest, if no hearing was requested, becomes final 30 days after the mailing of a notice of decision. If a hearing was requested, the Department's action becomes final 30 days after the mailing of a notice of decision unless a rehearing was requested within that 30-day period. If, within that 30-day period, the taxpayer requests a rehearing on the decision, the Department's action is to become final either upon its issuance (within 10 days after the rehearing request is received) of a denial of the request or, if such a denial is not issued within that 10-day period, upon the Department's issuance (as soon as practicable after a rehearing or, if granted in lieu thereof, a Departmental review) of a notice of final decision. (86 Ill. Adm. Code 100.9100(d).)
4) Federal change. If a taxpayer concedes the accuracy of a change or correction affecting the computation of his Illinois base or net income (viz., a change of tax liability reported on his federal income tax return or of any item of income, deduction, or loss on which such liability is based, or of the number of personal exemptions to which he is entitled under 26 U.S.C. 151), any deficiency in Illinois income tax liability resulting from the taxpayer's report of the federal change on Form IL-506, Form IL-1040X, or Form IL-1120X, as required under the provisions of IITA Section 506(b), is to be deemed assessed on the date of filing such report and the assessment is to be deemed timely irrespective of any other provision of the Act. IITA Section 203(a), (b), and (d) defines "base income" as a person's properly reportable federal adjusted gross income or taxable income, as the case may be, subject to certain specified modification; see IITA Section 204 for "net income" respecting individual taxpayers. Thus, it shall be the Department's position and practice to rely upon and accept the federal Internal Revenue Service determination as to the amount of a taxpayer's adjusted gross or taxable income and the number of exemptions to which he is entitled for federal income tax purposes. Adherence to that position shall be subject to exception only in rare circumstances such as where the Internal Revenue Service for some reason (e.g., where no change in federal tax liability would result) might fail or decline to act, or where the 18-month statutory period of limitations for prosecution would expire before action by IRS. IITA Section 506(b) also requires that a notification of the alteration, showing the taxpayer's address and signed by him or his representative, be filed with the Department not later than 120 days after such alteration has been agreed to or finally determined or after any federal income tax deficiency or refund, abatement, tentative carryback adjustment or credit resulting therefrom, has been assessed or paid for federal income tax purposes. Such finality also exists where a taxpayer executes (and IRS accepts) a Form 870 agreement waiving the restrictions on assessment or pays any asserted tax increase, even if it is his intent thereafter to file a claim for refund for all or part of such tax (in such instance, the claim would constitute a separate case), or after any federal income tax deficiency or refund, abatement, tentative carryback adjustment or credit resulting therefrom, has been assessed or paid for federal income tax purposes.
b) Limitations on assessment. No deficiency is to be assessed respecting a taxable year for which a return was filed unless a notice of deficiency for such year was issued not later than the date prescribed in IITA Section 905. (See 86 Ill. Adm. Code 100.9320.)
(Source: Amended at 11 Ill. Reg. 2450, effective January 20, 1987)
Section 100.9210 Waiver of Restrictions on Assessment (IITA Section 907)
a) Payment; Form IL-870. Whether or not a notice of deficiency has been issued, the taxpayer shall have the right at any time to waive the restrictions on assessment and collection of the whole or any part of any assessment proposed under the Act by properly executing and submitting Form IL-870. Also, payment (before a deficiency notice has been mailed) of tax in excess of that shown on the original return for any taxable year which has become assessed constitutes a waiver of restrictions on assessment and collection which will be taken into account in determining whether or not there is a deficiency for which a statutory notice must be issued, for example, payment of the additional amount due on an amended return showing an increase of tax, see IITA Section 903(a)(4). Payment of assessed tax stops the running of any interest imposed thereon under IITA Section 1003. Where an executed waiver on Form IL-870 (or Form IL-870 AD or Form IL-870 RH) is submitted without payment and a notice and demand for the tax is not issued by the Director or his delegate within 30 days thereafter, interest will not be imposed on the deficiency during the period beginning immediately after such 30th day and ending with the date of the notice and demand; under the further provision in IITA Section 1003(e), neither will interest be imposed during the 10-day period beginning with that date provided payment is made within that 10-day period.
b) Form IL-870 AD; Form IL-870 RH. Although waiver of the restrictions on assessment and collection, by payment or the filing of Form IL-870, does not have the effect of a closing agreement (as does Form IL-870 AD) nor does it prevent expiration of the statute of limitations respecting certain adjustment items and issues (as does Form IL-870 RH) – see 86 Ill. Adm. Code 100.9100, it does preclude a right to a formal hearing under IITA Section 902(b) unless thereafter the taxpayer files a claim for refund under IITA Section 909(d) which in whole or part becomes finally denied by the Department under IITA Sections 909(f) or 910(d).
SUBPART AA: DEFICIENCIES AND OVERPAYMENTS
Section 100.9300 Deficiencies and Overpayments (IITA Section 904)
a) Examination of return
The Department shall examine a return as soon as practicable after it is filed to determine the correct amount of tax. If for reasons other than mathematical error (see Section 100.9200(a)(1) of this Part) the Department finds that the correct amount of tax exceeds that shown on the return, and the taxpayer disagrees, the Department then shall issue to the taxpayer, subject to applicable limitations in IITA Section 905 (see Section 100.9230 of this Part), a notice of deficiency which shall set forth the amount of tax and any penalties proposed to be assessed. (See IITA Section 904(c).) Note that, in the absence of a written protest of the notice so issued (see 86 Ill. Adm. Code 200.120(b)), the Department's final action thereunder is not an administrative decision subject to judicial review (except as to jurisdictional questions) under the provisions of the Administrative Review Act (see Section 100.9600 of this Part). If the Department finds that the tax paid exceeds the correct amount, it shall credit or refund the overpayment as provided by IITA Section 909. The Department's findings under this subsection (a) shall be deemed prima facie correct and shall constitute prima facie evidence of the correctness of the amount of tax and penalties due.
b) No return filed
If any taxpayer fails to file a return required by the Act, the Department under its authority for access to books and records and to conduct examinations, investigations, and hearings provided in IITA Sections 913 through 916, using any reasonable method in accordance with its best judgment and information, shall determine the correct amount of tax due and without any time limitation (see IITA Section 905(c)) shall issue to the taxpayer a notice of deficiency setting forth the amount of tax and penalties proposed to be assessed. The term "reasonable method", for example, shall include any method or combination of methods to reconstruct the taxpayer's Illinois net income established or acceptable under federal 26 USC 446, e.g., methods based in whole or part on cash register receipts, specific items of income or expense, bank deposits, expenditures (including use of the rule in Cohan v. Commissioner, 39 F. 2d 540 (2d Cir.), to determine the amounts of allowable expenses), net worth, or other acceptable or accepted method. (In this connection see also Section 100.9200(a)(4) of this Part.) The Department's determination shall be deemed prima facie correct and shall constitute prima facie evidence of the correctness of the amount of tax due.
c) Notice of deficiency
A notice of deficiency issued under the Act shall set forth the reasons therefor and a basis sufficient to inform the taxpayer of the adjustments giving rise to the proposed assessment. In case a joint return was filed, the Department may issue a single joint notice of deficiency to the taxpayers unless it has been notified by either of the spouses that separate residences have been established in which case it shall issue the joint notice of deficiency to each spouse.
d) Assessment when no protest
The amount of tax and penalties specified in a notice of deficiency shall be deemed assessed upon the expiration of 60 days (150 days if the taxpayer is outside the United States) from the date of issuance to the taxpayer except only for such amounts as to which the taxpayer shall have filed a protest as provided in IITA Section 908. (See 86 Ill. Adm. Code 200.120(b).)
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.9310 Application of Tax Payments Within Unitary Business Groups (IITA Section 603)
a) In general
1) This Section relates to the exercise of the election provided in IITA Section 603 with respect to overpayments and liabilities that arise as the result of:
A) the filing of an original return;
B) an assessment due to a mathematical error;
C) the filing of an amended return showing an increase in tax liability;
D) the filing of an amended return showing a decrease in tax liability which is approved by the Department;
E) the submission by a taxpayer of a signed Form IL-870 waiver of restrictions on assessment and collection under Section 907 of the Act; and
F) the execution of a Form IL-870-AD pursuant to Section 100.9000(c)(5) of this Part.
IITA Section 603 was repealed by Public Act 88-195, which also amended IITA Section 502(e) to require combined returns for taxable years ending on or after December 31, 1993. No election under that Section may be made with respect to taxable years ending on or after December 31, 1993.
2) If the overpayment arises from subsection (a)(1) (A) or (D) above, it may only be credited against the liability for the same taxable year of one or more other taxpayers that are members of the same unitary group for that taxable year. If the overpayment arises from subsection (a)(1)(E) or (F) above, it may be credited against the liability of one or more other members of the same unitary group for any taxable year within the audit period of the electing company. The audit period of the electing company is any taxable year for which the original return or an amended return of the electing company has been examined under IITA Section 904(a) or 909(e) and the electing company has been notified that the correct tax is less than, equal to, or more than the amount of tax already assessed.
b) Elements of the election. The election may only be made by a taxpayer that has an overpayment and has filed its tax return. The election is only available for taxable years ending before December 31, 1985. The election, including the alternative election, is binding and cannot later be amended, revised, or cancelled by the taxpayer. The election must be specific on the following matters:
1) the identities of other members of the unitary business group to which the overpayment is assigned,
2) the amount of the overpayment assigned to each such member, and
3) the date the overpayment was made.
c) Meaning of overpayment. A company's overpayment for a taxable year is the amount by which its payment and credits for that year exceed its assessed liability for the same year under IITA Section 903, except for any penalties imposed under IITA Section 804 as a result of making this election.
1) In ascertaining whether a taxpayer has an overpayment for a particular taxable year and in computing the amount of such overpayment, an amended return constituting a claim for refund under IITA Section 909(d) shall not be treated as reducing the taxpayer's assessed liability for the taxable year unless the taxpayer has received a notice from the Department that the claim has been approved and that a refund will be issued.
2) If an overpayment has been refunded or credited forward to the taxpayer's next taxable year prior to an election being made, that overpayment is no longer available to be used as an offset against any other member's liability, and the refund or credit forward will not be reversed or cancelled by the Department at the request of the taxpayer. An overpayment elected to be credited forward to the taxpayer's next taxable year will be considered made as of the first installment due date of the credit carryforward year. Consequently, a credit carryforward will be binding once the due date for the first estimated tax installment of the carryforward year has passed without an election to offset having been made, and such overpayment will not be available for offset after that date. For purposes of this section the date on which a refund will be considered to be made will be the "process date," meaning the date the Department processes an account by computer for the issuance of a warrant, which is permanently recorded date maintained by the Department.
d) Procedure
1) Manner and time for making an election. The election must be made on forms prescribed by the Department, and it must be filed before the Department has issued a refund for the overpayment or before the overpayment has been credited forward to the taxpayer's next taxable year. All the members of a unitary group who wish to file an election must do so at the same time and on the same form. The election is only available to unitary business group members that have overpayments. Nothing in this Section permits a member of the unitary business group having a balance due on its liability to claim unilaterally the overpayment made by another member for the same taxable year. Both the overpaid and underpaid members are bound by the consequences of the election. The election should be filed with the original or amended returns which are related to the election if those returns have not been previously filed.
2) The Department's response to the election. As soon as practicable (but not later than 3 months) after the election is filed, the Department shall inform the electing taxpayer and each taxpayer that is to receive an assignment of payments pursuant to the election that the election has been approved or disapproved. An election will be disapproved if it violates any of the substantive or procedural requirements set out in this Section. In addition, an election may be disapproved if the Department has chosen to exercise its right under IITA Section 909(a) or Section 39e of the Civil Administrative Code of Illinois to use the overpayment to defray another Illinois tax liability of the electing taxpayer, thus causing the overpayment to be less than the electing taxpayer had anticipated in filing its election.
3) Alternative elections
A) If the election is disapproved because it is premised on a mistake as to the size of the overpayment, the notice of disapproval must provide the electing company with an explanation of the correct calculation of the overpayment, if any. If the election is disapproved because it violates one of the other requirements set out in this Section, the notice of disapproval must state the nature of the violation. In either event, the electing company shall have 45 days from the date that the notice of disapproval is issued to file an alternative election, provided that an election otherwise meeting the requirements of this Section is possible. A notice of disapproval is considered issued on its postmark date. The alternative election may include overpaid members of the unitary group which were not included in the original election. The alternative election shall be made on the form prescribed by the Department and should take into account whatever mistakes or violations the Department has cited in its notice of disapproval. If, by reason of the matters dealt with in the Department's notice of disapproval, the electing company is shown not to have an overpayment for the taxable year, then an alternative election may not be filed. In situations in which an alternative election may be filed, if one is not filed within 45 days of the date that the notice of disapproval is issued, then all companies involved will be treated as though no election had ever been attempted.
B) The Department will approve an election, if it is premised on a mistake in the size of the electing company's overpayment and if precisely the same election could be made on the basis of the reduced overpayment.
i) EXAMPLE: Corporation A, Corporation B, and Corporation C are all members of the same unitary business group for their taxable years ended November 30, 1984. Each filed its Illinois income tax return on February 15, 1985 on a combined apportionment basis with the other two. Corporation C showed a balance of tax due on its return of $20,000; Corporation A showed an overpayment of $20,000; and Corporation B showed an overpayment of $40,000 on its return. Corporation A filed an election under this Section, assigning its entire overpayment to Corporation C and specifying that $5,000 should be considered as having been paid by Corporation C on each of the four dates that Corporation A had made estimated tax installments. Corporation B indicated on its return that its entire $40,000 overpayment should be refunded. In processing Corporation A's return, the Department identified a mathematical error which caused an additional $16,000 to be assessed on Corporation A's return with a consequent reduction of Corporation A's overpayment by that same amount. In addition to notifying Corporation A of the mathematical error assessment, the Department notified both Corporation A and Corporation C that the election had been disapproved. At the time the disapproval notices were issued, Corporation B still had not received its $40,000 refund.
ii) QUESTION: The question is whether the tax compliance personnel of the A-B-C unitary business group have any alternative to simply having Corporation A file an alternative election assigning $4,000 to Corporation C and having Corporation C pay whatever Section 804 penalty and interest may accrue as a result of its $16,000 balance due.
iii) ANALYSIS AND CONCLUSION: Corporations A and B may make an alternative election to assign $4,000 and $16,000, respectively, to Corporation C or Corporation B may make an alternative election to assign $20,000 of its unrefunded overpayment to Corporation C.
e) Consequences of the election as between the electing company and the company receiving the assignment of overpayments
1) Once an election is approved, the electing company loses all entitlement to the overpayments assigned and all benefits which would otherwise have accrued to it under the Act as the actual payor of the overpayments assigned. Conversely, once an election is approved, companies receiving assignments of overpayments shall be entitled to all of the benefits that would have accrued to them under the Act had they themselves made the payments assigned to them at the times specified in the election.
A) EXAMPLE: Corporation A and Corporation B are part of the same unitary business group for calendar 1984. Corporation A's total Illinois income tax liability for 1984 is $20,000 and its total payments, $30,000. Corporation B's total Illinois income tax liability for 1984 is $12,000 and its total payments, $2,000. Corporation A makes an election assigning its entire $10,000 overpayment to Corporation B. The election is approved by the Department, and the companies are so notified. At a later date, Corporation B discovers that an item of its own nonbusiness (nonapportionable) income, which it had allocated to Illinois on its original return really should not have been allocated to Illinois under Section 303 of the Act. Corporation B files an amended return, relating to this item, claiming that its liability for 1984 should have been $6,000 less than shown on its original return and that it is consequently entitled to a refund of $6,000. The Department examines the claim under Section 909(e), determines that it is meritorious, and issues a notice of refund. Corporation A's legal officer, having heard of the claim filed by Corporation B and wishing to collect whatever he can on a large debt owed by Corporation B to Corporation A, petitions the Department to issue the $6,000 refund to Corporation A.
B) ANALYSIS AND CONCLUSION: The Department will not grant Corporation A's petition, and it will refund the $6,000 to Corporation B. By making the election, Corporation A lost all entitlement to the assigned amount.
2) A company may not elect to assign an amount in excess of its overpayment. However, as a result of making an election, a company may subject itself to penalties for underpayment of estimated tax, and it must agree to be liable for any such penalties as a condition of making the election.
A) EXAMPLE: Corporation A and Corporation B are members of the same unitary business group for 1984; neither has ever been an Illinois income taxpayer before. On completing their Illinois income tax returns for 1984, Corporation A and Corporation B arrive at the following conclusions:
i) Corporation A:
|
Total Illinois Income Tax Liability |
$2,000,000 |
|
|
|
|
|
|
1st est. tax installment – April 16, 1984 |
$400,000 |
|
|
|
|
|
|
|
|
|
|
2nd est. tax installment – June 15, 1984 |
400,000 |
|
|
|
|
|
|
3rd est. tax installment – September 17, 1984 |
800,000 |
|
|
|
|
|
|
4th est. tax installment – December 17, 1984 |
800,000 |
|
|
|
|
$2,400,000 |
|
|
|
$ 400,000 |
ii) Corporation B:
|
Total Illinois Income Tax Liability |
$1,000,000 |
|
|
|
|
|
|
1st est. tax installment – September 17, 1984 |
$200,000 |
|
|
|
|
|
|
2nd est. tax installment – December 17, 1984 |
600,000 |
|
|
|
|
$ 800,000 |
|
|
|
$ 200,000 |
Balance of Tax Due. The companies recognize that Corporation B has underpayments of estimated tax within the meaning of Section 804(b) of the Act of $200,000 as of April 16 and in the accumulated amount of $400,000 as of June 15 and September 17 and that these underpayments will generate a penalty under Section 804(a) of $56,547.94. The companies further recognize that, due to the seasonal nature of Corporation B's business, an estimated tax payment of $100,000 on or before April 16 would have qualified Corporation B for the exception of Section 804(d)(3) with respect to the underpayments mentioned above, with the result that Corporation B would have incurred no estimated tax penalty whatsoever for 1984. In view of these circumstances, Corporation A filed a timely election to assign $200,000 of its overpayment to Corporation B, specifying that the $100,000 should be considered as having been paid by Corporation B on April 16, 1984, and $100,000 as of September 17, 1984. Realizing that it has caused its first installment to be reduced below what is necessary to meet its own estimated tax obligations, Corporation A expects to incur an estimated tax penalty under Section 804(a) of the Act in the amount of $10,191.78, that being the penalty generated by a $100,000 underpayment for the 155 day period from April 15, 1984 to September 17, 1984. The election will have the effect of saving the A-B unitary business group $46,356.16 in estimated tax penalty.
B) ANALYSIS AND CONCLUSION: This election will be approved by the Department, and as a result, Corporation A will be liable for the penalty for underpayment of estimated tax in the amount of $10,191.78.
f) Additional provisions
1) The regulations are effective for all elections made under Section 603 of the Illinois Income Tax Act as amended by PA 93-1289. This provision provides coverage for elections made and processed by the Department prior to the regulations being adopted.
2) Overpayments can be divided up and used to offset more than one underpaid account.
3) Partnerships and Subchapter S corporations are qualified to participate in elections made under this Section.
4) Overpayments can only be assigned to accounts with liabilities. "Liability" includes penalties such as underpayment of estimated tax, late filing penalty, and late payment penalty. Movement of payments can cause penalties of underpaid accounts to be reduced or cancelled altogether.
5) The purpose of the reference to IITA Section 911 in IITA Section 603 is to preclude the creation of a new claim period outside of Section 911 by reason of new Section 603.
6) A company will not be considered a member of the same unitary business group as another company for purposes of this election unless the assessment from which the overpayment is derived is supported by a return, amended return, waiver of restrictions on assessment and collection or executed Form IL-870-AD or IL-870 premised on the electing company being a member of the same unitary business group as such other company.
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.9320 Limitations on Notices of Deficiency (IITA Section 905)
a) In General
1) Except as otherwise provided in this Section, no notice of deficiency for a taxable year may be issued later than 3 years after the date the return for that taxable year was filed or deemed filed under subsection (h) (see IITA Section 905(a)).
2) Consequences of Failure to Issue a Timely Notice of Deficiency. Failure by the Department to issue a timely notice of deficiency with respect to a taxable year precludes assessment of any additional tax for that taxable year, together with any related penalty or interest, that is required to be shown in a notice of deficiency. The expiration of the period for issuing a notice of deficiency for a taxable year:
A) does not preclude the Department from asserting any adjustments to net income or credits reported by a taxpayer, to the extent the adjustments would reduce or eliminate a refund claimed by the taxpayer for that taxable year. (See Lewis v. Reynolds, 284 U.S. 281 (1932).)
B) does not preclude the Department from asserting any adjustments to the amount of net loss incurred under IITA Section 207 (except as provided in subsection (l) of this Section for losses incurred in taxable years ending prior to December 31, 2002) or of any credit earned in that taxable year, or the amount of net loss deduction under IITA Section 207 or of any credit carryforward that is properly taken in that taxable year, in order to compute the amount of net loss deduction or credit carryforward allowable in another taxable year, so that a timely notice of deficiency may be issued for that other taxable year or a claim for refund for that other taxable year may be denied in whole or in part. (See Springfield Street Railway Co. v. U.S., 312 F.2d 754 (Ct. Cl. 1963).)
EXAMPLE:
Corporation A and its wholly-owned subsidiary Corporation B are members of a unitary business group, but filed separate returns for calendar years 2005 through 2009. Corporation A reported positive net income every year, and Corporation B reported net losses under IITA Section 207 for every year. For 2010, the corporations filed a combined return, and used losses incurred by Corporation B in 2010 and carryforwards of losses reported by Corporation B in prior years to reduce combined net income to zero. The corporations also filed refund claims for 2007, 2008 and 2009, computing their liability on a combined basis, and reporting net losses carried to 2010. The limitations periods for issuing notices of deficiency have expired for 2005 and 2006, but not for the later years.
The Department may examine the returns for 2005 and 2006 and may adjust the combined net income or loss of the corporations for those years and for each subsequent year in order to determine the correct amount of any combined net income or loss for each year, and the correct amount of any net loss deduction to be used in each year, so that the correct liabilities for 2007, 2008, 2009 and 2010 can be determined and any deficiency for the later years can be assessed and any excessive refund claim denied.
If the limitations period for issuing a notice of deficiency for 2007 expires before the Department begins its examination of the corporations' returns, but before any refund is paid, the Department may nevertheless make any adjustment to the net income or net loss of either corporation for 2007, as well as to any net loss carryforwards from 2005 and 2006, in order to reduce the allowable refund for that year or to reduce the net losses available to carry to subsequent years.
b) Omission of More than 25% of Base Income
1) If a taxpayer omits from base income an amount in excess of 25% of the amount of base income stated in the return, a notice of deficiency may be issued at any time not later than 6 years after the date the return was filed or deemed filed. There shall not be taken into account as an amount omitted from base income any amount disclosed in the return or in a statement attached thereto in a manner adequate to apprise the Department of its nature. (IITA Section 905(b)(1))
2) If a taxpayer fails to include on any return or statement for any taxable year any information with respect to a reportable transaction, as required under IITA Section 501(b), a notice of deficiency may be issued not later than 6 years after the return is filed or deemed filed with respect to the taxable year in which the taxpayer participated in the reportable transaction, provided that any such notice of deficiency shall be limited to the amount of deficiency resulting under the Act from any correction to the items required to be reported. (IITA Section 905(b)(2))
3) See subsection (h) regarding when a return is deemed filed.
c) No Return or Fraudulent Return
1) If no return is filed or a false and fraudulent return is filed with intent to evade the tax imposed by the IITA, a notice of deficiency may be issued at any time. (IITA Section 905(c)) However, if the taxpayer had reasonable cause for failing to file a return, a notice of deficiency may be issued no later than 6 years after the date the return was due, including any extensions or automatic extensions of time to file (see UPIA Section 3-10(b)). The issuance of a notice of deficiency does not cause the running of any limitations period to begin. If a fraudulent return is filed, the subsequent filing of a nonfraudulent amended return does not cause the running of any limitations period to begin. (See Badaracco v. Commissioner, 464 U.S. 386 (1984).)
2) For purposes of this subsection (c), any taxpayer who is required to join in the filing of a combined return under the provisions of IITA Section 502(e) for a taxable year ending on or after December 31, 2013 and who is not included on that return and does not file its own return for that taxable year shall be deemed to have failed to file a return; provided that the amount of any proposed assessment set forth in a notice of deficiency issued under this subsection (c) shall be limited to the amount of any increase in liability under the IITA that should have been reported on the combined return for that taxable year resulting from proper inclusion of that taxpayer on that combined return (IITA Section 905(c)). For purposes of this subsection (c)(2), a taxpayer is included on a combined return under IITA Section 502(e) if it is identified on that return and its base income and apportionment factors are reported on that return under Section 100.5270(b)(1) as those of a member of the unitary business group that has no nexus with this State.
d) Failure to Report Federal Change
If a taxpayer fails to notify the Department of an alteration or change as required by IITA Section 506(b), a notice of deficiency may be issued at any time. The assessment proposed in any such notice of deficiency shall be limited to the amount of deficiency resulting under the IITA from recomputing the taxpayer's net income, net loss, or Article 2 credits for the taxable year by giving effect to the item or items subject to the notification requirements. (See IITA Section 905(d).) The statute of limitations for issuing a notice of deficiency under this subsection (d) applies to a federal change for a taxable year, even if the federal change is made after the statute of limitations has expired for assessing a federal income tax deficiency for that taxable year. (See Peoria and Pekin Union Railway Co. v. IDOR, 301 Ill.App.3d 736 (1999).)
e) Report of Federal Change
In any case in which a taxpayer has given notification to the Department of an alteration or change as required by IITA Section 506(b), the Department, not later than 2 years after the date the notification is received, may issue a notice of deficiency proposing assessment limited to the amount of deficiency resulting under the IITA from recomputing the taxpayer's net income, net loss, or Article 2 credits for the taxable year for which the notification is required or for any year for which the amount of net loss or credit carryovers is affected by the recomputations for that year. The deficiency that may be assessed under this provision is limited to the changes in liability that result from giving effect to the item or items subject to the notification requirements. (See IITA Section 905(e).) The statute of limitations for issuing a notice of deficiency under this subsection (e) applies to a federal change for a taxable year, even if the federal change is made after the statute of limitations has expired for assessing a federal income tax deficiency for that taxable year. (See Peoria and Pekin Union Railway Co. v. IDOR, 301 Ill.App.3d 736 (1999).)
f) Extension by Agreement
1) When, before expiration of the time otherwise prescribed in this Section for issuance of a notice of deficiency pertinent to a return or returns for one or more taxable years, the Department has obtained the taxpayer's written consent to issuance after such time, a notice of deficiency for any or all of those years may be issued at any time prior to the expiration of the extended period agreed upon. After proper execution and submission by the taxpayer of an agreement to extend the statute of limitations, the consent will become effective upon acceptance and authorized execution on behalf of the Department.
2) In the case of a taxpayer who is a partnership, Subchapter S corporation, or trust and who enters into an agreement with the Department pursuant to this subsection (f) on or after January 1, 2003, a notice of deficiency may be issued to the partners, shareholders, or beneficiaries of the taxpayer at any time prior to the expiration of the period agreed upon. Any proposed assessment set forth in the notice under this subsection (f)(2) shall be limited to the amount of any deficiency resulting under the IITA from recomputation of items of income, deduction, credits, or other amounts of the taxpayer that are taken into account by the partner, shareholder, or beneficiary in computing its liability under the IITA. (IITA Section 905(f))
3) Prior to the expiration of any extended period under this subsection (f), the period may be successively further extended for any or all of the taxable years covered by the extension agreement by obtaining a further written consent.
g) Erroneous Refunds
In any case in which tax payable under the IITA has been erroneously refunded, a notice of deficiency not to exceed the amount so refunded may be issued within 2 years from the date of the refund, or within 5 years therefrom if it appears that any part of the refund was induced by fraud or misrepresentation of a material fact. Beginning July 1, 1993, in any case in which there has been a refund of tax payable under the IITA attributable to a net loss carryback as provided for in Section 207, and that refund is subsequently determined to be an erroneous refund due to a reduction in the amount of the net loss which was reported for the loss year, a notice of deficiency for the erroneous refund amount may be issued at any time during the same period in which a notice of deficiency can be issued for the loss year under this subsection (g). The amount of any proposed assessment set forth in the notice shall be limited to the amount of such erroneous refund. (IITA Section 905(g))
h) Time Return Deemed Filed
For purposes of this Section, a return filed before the last day prescribed by law (including any extensions of time for filing) shall be deemed to have been filed on such last day. (IITA Section 905(h)) The last day prescribed for filing returns shall include any automatic extensions of time for filing, regardless of whether the taxpayer filed the return prior to the unextended due date.
i) Request for Prompt Determination of Liability
1) In General
In the case of a tax return required under the IITA in respect of a decedent, or by the decedent's estate during the period of administration or by a corporation meeting the conditions stated in subsection (i)(3), in lieu of the 3-year limitations period in IITA Section 905(a)(1) that ends 3 years after the date the return was filed, that period if earlier shall end 18 months after the filing with the Department of three executed copies of a written request for prompt determination of liability by the executor, administrator, or other fiduciary representing the decedent's estate or by an officer authorized to act for the corporation or by the fiduciary provided if required under IITA Section 502(b)(4).
2) Purpose; Evidence of Authority to Act
The written request to be effective must be transmitted separately from and after the filing of the return and in a manner sufficient to put the Director of Revenue on notice of the request for prompt determination of liability. The shortened limitations period does not apply if more than 25% of base income is omitted from the return or in case of a false or fraudulent return or where no return has been filed (see subsections (b) and (c)). If not previously filed with the Department, there should be furnished with the written request in respect of a decedent copies of Letters Testamentary or of Administration, properly certified true and in full force and effect within 3 months of the day submitted. In the case of a corporation, consistent with the provisions of IITA Section 503(a) and (b), the signature (with title) of the president, vice-president, or treasurer shall be prima facie evidence of that person's authority.
3) Corporate Intent and Undertaking to Dissolve
For application of this subsection (i) in case of a corporation, the written request must notify the Department, as of the date of the request:
A) that the corporation contemplates dissolution at or before the expiration of the limitations period of 18 months (or less as the case may be), in which case the dissolution (for example, the proceedings required by applicable State law after the filing of an intent to dissolve) must in good faith be undertaken within and the dissolution must be completed (under the State law requirements) by the termination of the limitations period;
B) that a dissolution has in good faith begun, if it has so commenced (the dissolution must be completed by the termination of the limitations period); or
C) that the dissolution is completed, if it is complete.
j) Withholding Tax
1) In the case of returns required under Article 7 of the IITA relating to amounts withheld, or required to have been withheld, as tax a notice of deficiency may be issued at any time not later than 3 years after the 15th day of the 4th month following the close of the calendar year in which such withholding was required. (IITA Section 905(j))
2) For any period beginning on or after January 1, 2013, if an employer fails to report on a return an amount required to be withheld and to be reported on that return which is in excess of 25% of the total amount of withholding required to be reported on that return, a notice of deficiency may be issued not later than 6 years after the return was filed. (IITA Section 905(b)(3))
k) Transferee Liability
A notice of deficiency may be issued to a transferee relative to a liability asserted under IITA Section 1405 during the following time periods:
1) In the case of the liability of an initial transferee, up to 2 years after the expiration of the period of limitation for assessment against the transferor, except that if a court proceeding for review of the assessment against the transferor has begun, then up to 2 years after the return of the certified copy of the judgment in the court proceeding. (IITA Section 905(m)(1))
2) In the case of the liability of a subsequent transferee, up to 2 years after the expiration of the period of limitation for assessment against the preceding transferee, but not more than 3 years after the expiration of the period of limitation for assessment against the initial transferor; except that if, before the expiration of the period of limitation for the assessment of the liability of the transferee, a court proceeding for the collection of the tax or liability in respect thereof has been begun against the initial transferor or the last preceding transferee, as the case may be, then the period of limitation for assessment of the liability of the transferee shall expire 2 years after the return of the certified copy of the judgment in the court proceeding. (IITA Section 905(m)(2))
l) Net Losses
On and after August 23, 2002, no notice of deficiency shall be issued as the result of a decrease determined by the Department in the net loss incurred by a taxpayer in any taxable year ending prior to December 31, 2002 under IITA Section 207 unless the Department has notified the taxpayer of the proposed decrease within 3 years after the return reporting the loss was filed or within one year after an amended return reporting an increase in the loss was filed, provided that in the case of an amended return, a decrease proposed by the Department more than 3 years after the original return was filed may not exceed the increase claimed by the taxpayer on the amended return. (IITA Section 905(n))
1) This subsection (l) applies only to net losses incurred in taxable years ending prior to December 31, 2002.
2) This subsection (l) does not preclude the Department from decreasing a net loss reported by a taxpayer in order to deny some or all of a refund claimed by a taxpayer as the result of claiming a carryforward deduction of that net loss.
3) This subsection (l) does not preclude the Department from adjusting the net income of the taxpayer (before net loss deductions) for any year to which a net loss is carried in order to issue a notice of deficiency for that year or reduce the amount of net loss remaining available to carry to subsequent years, so that a notice of deficiency may be issued for one or more subsequent years.
m) Extension upon filing a claim for credit or refund
Beginning June 25, 2021, the effective date of Public Act 102-0040, for any taxable year included in a claim for credit or refund for which the statute of limitations for issuing a notice of deficiency under this Section will expire less than 6 months after the date a taxpayer files the claim for credit or refund, the statute of limitations is automatically extended for 6 months from the date it would have otherwise expired. (IITA Section 905(a-5))
The following examples help illustrate this provision:
EXAMPLE 1: The extended due date for filing Form IL-1120 corporate income and replacement tax return for tax year ending December 31, 2020, is October 15, 2021. The taxpayer files its Form IL-1120 on September 15, 2021. The statutory deadline for issuing a notice of deficiency is October 15, 2024. On October 14, 2024, the taxpayer files an IL-1120-X amended corporate income and replacement tax return reporting state-only changes. The refund claim was filed within six months of the expiration of the statute of limitations, thereby extending the deadline for issuing a notice of deficiency to April 15, 2025.
EXAMPLE 2: The extended due date for filing Form IL-1065 partnership replacement tax return for tax year ending December 31, 2016, is October 15, 2017. The taxpayer files its Form IL-1065 on September 16, 2017. An audit is initiated and a Form IL-872 waiver is executed extending the statute of limitations from October 15, 2020, to October 15, 2021. The taxpayer files a Form IL-1065-X amended partnership replacement tax return reporting state-only changes on September 1, 2021. The refund claim was filed within six months of the expiration of the statute of limitations, thereby extending the deadline for issuing a notice of deficiency to April 15, 2022, without the execution of an additional Form IL-872.
EXAMPLE 3: The extended due date for filing Form IL-1040 individual income tax return for tax year ending December 31, 2015, is October 15, 2016. The taxpayer files the Form IL-1040 on June 1, 2018. The deadline for issuing a notice of deficiency is June 1, 2021. The taxpayer files an IL-1040-X amended individual income tax return reporting state-only changes on May 25, 2021. The refund claim was filed within six months of the expiration of the statute of limitations, but the deadline for issuing a notice of deficiency was not extended because the statute of limitations expired before the effective date of Public Act 102-0040.
(Source: Amended at 47 Ill. Reg. 5726, effective April 4, 2023)
Section 100.9330 Further Notices of Deficiency Restricted (IITA Section 906)
a) No further notice after final department decision or prior notice. The Department shall not issue a further or additional notice of deficiency for any taxable year for which a notice of deficiency previously was issued under IITA Section 904, a protest thereto was filed under Sections 908(a) or 910(a), and the Department's decision on such protest has become final under IITA Sections 908(d) or 910(d), except in the case of fraud (see IITA Section 1002(b)), mathematical error (see IITA Section 903(a)(1) and (2)), or federal change (see IITA Sections 905(d), (e), or (g)).
b) Separate notices to be issued for each return required for the taxable year. With respect to liability for tax imposed by the Act for which the taxpayer is required under IITA Section 501 et seq., to file more than one return, a separate notice of deficiency may be issued for each such return for the taxable year. For example, for a particular taxable year, if a taxpayer is required to file both the Individual Income Tax Return Form IL-1040, and the Employer's Quarterly Illinois Withholding Tax Return Form IL-941, such returns may be examined separately at different times and if adjustments and a Revenue Auditor's Report result which are not agreed to a notice of deficiency may be issued with respect to each such return. The above notwithstanding, the Department to the extent it deems feasible shall encourage the making of comprehensive audits, i.e., the examination at one time of all or as many as practicable of a taxpayer's Illinois tax returns required respecting liability for any particular taxable year under all taxing statutes administered by the Department.
(Source: Amended at 12 Ill. Reg. 14307, effective August 29, 1988)
SUBPART BB: CREDITS AND REFUNDS
Section 100.9400 Credits and Refunds (IITA Section 909)
a) In General. The Department, within the applicable period of limitations for a claim for refund, shall credit the amount of any overpayment, including interest allowed on the overpayment, against any liability for tax imposed under the IITA or any other Act administered by the Department on the person who made the overpayment, and it shall refund the balance to that person. (See IITA Section 909(a) and Section 2505-275 of the Department of Revenue Law [20 ILCS 2505/2505-275].)
b) Credit Against the Estimated Tax. A taxpayer may elect to have any portion of any overpayment shown on an original or amended return for a taxable year applied against the taxpayer's estimated tax liability for a subsequent taxable year. (See IITA Section 909(b).) The election shall be made on the form and in the manner prescribed by the Department, must be made before the overpayment is refunded, and, once an election is made, the election may not be altered to reduce the amount credited or to change the taxable year to which the credit will be applied. After an election is properly made, the Department shall apply the amount of the overpayment against other liabilities of the taxpayer and apply only the balance (if any) of the overpayment against the taxpayer's estimated tax liability. (See IITA Section 909(a) and (b) and Section 2505-275 of the Department of Revenue Law .) If the Department applies a portion of an overpayment against a liability other than the estimated tax liability to which the taxpayer elected to apply the overpayment or refunds some or all of the amount that the taxpayer had elected to apply against its estimated tax liability, the Department shall issue a notice to the taxpayer stating the amount so applied and the liability against which the application was made, or the amount so refunded, and no penalty for late payment of estimated taxes under IITA Section 804(a) or for underpayment of tax under IITA Section 1005(a) shall accrue with respect to the amount so applied or refunded, if the full amount of the liability that was due as of the date the notice was issued is paid prior to the later of:
1) 30 days after the date the notice is issued; or
2) the unextended due date of the return for the year for which the estimated tax credit was requested or, in the case of the penalty for late payment of estimated taxes, the due date of the next estimated tax installment (if any) due after the date of the notice.
c) Interest on Overpayments
1) General Rule. Subject to the provisions of this subsection (c), interest shall be allowed and paid upon any overpayment in respect of the tax imposed by the Act at a rate determined by reference to IITA Section 909(c). When there is a dispute between a taxpayer and the Department regarding the amount of interest that is due, see subsection (f)(6).
2) Overpayments. The overpayment in respect of any tax imposed by the Act includes any penalties assessed under IITA Section 1002(e) and any interest assessed on the tax or on a penalty under IITA Section 1003. For this purpose, an overpayment is any creditable or refundable portion of taxes, penalty, or interest that was previously paid.
3) Date of Overpayment
A) The date of overpayment is the date of payment of any tax that thereafter becomes or is determined to be refundable or creditable for the taxable year, except as provided in subsection (c)(3)(B). There can be no overpayment of tax prior to the last day prescribed for filing the return, nor until the entire tax liability for the taxable year is satisfied, nor until the return is filed for the taxable year. Therefore, the date or dates of overpayment are the date of payment of the first amount that (when added to previous payments) exceeds the tax liability (including any interest or penalties) for the taxable year and the date or dates of any subsequent payments made with respect to the tax liability, which in any event cannot be earlier than the last day prescribed for filing the return for the year, nor earlier than the date the return is filed. The "last day prescribed for filing the return", for purposes of this subsection (c)(3)(A) and subsection (d) is the original due date, not the extended due date, if any.
B) In the case of a federal change due to the final allowance of a carryback from a loss year ending prior to December 31, 1986, under the provisions of the federal Internal Revenue Code, the date of overpayment shall be as of the close of the taxable year in which the deduction, losses, or other item or event occurred that created the federal carryback, or the date when the return for the carryback year is filed, whichever is later.
C) In the case of a federal change due to the final allowance of a carryback or carryforward from a loss year ending on or after December 31, 1986, and in the case of an Illinois change due to the carryforward or carryback of an Illinois net loss, Illinois investment credit, jobs credit, replacement tax credit, or other credit (other than estimated or tentative tax credit) from a loss or credit year ending on or after December 31, 1986, the date of overpayment shall be the date the claim for refund is filed, except that, if any overpayment is refunded within 3 months after the date the claim for refund is filed, determined without regard to processing by the Comptroller, no interest shall be allowed on the overpayment.
D) Beginning January 1, 1994, if a claim for refund relates to an overpayment attributable to a net loss carryback as provided by Section 207 of the Illinois Income Tax Act, the date of overpayment shall be the last day of the taxable year in which the loss was incurred. [35 ILCS 735/3-2(d)]
d) Period for Which Interest is Allowable
1) In General
A) Prior to January 1, 1994, interest shall be allowed and paid from the date of overpayment to a date determined by the Director or his or her designee, which shall be not more than 30 days prior to the date of any refund or credit. However, no interest shall be allowed on the amount of tax overpaid if that amount is refunded or credited within the later of 3 months after the last date prescribed for filing the return of the tax or within 3 months after the return was filed, determined without regard to processing by the Comptroller.
B) On and after January 1, 1994, interest shall be allowed and paid in the manner prescribed under the Uniform Penalty and Interest Act [35 ILCS 735] (UPIA).
2) Estimated Tax for Succeeding Year. Notwithstanding any other provision of this Section, if a taxpayer elects, under subsection (b):
A) on a timely filed original return, to have all or part of an overpayment shown on the return applied as an estimated tax payment for the succeeding taxable year, no interest shall be allowed on that portion of the overpayment so credited;
B) on an original return that is filed after the due date for filing that return (including extensions), or on an amended return, to have all or part of an overpayment shown on the return applied as an estimated tax payment for any subsequent taxable year, no interest shall be allowed on that portion of the overpayment so credited for any period after the date on which the election is made;
C) by the filing of any other form or statement prescribed by the Department requesting to have all or part of a refund requested on a previously filed original or amended return applied against an estimated tax obligation, no interest shall be allowed on that portion of the overpayment so credited for any period after the date on which the election is made.
e) Examples. This Section may be illustrated by the following examples:
EXAMPLE 1
T, a calendar year taxpayer, receives an extension to June 30, 1972 to file a 1971 return. On April 15, 1972, T files a tentative return pursuant to IITA Section 602(a) showing an estimated liability of $500 that has been paid through withholding, estimated tax payments, or as a payment with the tentative return of the tax properly estimated to be due. On June 15, 1972, T files a 1971 return showing a tax liability of $3,000 including interest for late payment and remits $2,500 that in addition to the $500 paid as indicated, satisfies the liability shown on the return. On August 15, 1972, T files a claim for refund for $1,500 as an overpayment of 1971 tax. The date of overpayment for the computation of any interest would be June 15, which is the date when payments first exceeded liability, as now shown as a result of the claim for refund, and that is the date when the return for the taxable year was first filed. See Example 2 for application of the 3-month rule.
EXAMPLE 2
Assume the same facts as in Example 1 and that T's refund claim of $1,500 was allowed and paid on September l. No interest would be allowed because the refund was made within 3 months after June 15, the date the return for the taxable year was filed. If the refund was made on October 1, interest would be allowed from June 15 to a date that would be not more than 30 days prior to October 1.
EXAMPLE 3
W, a calendar year taxpayer, files a return on March 7 and claims a refund as a result of excess withholding. The refund is made July l. No interest would be allowed because the refund was made within 3 months after April 15, which is the later of the last day prescribed for filing the return or the date the return was filed. If, with the same facts, the refund is made July 28, interest would be allowed from April 15 (the date of overpayment).
EXAMPLE 4
X, a calendar year corporation, sustains a federal net operating loss in 1973. X files a federal claim for refund, carrying the loss back to 1970 and receives a refund of federal taxes for 1970 based on the net operating loss carryback. (Refer to subsection (f)(4) respecting a federal application for tentative carryback adjustment.) X then files Form IL-1120-X claiming an overpayment of 1970 Illinois tax as a result of a federal change in its reported taxable income for 1970. The date of overpayment would be December 31, 1973, the close of the taxable year in which the federal net operating loss occurred (provided an original 1970 IL-1120 had been filed by this date).
f) Refund Claim
1) In General. A claim for refund of an overpayment of income tax may be filed with the Department only if a return for the taxable year for which the refund is claimed has been filed. An original return does not constitute a claim for refund under IITA Section 909(d) and (e) of the Act calling for consideration, but may qualify as an extension of the limitations period for filing a claim for refund under Section 100.9410(c)(2). A separate claim shall be filed for each taxable year for which an income tax overpayment was made. Every claim for refund shall be in writing, shall be on the appropriate form prescribed by the Department, and (using attachments if necessary) shall state the specific grounds upon which it is founded.
2) Evidence of Claim Filing. In preparing and filing a claim on either an amended return before the return due date, or after that date has passed on Form IL-843, Form IL-1040-X, or Form IL-1120-X, a taxpayer may attach two photocopies of page l of the original executed claim being filed as a pro forma claim receipt form identifying the claim with a written request that one photocopy be returned to the claimant as a receipt. Upon the Department's receiving the claim and the two photocopies of page l of the claim if attached, the Director's designee shall place on the claim the Department's Date Received Stamp and initial the stamp in ink, after which one photocopy shall be removed and mailed to the claimant for use as a receipt. In absence of a photocopy of the claim form (so stamped and initialed) being attached to the original claim or being produced by the claimant, copies of the Department's records certified true by the Director or his or her designee shall be deemed prima facie correct to show whether or not a claim was filed and, if so, the date upon which it was received by the Department. Furthermore, the Department's records as to the date that the claim was received in the Department's mail room shall be prima facie evidence that the postmark date on the claim was 10 days prior to that date.
3) Amended Return as Claim; Limited Use. In an instance in which a return for the taxable year is filed early, the latest received by the Department of any further return or amended return filed by the taxpayer on or before the last day prescribed for timely filing shall constitute and be accepted as the return for the taxable year. Therefore, if a return showing a tax liability for the taxable year has been filed with the Department and the tax paid and the due date prescribed for filing that return has not passed, any claim for refund filed prior to that date shall be made by the filing of a further return marked "CORRECTED", showing the amount of the tax overpayment to be refundable. Form IL-1040-X and Form IL-1120-X shall be used for this purpose by individuals and corporations.
4) Claim Form; Federal Change. If, on the other hand, the due date for filing a return has passed and under the Act an overpayment based on a federal change has arisen, in addition to meeting the requirements of IITA Section 506 a claim for refund based on the federal change should be made by the filing (following the instructions thereon) of a notice of the change on Illinois Form IL-843, Form IL-1040-X, or Form IL-1120-X, as appropriate. To meet the requirements of IITA Section 909(d) for stating specific grounds, there should be within the form or on an attachment an explanation in detail sufficient to show the nature of the items of change or alteration. If helpful or otherwise appropriate to show the grounds and to compute the amount claimed as refundable, another return marked "AMENDED" may be attached or filed in connection with the Form IL-843. Further, when a claim for refund is filed based on a federal change giving rise to an overpayment, documentation in form of the original federal documents or correspondence furnished the taxpayer or other satisfactory proof in connection with the change (or true and correct fully legible photocopies) shall be attached evidencing that the federal change represents an agreed to or final federal Internal Revenue Service (or court imposed) acceptance, recomputation, redetermination, change, tentative carryback adjustment or settlement, and it shall be stated or shown that no contest is pending. In this connection, the payment received as the result of the filing of an application for a tentative carryback adjustment (on Form 1045 or Form 1139) pursuant to IRC section 6411 is a change reportable under IITA Section 506. A claim for refund of an overpayment of Illinois income tax occasioned by the payment of a tentative carryback adjustment may be filed on Form IL-1040-X and Form IL-1120-X. A premature or incomplete claim on Form IL-843, Form IL-1040-X, or Form IL-1120-X shall not constitute a claim for refund within the meaning of IITA Section 909(d), nor for purposes of commencing the 6-month period in subsection (g). Upon any claim being received and identified as premature, incomplete, or otherwise defective under the Act, the Department, as soon as practicable, shall notify the taxpayer in writing to enable, if possible, the timely submission of a mature and perfected claim.
5) Claim Form; No Federal Change. If a return showing tax due for the taxable year has been filed and the tax paid and an overpayment based on a purely Illinois change has arisen and is not based to any extent on a change in federal income tax liability, any claim for refund should be made by the filing (following the instructions thereon) of Illinois Form IL-843, Form IL-1040-X (individuals), or Form IL-1120-X (corporations), as appropriate, using, if necessary, an attachment to set forth in detail each specific ground for refund. If appropriate, another return marked "AMENDED" may be attached to or filed in connection with the Form IL-843. Pertaining to purely Illinois changes, Forms IL-843, IL-1040-X and IL-1120-X are designed for use not only to claim a refund of tax overpayment, but also to report an increase in the amount of previously reported or determined income tax liability for the taxable year.
6) Informal Claim Not Permitted; Disputes Regarding the Amount of Interest Due. In all cases in which the original return due date has passed, claims for refund shall be filed using the following forms, as appropriate: Form IL-843, Form IL-1040-X and Form IL-1120-X. These forms may also be used by taxpayers to claim additional interest when there is a dispute regarding the amount of interest that is due from the Department relative to a refund. The claims for additional interest must be filed either within the 60-day protest period for claim denials (see IITA Section 910) or within the limitations period for filing claims for refund for the taxable year for which the interest is due (see IITA Section 911). See 86 Ill. Adm. Code 200.120 for procedure on protest. An "informal claim", such as a letter from the taxpayer, is insufficient for the purpose of establishing or extending any of the limitations in IITA Section 911 or in subsections (g) and (h) of this Section.
g) Notices of Refund or Denial
1) In General. The Department shall examine a claim for refund, in connection, as appropriate, with the return for the taxable year to which it relates, as soon as practicable after it is filed to determine the correct amount of tax and the amount of any refundable overpayment to which the claimant-taxpayer may be entitled. If, for the taxable year involved, the Department finds the claimant entitled to a refund in any amount, it shall issue an appropriate notice of refund, abatement, or credit (see subsection (b)). If the Department has failed to approve or deny the claim before the expiration of 6 months after the date the claim was filed, the claimant may nevertheless thereafter file with the Department a written protest addressed in accordance with the instructions in the applicable claim form (IL-1040-X, IL-1120-X, or IL-843). If a protest is filed, the Department shall consider the claim and, if the taxpayer has so requested, shall grant the taxpayer or the taxpayer's authorized representative a hearing within 6 months after the date the request is filed.
2) Notice of Denial; Notice of Deficiency as Denial. However, if the Department finds that the claim for refund is not allowable and proposes to issue a notice of denial or, if taking into account the claim, nevertheless finds adjustments that are a basis for proposing an increase in the amount of tax liability over that shown on the return, or decreasing it by an amount less than that claimed as refundable, the Department shall issue a notice of deficiency under IITA Section 904(c) (see Section 100.9300(a)) or it shall issue a notice of denial or partial denial of the claim. In the event that a notice of deficiency is issued that indicates that the claim for refund was considered, the notice of deficiency shall constitute (concurrently) a notice of denial of the claim. Note that, in the absence of a written protest of the notice of deficiency or denial (see 86 Ill. Adm. Code 200.120(b)), the Department's final action is not an administrative decision subject to judicial review (except as to jurisdictional questions) under the provisions of the Administrative Review Law [735 ILCS 5/Art. III] (see Section 100.9600).
h) Effect of Denial. Denial of a claim becomes final 60 days after the denial is issued (irrespective of whether the claimant is outside the United States), except to the extent (in whole or part) that the claimant in the meantime filed a protest, as provided by IITA Section 910 (see 86 Ill. Adm. Code 200.120(b)), against the denial of amounts claimed as refundable. In the absence of a written protest of the denial of the claim for refund, the Department's final action is not an administrative decision subject to judicial review (except as to jurisdictional questions) under the provisions of the Administrative Review Law (see 86 Ill. Adm. Code 100.9600).
i) Time for Protest. If, after a claim for refund is denied by issuance of a notice of denial (see Section 100.9400(g)(2)), a written protest against the denial is filed by the taxpayer within 60 days after the denial is issued (irrespective of whether the taxpayer is outside the United States), the Department shall reconsider the denial and, if requested, shall grant the taxpayer or the taxpayer's authorized representative a hearing, as provided for in IITA Section 914. See 86 Ill. Adm. Code 200 for protest and hearing procedures.
(Source: Amended at 40 Ill. Reg. 15575, effective November 2, 2016)
Section 100.9410 Limitations on Claims for Refund (IITA Section 911)
a) In General
Except as otherwise provided in this Section, no credit or refund shall be allowed or made with respect to any year unless a claim for refund or credit was filed on or before the later of:
1) 3 years after the date the return was filed or, in the case of returns required under Article 7 of the IITA respecting any amounts withheld as tax, the 15th day of the 4th month following the close of the calendar year in which such withholding was made); or
2) one year after the date the tax was paid. (IITA Section 911(a))
3) Consequence of Failing to File a Timely Refund Claim. In the case of any overpayment, the Department may grant a credit or refund of the amount of such overpayment within the applicable period of limitations for a claim for refund (see IITA Section 909(a)). Failure of a taxpayer to file a refund claim before the expiration of the limitations period for a taxable year precludes the Department from granting a credit or refund of any overpayment for that taxable year after the date of expiration. The expiration of the period for filing a refund claim for a taxable year:
A) does not preclude the taxpayer from asserting any adjustments to net income or credits to the extent the adjustments would reduce or eliminate a deficiency asserted by the Department for that taxable year. (See Lewis v. Reynolds, 284 U.S. 281 (1932).)
B) does not preclude the taxpayer from asserting any adjustments to the amount of net loss incurred under IITA Section 207 (except as provided in subsection (g) of this Section for losses incurred in taxable years ending prior to December 31, 2002) or of any credit earned in that taxable year, or the amount of net loss deduction under IITA Section 207 or of any credit carryforward that is properly taken in that taxable year, in order to compute the amount of net loss deduction or credit carryforward allowable in another taxable year, so that a timely refund claim may be filed for that other taxable year or a deficiency for that other taxable year may be reduced or eliminated. (Springfield Street Railway Co. v. U.S., 312 F.2d 754 (Ct. Cl. 1963).)
4) See subsection (e) regarding when a return is deemed filed.
b) Federal Changes
Irrespective of whether notification of a federal change required by IITA Section 506(b) has been filed by a taxpayer, a claim for refund may be filed not later than two years after the date the notification was due. The recoverable amount of a claim filed under this subsection (b) is limited to any overpayment resulting from a change in the taxpayer's net income, net loss, or Article 2 credits for the taxable year for which the notification is required, and any resulting change in a net loss or Article 2 credit carryover to a subsequent year, after giving effect to the items of adjustment in the alteration required to be reported. (IITA Section 911(b)(1)) IITA Section 506(b) requires that a notification of federal change be filed with the Department not later than 120 days after the alteration has been agreed to or finally determined for federal income tax purposes or, if earlier, not later than 120 days after any federal income tax deficiency or refund, tentative carryback adjustment, or abatement or credit resulting therefrom, has been assessed or paid.
c) Extension by Agreement
1) When, before expiration of the time otherwise prescribed in this Section for the filing of a claim for refund, the Department and the taxpayer have consented in writing to the filing after that time, then a claim may be filed at any time prior to the expiration of the period agreed upon.
2) In the case of a taxpayer who is a partnership, Subchapter S corporation, or trust and who enters into an agreement with the Department pursuant to this subsection (c) on or after January 1, 2003, a claim for refund may be filed by the partners, shareholders, or beneficiaries of the taxpayer at any time prior to the expiration of the period agreed upon. Any refund allowed pursuant to the claim, however, shall be limited to the amount of any overpayment of tax due under the IITA that results from recomputation of items of income, deduction, credits, or other amounts of the taxpayer that are taken into account by the partner, shareholder, or beneficiary in computing its liability under the IITA. (IITA Section 911(c))
3) Prior to the expiration of any extended period under this subsection (c), the period may be successively further extended for any or all the taxable years covered by the extension agreement by the obtaining of a further written consent.
4) Under Section 100.9400(f)(1), an original return is not a refund claim that preserves a taxpayer's right to a refund or credit for an overpayment of tax after the statute of limitations for filing of a refund claim has otherwise expired. However, a timely-filed original return showing an overpayment shall be treated as an extension of time for the filing of a claim for refund of that overpayment through the date that is 6 months after the date on which the Department issues a refund of a portion of the reported overpayment, notifies the taxpayer that it has allowed a credit for a portion of the reported overpayment, or notifies the taxpayer that no refund or credit of the reported overpayment will be allowed.
d) Limit on Amount of Credit or Refund
1) Limit When Claim is Filed within a 3-Year Period
With respect to a taxable year for which a claimant-taxpayer has filed a return and during the 3-year period in subsection (a)(1) has filed a claim for refund, the amount of the credit or refund shall not exceed the portion of the tax paid within the period immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return. (IITA Section 911(d)(1)) For the purposes of this subsection (d)(1), any amount paid on account of withheld tax or estimated tax (IITA Arts. 7 and 8) or any other payment paid as tax or in respect of tax imposed by the Act (for example tax paid with a return filed before the due date) shall be deemed to have been paid not earlier than the last day prescribed for filing the return (irrespective of extensions) for the taxable year for which the payments are applicable (see IRC section 6513(b).)
2) Limit When Claim is Not Filed Within a 3-Year Period
Irrespective of whether a return was filed, if the claim was not filed within the 3-year period in subsection (a) or within an agreed-to extended period for filing of a refund claim, the amount of credit or refund shall not exceed the portion of the tax paid during the one year immediately preceding the filing of the claim. (IITA Section 911(d)(2))
3) Limit When Claim is Filed Under an Extension
If the claim is filed prior to the expiration of an extended period for filing under subsection (c), the credit or refund is limited to the amount that could have been allowed if the claim had been filed prior to the expiration of the period that was extended.
e) Time Return Deemed Filed
For purposes of this Section, a tax return filed before the last day prescribed by law for the filing of the return (including any extensions) shall be deemed to have been filed on the last day. (IITA Section 911(e)) The last day prescribed for filing returns shall include any automatic extensions of time for filing, regardless of whether the taxpayer filed the return prior to the unextended due date.
f) Special Period of Limitation with Respect to Net Loss Carrybacks
The 3-year period of limitation prescribed in subsection (a)(1) does not apply if the claim for refund relates to an overpayment attributable to a net loss carryback provided by IITA Section 207. Instead, the period of limitation shall be that period which ends 3 years after the time for filing the return (including extensions) for the taxable year in which the net loss occurs, or the period prescribed in subsection (c) in respect of that taxable year, whichever expires later. The amount of the refund may exceed the portion of the tax paid within the period provided in subsection (d) to the extent of the amount of the overpayment attributable to the net loss carryback.
g) Net Losses. On and after August 23, 2002, no claim for refund shall be allowed to the extent the refund is the result of an amount of net loss incurred under IITA Section 207 that was not reported to the Department within 3 years after the due date (including extensions) of the return for the loss year on either the original return filed by the taxpayer or on amended return or to the extent that the refund is the result of an amount of net loss incurred in any taxable year under Section 207 for which no return was filed within 3 years after the due date (including extensions) of the return for the loss year. (IITA Section 911(h))
1) This subsection (g) applies only to net losses incurred in taxable years ending prior to December 31, 2002.
2) This subsection (g) does not preclude a taxpayer from increasing a net loss in order to carry forward deduction of that increased net loss to reduce or eliminate a deficiency for a subsequent taxable year.
EXAMPLE:
Corporation A and its wholly-owned subsidiary Corporation B are members of a unitary business group, but filed separate returns for calendar years 2005 through 2009. Corporation A reported positive net income every year, and Corporation B reported net losses under IITA Section 207 for each year. After auditing Corporation A's returns for 2007, 2008 and 2009, the Department adjusted various items of income and apportionment, and issued notices of deficiency. The limitations periods for filing claims for refund have expired for 2005 and 2006, but not for the later years.
The taxpayer may file amended returns for all of the years in question to combine the corporations so that Corporation B's net losses for the years under audit can offset the income of Corporation A, and may carry any combined net loss properly determined for any year (including 2005 and 2006) to each subsequent year in order to determine the correct liabilities for the years 2007, 2008 and 2009, and reduce or eliminate the deficiencies determined by the Department or to claim refunds for the open years.
h) Periods of Limitation Suspended While Taxpayer is Unable to Manage Financial Affairs Due to Disability
1) In the case of an individual, the running of the periods specified in this Section shall be suspended during any period when that individual is financially disabled. (IITA Section 911(i))
2) For purposes of this subsection (h), an individual is financially disabled if that individual is unable to manage his or her financial affairs by reason of a medically determinable physical or mental impairment of the individual that can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be treated as financially disabled during any period when that individual's spouse or any other person is authorized to act on behalf of that individual with respect to financial matters. (IITA Section 911(i)) A person who has been determined to be financially disabled for any period of time for purposes of IRC section 6511(h) shall be deemed to be financially disabled for purposes of this subsection (h) for the same period.
3) After a limitations period has expired, legislation cannot extend the period. (See Sepmeyer v. Holman, 162 Ill. 2d 249 (1994).) Accordingly, this subsection (h) shall apply only to periods specified in this Section that had not expired prior to August 15, 2014, the effective date of Public Act 98-970, which enacted IITA Section 911(i).
(Source: Amended at 40 Ill. Reg. 10925, effective July 29, 2016)
Section 100.9420 Recovery of Erroneous Refund (IITA Section 912)
a) An erroneous refund shall be considered a deficiency of tax on the date made, and shall be deemed assessed and shall be collected as provided in IITA Sections 903 and 904 (see 86 Ill. Adm. Code 100.9200, 100.9300 and 100.9320(g)).
b) Prior to January 1, 1994, IITA Section 1003(f) provides that any portion of the tax imposed by the Act or any interest or penalty which has been erroneously refunded and which is recoverable by the Department shall bear interest at the rate of 9% per annum (or at such adjusted rate as is established under Section 6621(b) of the Internal Revenue Code) from the date of payment of such refund.
c) Effective January 1, 1994, Section 3-2(e) of the Uniform Penalty and Interest Act provides that, [a]ny portion of the tax imposed by an Act to which this Act is applicable or any interest or penalty which has been erroneously refunded and which is recoverable by the Department shall bear interest from the date of payment of the refund. However, no interest will be charged if the erroneous refund is for an amount less than $500 and is due to a mistake of the Department.
(Source: Amended at 18 Ill. Reg. 1510, effective January 13, 1994)
SUBPART CC: INVESTIGATIONS AND HEARINGS
Section 100.9500 Access to Books and Records (IITA Section 913)
All books and records and other papers and documents which are required by the Act to be kept shall, at all times during the business hours of the day, be subject to inspection by the Department or its duly authorized agents and employees.
Section 100.9505 Access to Books and Records -- 60-Day Letters (IITA Section 913) (Repealed)
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
Section 100.9510 Taxpayer Representation and Practice Requirements
The rules pertaining to taxpayer representation at hearings before the Department are found at 86. Ill. Adm. Code 200.
(Source: Amended at 12 Ill. Reg. 14307, effective August 29, 1988)
Section 100.9520 Conduct of Investigations and Hearings (IITA Section 914)
The rules of Practice and Procedure for Hearings before the Illinois Department of Revenue are found at 86 Ill. Adm. Code 200.
(Source: Amended at 12 Ill. Reg. 14307, effective August 29, 1988)
Section 100.9530 Books and Records
a) General Requirements
1) Every person liable for any tax imposed by the IITA shall keep books and records sufficient to substantiate all information reported on any income tax, withholding or information return required under the IITA.
2) The books or records required by this Section shall be kept at all times available for inspection by the Department or its duly authorized agents and employees, and shall be retained so long as the contents may become material in the administration of the IITA. Such books and records must be kept in the English language. If a person retains records required to be retained by this Part in both machine-sensible and hardcopy formats, the person shall, upon request, make the records available to the Department in machine-sensible format.
3) The Department may require any person, by notice served upon him, to make returns, render statements, or keep specific records as will enable the Department to determine whether such person is liable for tax under the IITA and the correct amount of the tax.
b) What Records Constitute Minimum Requirement
1) In General. The records required by this Part shall be kept accurately, but, unless otherwise required by the IITA, this Part or any tax form, no particular form must be maintained for keeping the records. These forms and systems of accounting shall be used to enable the Department to ascertain whether liability for tax is incurred and, if so, the amount of the liability. Every person who is required by this Part, instructions applicable to any tax form, or as otherwise required by the Department, to keep any copy of any return, schedule, statement, or other document shall keep the copy as a part of his records.
2) Records prepared by Automated Data Processing Systems (ADP). When an ADP accounting system is used to maintain all or part of a taxpayer's accounting or financial records, the ADP system must include a method of producing legible and readable records that will provide the necessary information for verifying tax liabilities. If a taxpayer retains records required to be retained by this Part in both machine-sensible and hardcopy formats, the taxpayer shall, upon request, make the records available to the Department in machine-sensible format in accordance with subsection (g)(2) of this Section. An ADP system must not be subject, in whole or in part, to any agreement (such as a contract or license) that would limit or restrict the Department's access to and use of the ADP system on the taxpayer's premises (or any other place where the ADP system is maintained), including personnel, hardware, software, files, indexes, and software documentation. ADP accounting systems encompass all types of data processing systems, stand-alone or networked microcomputer systems, Database Management Systems (DBMS) and systems using Electronic Data Interchange (EDI) technology.
c) Definitions
"Database Management System" or "DBMS" means a software system that creates, controls, relates, retrieves and provides accessibility to data stored in a database.
"Electronic Data Interchange" or "EDI technology" means the computer-to-computer exchange of business transactions in a standardized structured electronic format.
"Hardcopy" means any documents, records, reports, or other data printed on paper.
"Machine-sensible record" means a collection of related information in an electronic format. Machine-sensible records do not include hardcopy records that are created or recorded on paper or stored in or by an imaging system such as microfilm, microfiche or storage-only imaging systems.
"Storage-only imaging systems" means a system of computer hardware and software that provides for the storage, retention and retrieval of documents originally created on paper. It does not include any system, or part of a system, that manipulates or processes any information or data contained on the document in any manner other than to reproduce the document in hardcopy or as an optical image.
d) Recordkeeping Requirements for Machine-Sensible Records
1) General Requirements
A) Machine-sensible records used to establish tax compliance shall be retained by the taxpayer in accordance with the requirements of this Section. The retained records shall provide sufficient information to establish matters required to be shown by a taxpayer in any tax or information returns. The machine-sensible records shall contain sufficient transaction-level detail information so that the details and the source documents underlying the machine-sensible records can be identified and made available to the Department upon request.
B) The retained records should reconcile to the books and the tax returns by establishing the relationship (i.e., audit trail) between the total of the amounts in the retained records to the totals in the books and to the tax returns.
C) The retained records must be capable of being processed. For purposes of this Section, "capable of being processed" means to be able to retrieve, manipulate, print hardcopy, or produce other output. This term does not encompass any requirement that the program or system that created the computer data be available to process the data unless the process is essential to a tax-related computation.
D) Taxpayers are not required to construct machine-sensible records other than those created in the ordinary course of business. A taxpayer who does not create the electronic equivalent of a traditional paper document in the ordinary course of business is not required to construct such a record for tax purposes.
E) Electronic Data Interchange (EDI)
i) Where a taxpayer uses EDI processes and technology, the level of record detail, in combination with other records related to the transaction, must be equivalent to the level of detail contained in an acceptable paper record.
ii) The taxpayer may capture the information necessary to satisfy subsection (d)(1)(E)(i) at any level within the accounting system and need not retain the original EDI transaction records, provided the audit trail, authenticity and integrity of the retained records can be established.
2) Electronic Data Processing Systems Requirements. The requirements for an electronic data processing accounting system are similar to that of a manual accounting system, in that an adequately designed accounting system should incorporate methods and records that will satisfy the requirements of this Section.
e) Recordkeeping Requirements – ADP Systems Documentation
1) Upon the request of the Department, the taxpayer shall provide a description of the business process that created the retained records. The description shall include the relationship between the records and the tax documents prepared by the taxpayer and the measures employed to ensure the authenticity and integrity of the records.
2) The taxpayer shall be capable of demonstrating:
A) the functions being performed as they relate to the flow of data through the system;
B) the internal controls used to ensure accurate and reliable processing; and
C) the internal controls used to prevent the unauthorized addition, alteration or deletion of retained records.
3) The following specific documentation is required for machine-sensible records pursuant to this Section:
A) record formats and layouts;
B) field definitions (including the meaning of all "codes" used to represent information);
C) file descriptions (e.g., data set name); and
D) detailed charts of accounts and account descriptions.
4) Any changes to the items specified in subsection (e)(2), together with their effective dates, shall be documented and made available to the Department upon request.
f) Machine-Sensible Records Maintenance Requirements
1) The establishment of records management practices is solely at the discretion of the taxpayer, who ultimately bears the burden of producing records capable of being processed at the time of an examination by the Department. The Department recommends but does not require that taxpayers refer to the National Archives and Record Administration (NARA) standards for guidance on the maintenance and storage of electronic records. The NARA standards may be found at 36 CFR 1234, subpart C (1996).
2) In establishing records management practices, taxpayers should consider, for example, the labeling of records, the security of the storage environment, the creation of back-up copies and their storage location and the use of periodic testing to confirm the continued integrity of the records.
3) The taxpayer's computer hardware or software shall accommodate the processing of or the extraction and conversion of retained machine-sensible records.
g) Access to Machine-Sensible Records. The manner in which the Department is provided access to machine-sensible records as required by this Part may be satisfied through a variety of means that shall take into account a taxpayer's facts and circumstances. Access will be provided in one or more of the following manners:
1) A taxpayer may provide the Department copies of the machine-sensible records for use on the Department's equipment;
2) The taxpayer may arrange to provide the Department with the hardware, software and personnel resources necessary to access and process the machine-sensible records;
3) The taxpayer may arrange for a third party to provide the hardware, software and personnel resources necessary to access and process the machine-sensible records;
4) The taxpayer may convert machine-sensible records to a standard record format specified by the Department on a magnetic medium that is agreed to by the Department. This may include conversion to a different medium (e.g., from mainframe files to microcomputer diskette). These records may be processed on the Department's equipment or at the taxpayer's location;
5) The taxpayer and the Department may agree on other means of providing access to the machine-sensible records.
h) Taxpayer Responsibility and Discretionary Authority
1) In discharging their responsibilities under this Section, taxpayers are empowered to determine which of their machine-sensible records must be retained and which records may be discarded. These determinations require a consideration of all the facts and circumstances, including whether duplicated or redundant records exist.
2) In general, taxpayers should retain the machine-sensible records that are the most direct evidence of the transactions, and have discretion to discard duplicated records and redundant information. In exercising this discretion, the taxpayer should generally retain those records that best facilitate the retrieval and processing of the data during an audit. For example, Departmental records stored in Departmental data files that are duplicated in a central system could be discarded provided that all required information in the Departmental records is contained in the central system and the requirements of this Section are met. Similarly, daily or weekly data files could be discarded if appropriate monthly, quarterly or annual data files with the ability to access appropriate transaction-level records are available.
3) In conjunction with meeting the requirements of this Section, a taxpayer may create files solely for the use of the Department. For example, if a database management system is used, it is consistent with this Section for the taxpayer to create and retain a file that contains the transaction-level detail from the database management system and that meets the requirements of this Section. The taxpayer should document the process that created the separate file to show the relationship between that file and the original records.
4) A taxpayer may contract with a third party to provide custodial or management services of the records. The contract shall not relieve the taxpayer of its responsibilities under this Section.
i) Alternative Storage Media. For purposes of storage and retention, taxpayers may convert hardcopy documents received or produced in the normal course of business and required to be retained under this Section to microfilm, microfiche or other storage-only imaging systems and may discard the original hardcopy documents, provided the conditions of this Section are met. These records are not a substitute for machine-sensible records (e.g., magnetic tapes, magnetic cartridges or magnetic disks) as defined in subsection (c). Documents that may be stored on these media include, but are not limited to, general books of account, journals, voucher registers, general and subsidiary ledgers and supporting records of details, such as sales invoices and purchase invoices. Microfilm, microfiche and other storage-only imaging systems shall meet the following requirements:
1) Documentation establishing the procedures for converting the hardcopy documents to microfilm, microfiche or other storage-only imaging systems must be maintained and made available on request. That documentation shall, at a minimum, contain sufficient description to allow an original document to be followed through the conversion system as well as internal procedures established for inspection and quality assurance.
2) Procedures must be established for the effective identification, processing, storage and preservation of the stored documents and for making them available for the periods they are required to be retained under this Section.
3) All data stored on microfilm, microfiche or other storage-only imaging systems must be maintained and arranged in a manner that permits the location of any particular record.
4) Microfiche, microfilm or other storage-only imaging systems records must be indexed, cross-referenced and labeled to show beginning and ending numbers or beginning and ending alphabetical listing of documents included, and must be systematically filed to permit the immediate location of any particular record. A posting reference must be on each document and a control log or catalog of the documents must be maintained.
5) Upon request of the Department, a taxpayer must provide facilities and equipment, in good working order, for reading, locating and reproducing any documents maintained on microfilm, microfiche or other storage-only imaging systems.
6) When displayed on such equipment or reproduced on paper, the documents must exhibit a high degree of legibility and readability. For this purpose, legibility is defined as the quality of a letter or numeral that enables the observer to identify it positively and quickly to the exclusion of all other letters or numerals. Readability is defined as the quality of a group of letters or numerals being recognized as words or complete numbers.
7) There must not be substantial evidence that the microfilm, microfiche or other storage-only imaging systems lack authenticity or integrity.
j) Effect on Hardcopy Recordkeeping Requirements
1) Hardcopy records may be retained on a recordkeeping medium provided in subsection (i).
2) If hardcopy records are not produced or received or required to be produced or received in the ordinary course of transacting business (i.e., when the taxpayer uses EDI technology), such hardcopy records need not be created.
3) Unless hardcopy records are required to be provided or received, hardcopy records generated at the time of a transaction need not be retained if all the details relating to the transaction are subsequently received by the taxpayer in an EDI transaction and are retained by the taxpayer in accordance with this Section.
4) Computer print-outs that are created for validation, control or other temporary purposes need not be retained.
5) Nothing in this Section shall prevent the Department from requesting hardcopy print-outs of retained machine-sensible records. These requests may be made either at the time of an examination or in conjunction with the evaluation described in subsection (k)(2)(G) of this Section.
k) Department Authorization to Destroy Records Sooner Than Would Otherwise Be Permissible
1) In all cases, the Department may, in writing, authorize the destruction of books and records and other papers prior to the expiration of the periods of time during which the taxpayer, except for the written authorization from the Department, is required to keep books and records. The Department may authorize destruction of records if the records are preserved in microfilm, microfiche, other storage-only imaging systems or an electronic data processing system and meet the conditions prescribed in this Section.
2) Record Retention Limitation Agreements
A) The Department may, at the request of the taxpayer, enter into a record retention limitation agreement with a taxpayer that may modify or waive any of the specific requirements of this Section. A taxpayer's request for an agreement must specify which records (if any) the taxpayer proposes not to retain and provide the reasons for not retaining those records as well as proposing any other terms of the requested agreement. The taxpayer shall remain subject to all the requirements of this Section that are not modified, waived or superseded by a duly approved record retention limitation agreement.
B) The Department may revoke or modify a record retention limitation agreement or any provision of an agreement.
C) The record retention limitation agreement shall specifically identify which of the taxpayer's records the Department has determined are not necessary for retention and which the taxpayer may discard. The agreement shall also clearly state each authorized variance, if any, from the normal provisions of this Section. The agreement shall also document other understandings reached with the Department, which may include, but not be limited to:
i) the conversion of files created on an obsolete computer system;
ii) restoration of lost or damaged files and the actions to be taken;
iii) use of taxpayer computer resources.
D) The Department shall consider a taxpayer's request for a record retention limitation agreement and notify the taxpayer of the actions to be taken. The Department's decision to enter or not to enter into a record retention limitation agreement shall not relieve the taxpayer of the responsibility under this Section to keep adequate and complete records necessary to a determination of tax liability.
E) Unless otherwise specified, an agreement shall not apply to accounting and tax systems added subsequent to the effective date of the agreement. All machine-sensible records produced by a subsequently added accounting or tax system shall be retained by the taxpayer in accordance with this Section until a new agreement is entered into with the Department.
F) Unless otherwise specified, an agreement shall not apply to any subsidiary or other entity that, subsequent to the effective date of a record retention limitation agreement, is acquired by the taxpayer. All machine-sensible records produced by the acquired subsidiary shall be retained pursuant to this Section and any record retention limitation agreement that may have been in effect for the acquired subsidiary ("pre-acquisition agreement"). The provisions of the pre-acquisition agreement shall continue to apply to the acquired subsidiary until revoked or modified by the Department or a new agreement applying to the acquired subsidiary is entered.
G) To evaluate the propriety of a record retention limitation agreement, the Department may conduct an evaluation of the taxpayer's record retention practices. The evaluation may include a review of the taxpayer's relevant data processing and accounting systems, including systems using EDI technology.
i) The Department shall notify the taxpayer of the results of any evaluation, including acceptance or rejection of any proposals made by the taxpayer (e.g., to discard certain records) or any changes considered necessary to bring the taxpayer's practices into compliance with this Section.
ii) The evaluation of a taxpayer's records retention practices is not directly related to the determination of tax reporting accuracy for a particular period or return, nor is the evaluation an "audit".
(Source: Added at 24 Ill. Reg. 18731, effective December 11, 2000)
SUBPART DD: JUDICIAL REVIEW
Section 100.9600 Administrative Review Law (IITA Section 1201)
a) Circuit Court review; application and scope; remand procedure. IITA Section 1201 states that the provisions of the Administrative Review Law as contained in Article III of the Code of Civil Procedure [735 ILCS 5/Art. III] and rules adopted pursuant thereto shall apply to and govern all proceedings for the judicial review of the Department's final actions under IITA Sections 908(d) and 910(d) and that such actions shall constitute administrative decisions as defined in Section 3-101 of the Administrative Review Law. (See Sections 100.9000(c)(2) and 100.9100(b)(1) and (3) of this Part.) The Administrative Review Act (which should be consulted for completeness) also includes the following provisions:
Scope of Review. Every action to review any final administrative decision shall be heard and determined by the court with all convenient speed. The hearing and determination shall extend to all questions of law and of fact presented by the entire record before the court. No new or additional evidence in support of or in opposition to any finding, order, determination or decision of the administrative agency shall be heard by the court. The findings and conclusions of the administrative agency on questions of fact shall be held to be prima facie true and correct. [735 ILCS 5/3-110]
Powers of Trial Court. The Circuit Court has power: Where a hearing has been held by the agency, to remand for the purpose of taking additional evidence when from the state of the record of the administrative agency or otherwise it shall appear that such action is just. However, no remandment shall be made on the ground of newly discovered evidence unless it appears to the satisfaction of the court that such evidence has in fact been discovered subsequent to the termination of the proceedings before the administrative agency and that it could not by the exercise of reasonable diligence have been obtained at such proceedings; and that such evidence is material to the issues and is not cumulative. [735 ILCS 5/3-111]
b) Where the case is remanded to the Department under the provisions quoted immediately above for the taking of additional evidence, the Department in compliance therewith and to the extent appropriate shall reopen and resume the examination of the return or claim under IITA Section 904(a) (see Sections 100.9300(a), 100.9400(a), and 100.9520(a) of this Part). The informal procedure shall be made available at the taxpayer's or claimant's option as set forth at Section 100.9000 of this Part, and if the dispute continues, the investigation and hearing provided for in IITA Section 914 (see Section 100.9520 of this Part) shall be reopened and resumed. Any settlement or other disposition stipulated by the agreement of the parties of any of the adjustments or issues as a result of the remand prior to or after the resumption of the hearing shall be subject to the concurrence of the Attorney General and approval of the court; however, such approval shall not extend to or be considered as a decision on the merits of the issues by the court. After the handing down of the Circuit Court decision the Department as soon as practicable may publish its acquiescence or nonacquiesence to any part of the court's findings or conclusions decided adversely to the State and well within the time for taking an appeal shall transmit to the Attorney General its recommendations for or against taking an appeal. In its litigation positions and action on decision recommendations, at whatever judicial review level, the Department shall endeavor to promote and attain legal soundness tempered with practicability and fairness and coordinated uniformity of application in the interpretations taking into account overall the views and the interest of taxpayers or claimants and the state.
c) Appellate review. The Administrative Review Law also contains the following provisions:
Any final decision, order, or judgment of the Circuit Court, entered in an action to review a decision of an administrative agency, is reviewable by appeal as in other civil cases. [735 ILCS 5/3-112]
(Source: Amended at 24 Ill. Reg. 10593, effective July 7, 2000)
SUBPART EE: DEFINITIONS
Section 100.9700 Unitary Business Group Defined (IITA Section 1501)
a) Scope
This Section is designed to clarify the meaning of IITA Section 1501(a)(27), defining "unitary business group". This definition became effective for tax years ending on or after December 31, 1982.
b) Persons Required to Use Combined Apportionment
Any person subject to Illinois income taxation may be a member of a unitary business group and required to use combined apportionment under IITA Section 304(e). Only corporations (other than subchapter S corporations) who are members of a unitary business group are required to file combined returns under IITA Section 502(e). For the treatment of certain partners and partnerships engaged in a unitary business, see Section 100.3380(d). Every member of a unitary business group who is neither a corporation required to join in a combined return nor a partnership excluded from combined apportionment under Section 100.3380 shall determine the Illinois portion of its business income pursuant to IITA Section 304(e) by computing the combined business income of the unitary business group in the manner prescribed in Section 100.5270(a), and apportioning that unitary business income to Illinois using the combined everywhere apportionment factors of the unitary business group and that person's own Illinois apportionment factors. If one or more other members of the unitary business group have taxable years different from the taxable year of the taxpayer filing the return, that taxpayer shall compute the combined business income of the group for its taxable year by including the incomes of the members using a different taxable year in the manner prescribed by Section 100.5265.
c) The 80/20 U.S. Business Activity Test for Prospective Members of a Unitary Business Group
The factors to be used in determining whether 80% or more of a person's business activity is conducted outside the United States shall be gross figures without eliminations premised on the person's membership in any unitary business group. However, the factors should relate to the common taxable year, as defined in Section 100.5265, of the unitary business group of which the person being tested could become a member were the person's business activity found to be less than 80% outside the United States. The factors to be used are as follows:
1) persons who apportion business income under IITA Section 304(a) shall use property and payroll;
2) persons who apportion business income under IITA Section 304(b), (c) or (d) will use the respective factors prescribed in those provisions.
A) For taxable years ending prior to December 31, 2017, the phrase "United States" as used in IITA Section 1501(a)(27) includes only the 50 states and the District of Columbia, but does not include any territory or possession of the United States or any area over which the United States has asserted jurisdiction or claimed exclusive rights with respect to the exploration for or exploitation of natural resources. For taxable years ending on or after December 31, 2017, the phrase "United States", as used in IITA Section 1501(a)(27), means only the 50 states, the District of Columbia, and any area over which the United States has asserted jurisdiction or claimed exclusive rights with respect to the exploration for or exploitation of natural resources, but does not include any territory or possession of the United States. (IITA Section 1501(a)(27)(B)) Areas over which the United States has asserted jurisdiction and claimed exclusive rights with respect to the exploration for or exploitation of natural resources include the outer continental shelf. (See IRC section 638 and 43 USC 1331.)
B) Mechanically, the computation of the 80/20 U.S. business activity test involves the formation of one or two fractions, as the case may be, and the subsequent averaging of those fractions to arrive at an overall U.S. business activity in relation to world-wide business activity. The numerators of the fractions shall represent U.S. property, U.S. payroll, U.S. revenue miles or other transportation company factors, insurance premiums on property or risk in the U.S., or financial organization business income from sources within the U.S.; the respective denominators shall be world-wide figures.
C) In the case of a person who would be a member of a unitary business group for only part of a taxable year if less than 80% of its business activities were conducted outside the United States, the 80/20 U.S. business activity test shall be applied only to that part of the person's taxable year for which the prospective member otherwise qualifies for membership in the unitary business group. If that person is a corporation and is a prospective member of a unitary business group required to file combined returns under IITA Section 502(f), the 80/20 U.S. business activity test shall be applied only to that part of the combined group's common taxable year for which that person otherwise qualifies for membership in the combined group.
d) Taxpayers Using Different Apportionment Formulas under IITA Section 304
1) Prior to December 31, 2017
A) For taxable years ending prior to December 31, 2017, only taxpayers who use the same apportionment formula under IITA Section 304 may be members of the same unitary business group. As a consequence:
i) a corporation required to use the three factor apportionment formula of IITA Section 304(a) cannot be a member of the same unitary group as a corporation required to use the one factor apportionment formula of IITA Section 304(c); and
ii) a corporation required to use the one factor apportionment formula of IITA Section 304(c) cannot be a member of the same unitary business group as a corporation required to use the one factor apportionment formula of IITA Section 304(b).
B) The proper method for determining unitary business group memberships under IITA Section 1501(a)(27) is:
i) first, to identify all entities that are related through common ownership and engaged in either horizontally or vertically integrated enterprises with the requisite exercise of strong centralized management; and
ii) second, to create from the population of entities thus identified:
• one unitary business group composed of entities required to apportion under IITA Section 304(a);
• one unitary business group composed of entities required to apportion under IITA Section 304(b);
• one unitary business group composed of entities required to apportion under IITA Section 304(c);
• one unitary business group composed of entities required to apportion under IITA Section 304(c-1); and
• one unitary business group composed of entities required to apportion under IITA Section 304(d).
2) After December 31, 2017
For taxable years ending on or after December 31, 2017, all taxpayers may be included in the same unitary business group without regard to the apportionment formula used by any of the taxpayers under IITA Section 304.
EXAMPLE: For the taxable year ending December 31, 2016, Corporation A owns all of the outstanding common stock of Corporations B and C. Corporations B and C each own 30% of the outstanding common stock of Corporation D. Corporation D owns 60% of the outstanding common stock of Corporation E. Corporation A is a mining company operating exclusively in Illinois. Corporation D is a manufacturing company with factories in Illinois and Indiana. Corporation C is an insurance company earning premiums for insuring property and risks located in Illinois and Indiana. Corporation B is an air freight company and Corporation E is a trucking company, both operating nationwide. In their relationships to one another, the five companies: are steps in a vertically structured enterprise or process (see subsection (h)(1)(A)) and are functionally integrated through the exercise of strong centralized management (IITA Section 1501(a)(27)(A)(2)). As a result of these facts, Corporations A and D, which would apportion business income using the formula in IITA Section 304(a), shall constitute one unitary business group; Corporations B and E, which would apportion business income using the transportation company formula in IITA Section 304(d), shall constitute a second unitary business group; and Corporation C shall compute its liability on a non-combined apportionment basis using the insurance company formula in IITA Section 304(b).
3) For purposes of applying the transition from the provisions in subsection (d)(1) to those in subsection (d)(2), the relevant taxable year is the common taxable year under Section 100.5265 of the unitary business group that would result from combining taxpayers using different apportionment formulas.
EXAMPLE 1: Prior to 2017, Subgroup A (comprised of financial organizations that apportion their business income under IITA Section 304(c)) and Subgroup B (comprised of corporations that apportion their business income under IITA Section 304(a)) were separate unitary business groups that each filed its own combined return. Subgroup A used a calendar taxable year and Subgroup B used a taxable year ending June 30. For 2017 and subsequent years, the two subgroups will be a single unitary business group as the result of the repeal of the prohibition against including in one unitary business group taxpayers who use different apportionment formulas. If the common taxable year of the unitary business group comprised of the two subgroups will be the calendar year, the revised law will first apply for the taxable year ending December 31, 2017. The unitary business group will file a single combined return for the taxable year ending December 31, 2017 and include in its combined income the income of Subgroup B for the period from July 1, 2017 through December 31, 2017, as provided in Section 100.5265(f).
EXAMPLE 2: Assuming the same facts as in Example 1, except that the common taxable year of the unitary business group comprised of the two subgroups will be the June 30 year, the revised law will first apply for the taxable year ending June 30, 2018. Subgroup A will file its own combined return for its taxable year ending December 31, 2017. The unitary business group comprised of both subgroups will file a single combined return for the taxable year ending June 30, 2018, and include in its combined income the income of Subgroup A for the period from January 1, 2018 through June 30, 2018, as provided in Section 100.5265(f).
e) Common Ownership
In the case of a corporation, common ownership means direct or indirect control or ownership of more than 50% of the corporation's outstanding voting stock. In the case of any other entity, common ownership means direct or indirect ownership of an interest sufficient to exercise control over the activities of the entity. For example, ownership of a general partnership interest gives the partner the authority to act on behalf of the partnership and bind the partnership, regardless of actual ownership share. (See Section 9 of the Uniform Partnership Act [805 ILCS 205/9]). Accordingly, a general partner in any partnership has an interest in the partnership sufficient to establish common ownership. Insofar as corporations are concerned, a person has direct ownership of the outstanding voting stock of the corporation to the extent that person owns the stock, and indirect control to the extent that person owns the voting stock of a another corporation that itself owns stock in the first corporation. Any combination of direct and indirect control or ownership aggregating more than 50% will suffice to qualify the corporation whose stock is owned for membership in the unitary business group if the other tests unrelated to ownership are met.
EXAMPLE 1: Corporation A owns 60% of the outstanding voting stock of Corporation B that, in turn, owns 60% of the outstanding voting stock of Corporation C. There is common ownership of Corporations A, B and C by reason of Corporation A's direct ownership of more than 50% of the outstanding voting stock of Corporation B and indirect control of more than 50% of the outstanding voting stock of Corporation C.
EXAMPLE 2: Corporation A owns 60% of the outstanding voting stock of Corporation B and 60% of the outstanding voting stock of Corporation C. Corporations B and C in turn each own 30% of the outstanding voting stock of Corporation D. Corporations A, B, C and D are all under common ownership by reason of Corporation A's direct ownership of more than 50% of the outstanding voting stock of Corporations B and C and by reason of Corporation A's indirect control of more than 50% of the outstanding voting stock of Corporation D.
EXAMPLE 3: Corporation A owns 60% of the outstanding voting stock of Corporation B and 40% of the outstanding voting stock of Corporation C. Corporations B and C each in turn own 30% of the outstanding voting stock of Corporation D. Corporations A and B are under common ownership by reason of Corporation A's direct ownership of more than 50% of the outstanding voting stock of Corporation B, but neither Corporations C or D are under common ownership with Corporations A and B because neither Corporation A nor Corporation B has direct or indirect control or ownership of more than 50% of the outstanding voting stock of Corporations C or D.
EXAMPLE 4: Corporation A owns 60% of the outstanding voting stock of Corporation B and 40% of the outstanding voting stock of Corporation C. Corporation B owns 30% of the outstanding voting stock of Corporation D and Corporation C owns 60% of the outstanding voting stock of Corporation D. Corporations A and B are under common ownership by reason of the fact that Corporation A owns more than 50% of the outstanding voting stock of Corporation B, and Corporations C and D are under separate common ownership by reason of the fact that Corporation C owns more than 50% of the outstanding voting stock of Corporation D.
f) Attribution of Stock Ownership Among Certain Persons
For the purpose of IITA Section 1501(a)(27), a person shall be considered to have indirect control over any stock that that person is considered as owning under IRC section 318(a).
EXAMPLE: Strictly as an investment, Mr. X and his wife, Mrs. X, each individually own 30% of the outstanding voting stock of Corporation A and 30% of the outstanding voting stock of Corporation B. Corporations A and B are under common ownership within the meaning of Section 1501(a)(27) and, assuming that they meet the other requirements of IITA Section 1501(a)(27), they will be members of the same unitary business group. The common ownership stems from the fact that, under IRC section 318(a)(1), the stock holdings of Mr. X are imputed to his wife and vice versa. Note that it is not necessary in order for Corporations A and B to be members of a unitary business group that the "person" in whom the common ownership is embodied also be a member of the unitary business group.
g) Strong Centralized Management
Under IITA Section 1501(a)(27), no group of persons can be a unitary business group unless they are functionally integrated through the exercise of strong centralized management. It is this exercise of strong centralized management that is the primary indicator of mutual dependency, mutual contribution and mutual integration between persons that is necessary to constitute them members of the same unitary business group. The exercise of strong centralized management is deemed to exist when authority over such matters as purchasing, financing, tax compliance, product line, personnel, marketing and capital investment is not left to each member. Thus, some groups of persons may properly be considered as constituting a unitary business group under IITA Section 1501(a)(27) when the executive officers of one of the persons are normally involved in the operations of the other persons in the group and there are centralized units that perform for some or all of the persons functions that truly independent persons would perform for themselves. Note in this connection that neither the existence of central management authority, nor the exercise of that authority over any particular function (through centralized operations), is determinative in itself; the entire operations of the group must be examined in order to determine whether or not strong centralized management exists. A finding of "strong centralized management" is not supported merely by showing that the requisite ownership percentage exists or that there is some incidental economic benefit accruing to a group because the ownership improves its financial position. Only if both elements of strong centralized management, i.e., strong central management authority and the exercise of that authority through centralized operations, are present will persons be found to constitute a unitary business group under IITA Section 1501(a)(27). Finally, a finding of strong centralized management can be supported even though the authority resides in a person that is not a member of the group, provided that the authority is actually exercised by that person.
h) General Line of Business and Vertically Structured Enterprises
1) IITA Section 1501(a)(27) establishes that persons meeting all of the other tests for inclusion in a unitary business group, including common ownership, strong centralized management and comparability of apportionment method, will ordinarily be in one of the following relationships to one another:
A) in the same general line of business; or
B) steps in a vertically structured enterprise or process.
2) IITA Section 1501(a)(27) recites that two persons will ordinarily be considered to be in the same general line of business if they are both involved in one of the following activities:
A) manufacturing;
B) wholesaling;
C) retailing;
D) insurance;
E) transportation; or
F) finance.
3) IITA Section 1501(a)(27) does not contemplate that the list in subsection (h)(2) is exclusive. For example, two persons that are both involved in rendering services to the public would ordinarily be considered to be in the same general line of business. In this regard, a retailer that renders services that are incidental to its retail business will not be considered to be in the same general line of business as a person that is primarily a provider of that same type of service.
4) It is not a requirement of IITA Section 1501(a)(27) that the activities of the two persons in whichever category is applicable relate to the same product or product line in order for the two persons to be in the same general line of business.
5) Two persons are steps in a vertically structured enterprise or process under IITA Section 1501(a)(27) even though other persons who are also steps in that enterprise or process are not members of the same unitary business group because of the intervention of: the 80/20 U.S. business activity test or the rules stated in subsection (d), relating to the comparability of apportionment formulas of members of a unitary business group.
EXAMPLE: Corporation A manufactures furniture. Corporation C retails the furniture manufactured by Corporation A. Corporation B is a furniture finisher and wholesaler operating exclusively in Mexico that purchases Corporation A's unfinished furniture, applies the appropriate finishing materials in its Mexican plants, and sells the finished furniture to Corporation C. Corporations A and C are steps in a vertically structured enterprise and therefore can be members of the same unitary business group. They do not lose their status as steps in a vertically structured enterprise by reason of the fact that they never directly deal with one another since they both deal with Corporation B, which is also a step in the vertically structured enterprise and would be a member of the unitary business group if the other tests for a unitary business were met.
6) A person is not considered a step in a vertically structured enterprise or process unless it is connected to one or more other persons that are steps in the vertically structured enterprise or process by a flow of goods or services, including management services, to itself or from itself. However, if the flow of goods or service is present with respect to a particular person, that person's status as a step in the vertically structured enterprise or process does not depend on the relationship between the price at which this flow exists and the fair market price at which this flow would exist in an arm's length transaction.
EXAMPLE: Same facts as in the example in subsection (h)(5), except that Corporation A can establish that it sells its unfinished furniture to Corporation B at a fair market arm's length price and Corporation C can establish that it purchases the finished furniture from Corporation B at a fair market arm's length price. Even with their respective showings that the flow of furniture connecting them to Corporation B existed at an arm's length price, Corporations A and C are still steps in a vertically structured enterprise and can still be members of the same unitary business group.
(Source: Amended at 43 Ill. Reg. 10124, effective August 27, 2019)
Section 100.9710 Financial Organizations (IITA Section 1501)
a) General Definition. The term "financial organization" is defined in IITA Section 1501(a)(8)(A) to mean any bank, bank holding company, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, building and loan association, credit union, currency exchange, cooperative bank, small loan company, sales finance company, investment company, or any person which is owned by a bank or bank holding company. For the purpose of this Section a "person" will include only those persons which a bank holding company may acquire and hold an interest in, directly or indirectly, under the provisions of the Bank Holding Company Act of 1956 (12 USC 1841), except where interests in any person must be disposed of within certain required time limits under the Bank Holding Company Act of 1956. This definition constitutes an exclusive and exhaustive list of the types of organization that are "financial organizations" under the Illinois Income Tax Act.
b) Entities Engaged in Financial Organization Activities and Other Activities. For purposes of this Section, an entity that is classified as a "bank" under subsection (e) of this Section; as a "bank holding company" under subsection (f) of this Section; or as a person owned by a bank or bank holding company under subsection (g) of this Section, is a "financial organization" regardless of whether the entity is predominantly engaged in the business activities characteristic of a financial organization. In order for any other entity to be characterized as a "financial organization" in any tax year, the entity must be predominantly engaged in the business activities of a financial organization during the year. For this purpose, an entity engaged in business activities of a financial organization, as well as other business activities in the same tax year, is predominantly engaged in the business activities of a financial organization during that year only if more than 80% (50% in the case of a sales finance company under subsection (d)(10) of this Section) of the entity's gross income, averaged over a period of three years, which includes the current tax year and the immediately preceding two tax years, is derived from the business activities characteristic of one or more of the categories of financial organization defined in this Section for which the entity otherwise qualifies. For purposes of this subsection, gross income shall include only amounts that are received in the ordinary course of the entity's regular business activities and that are included in net income under the Illinois Income Tax Act. For purposes of determining whether an entity is predominantly engaged in the business activities of a financial organization when an entity is formed in a current tax year or in its immediately preceding tax year, only the years for which the entity is in existence will be used in determining whether the entity meets the 80% test (or 50% test in the case of a sales finance company under subsection (d)(10) of this Section).
1) Income which results from transactions outside the ordinary course of an entity's regular business activities is not taken into account for the purposes of the gross income test. For example, amounts received from the sale of an entity's headquarters shall be disregarded, whether or not the gain is characterized as business income.
2) The classification of an entity as a "financial organization" under the IITA is relevant to how the business income of the entity shall be apportioned to Illinois under IITA Section 304(c). The treatment of items of income that are not included in apportionable business income is not affected by such classification, and such items are therefore disregarded for purposes of the gross income test. For example, interest received on United States Treasury obligations is excluded from Illinois base income, and accordingly is disregarded for purposes of determining whether the business income of an entity should be apportioned using the financial organization formula. Similarly, dividends received by a corporation shall be disregarded to the extent the dividends are deducted from federal taxable income under section 243 of the Internal Revenue Code or are subtracted in the computation of Illinois base income under IITA Section 203(b)(2)(O).
3) In the case of a sale or disposition of any asset (whether tangible or intangible, and whether the asset is part of the taxpayer's stock in trade) that occurs in the ordinary course of an entity's regular business activities, only the net gain shall be taken into account for purposes of the gross income test. Thus, for example, gross income from the sale of inventory is equal to its gross receipts minus the cost of goods sold; while gross income from the sale of stock is equal to the sales price minus any brokerage commission and minus the taxpayer's basis in the stock. If gross income from a transaction is negative, the loss shall not be considered for purposes of the gross income test.
4) Leasing Activities. For purposes of the IITA and the Internal Revenue Code, a "finance lease" is treated as an extension of credit, rather than as a true lease. In a finance lease, the lessor is treated as a creditor, and the lessee is treated as the owner of the leased asset entitled to any deduction for depreciation allowed under section 167 of the Internal Revenue Code. For purposes of this Section, a finance lease shall be treated as a loan or other extension of credit, rather than as a lease, regardless of how the transaction is characterized for any other purpose, including the purposes of any regulatory agency to which the lessor is subject.
5) In applying the gross income test to an entity engaged in the businesses of more than one of the types of organization defined in subsection (d) of this Section, "gross income from financial services" shall include gross income derived from all services characteristic of any specific defined type of organization for which the entity qualifies. For example:
A) Selling and exchanging currency is a characteristic service only of banks. Accordingly, "gross income from financial services" of an entity which qualifies as a bank under subsection (d)(1) of this Section, and as a safe deposit company under subsection (d)(6) of this Section, includes both income from trading in foreign currency and safe deposit box rentals. However, "gross income from financial services" of an entity which qualifies as a safe deposit company, but not as a bank, does not include income from trading in foreign currency.
B) A taxpayer that meets all other qualifications of a sales finance company and also of a small loan company, and that derives 40% of its gross income from transactions characteristic of a sales finance company and 35% of its gross income from transactions characteristic of a small loan company is not a financial organization because it does not meet either the 50% test for sales finance companies nor the 80% test applicable to other types of financial organization. If, however, the taxpayer derives 45% of its gross income from transactions characteristic of a sales finance company and 36% of its gross income from transactions characteristic of a small loan company, it would not be a sales finance company because it does not meet the 50% test, but it would be a financial organization under the 80% test.
6) IITA Section 1501(a)(8)(D) provides that an entity that is a "financial organization" that engages in any transaction with an affiliate shall be a "financial organization" for all purposes of the Act. Accordingly, in applying the gross income test, an entity's transactions with a person to which it is related (including transactions with a member of the entity's unitary business group which are eliminated in combination under Section 100.3320(d) of this Part) shall be treated in the same manner as transactions between the entity and an unrelated person, subject in all cases to the authority of the Department under IITA Section 404 to make such adjustments as are necessary to properly reflect each party's Illinois business activities.
c) Some of the types of organizations listed in subsection (a) of this Section are defined by State or federal statutes. The remaining types of organization are terms frequently used in other states' laws to refer to entities engaged in the same businesses as the entities in one or more of the types defined in Illinois or federal law. An entity defined as a bank or a bank holding company, or that is owned by a bank or bank holding company, under subsection (e), (f) or (g) of this Section, is a financial organization regardless of its actual business activities. For any other entity, notwithstanding the title or characterization of the entity for purposes of any other law, the entity is a "financial organization" for purposes of the IITA only if that entity is predominantly engaged in a business which is identical in all material respects to the characteristic business of an entity within one or more of the types of organization defined in Illinois or federal law. In order for an entity's business to be identical in all material respects to the business of one of the defined types of organization, the entity must:
1) provide substantially all of the characteristic services provided by entities in the defined type of organization; and
2) be subject to regulation by the Illinois or federal agency (if any) with authority over entities in the defined type of organization or by the equivalent authority (if any) established under the laws of the entity's state or country of formation or of its commercial domicile. However, "sales finance companies", as defined in subsections (d)(10)(A) and (B) of this Section are not required to be regulated by any state or federal authority.
d) Application to Defined Types of Financial Organization. This subsection lists the types of financial organization defined in Illinois or federal law and describes the characteristic business of each type as provided in the relevant Illinois or federal statutes. The references to Illinois State and federal statutes and authorities in this subsection shall be construed to refer to any predecessor to the current statute or authority, whenever appropriate.
1) Entities engaged in the business of a "bank". The term "bank" includes any entity described in subsection (e) of this Section. In addition, for purposes of categorizing an entity that does not come within the scope of subsection (e) of this Section, the term "bank" means an entity predominantly engaged in the business activities characteristic of an entity which has been issued a charter by the Commissioner of Banks and Real Estate under 205 ILCS 5/13 or that has been given a certificate of authority to commence banking by the Comptroller of the Currency under 12 USC 27. The terms "savings bank", "industrial bank" and "cooperative bank" are sometimes used in the laws of other states to refer to entities engaged in the same business as a "bank" as defined in Illinois or federal law. The term "private banker" means an unincorporated bank, conducted as a partnership of individuals or as an individual proprietorship. Notwithstanding that an entity does or does not come within the meaning of any of these terms for any other purpose, the determination of whether an entity is engaged in the business of a "bank" for purposes of the IITA shall be made pursuant to the following standards:
A) Characteristic Services. The Illinois and federal statutes providing for the formation of banks state that the characteristic activities of banks are accepting deposits, making loans, discounting evidences of debt, and buying and selling exchange. (See 205 ILCS 5/3; 12 USC 24; and section 581 of the Internal Revenue Code.) In order to be engaged in a business identical in all material respects to the business of a "bank," an entity formed under the laws of another state or of a foreign country as a bank, savings bank, industrial bank, or cooperative bank must engage in each of these characteristic financial services of a bank. Thus, for example, an entity that does not accept deposits is not engaged in the business of a bank. For purposes of applying the 80% of gross income test in subsection (b) of this Section, examples of gross income from characteristic services of a bank include:
i) application and origination fees, points, interest, late payment fees and other charges received in connection with loans or with commitments to make loans or provide other credits;
ii) service charges and early withdrawal or other penalties received in connection with deposit accounts;
iii) fees and gains realized from buying and selling exchange, including foreign currency;
iv) loan servicing fees and charges received in connection with syndicated loans or loans sold to third parties; and
v) discounts and gains realized on the purchase or resale of loans.
Examples of items of income that are not gross income from the characteristic services of a bank include rental income from real estate; gains from sale of property obtained in foreclosure or settlement of loans; and interest and dividends received from, and gains realized on the sale or exchange of, securities.
B) Regulation. Illinois State banks are subject to regulation by the Commissioner of Banks and Real Estate (see 205 ILCS 5/48), while national banks are subject to regulation by the Comptroller of the Currency (see 12 USC 27(b)(2)). These entities qualify as banks under subsection (e) of this Section regardless of their business activities. In order to qualify as a bank, an entity that is not a bank within the meaning of subsection (e) of this Section must be regulated by the authority (if any) equivalent to the Commissioner of Banks and Real Estate or the Comptroller of the Currency having regulatory jurisdiction within the entity's state or country of formation or commercial domicile.
2) Entities engaged in the business of a "trust company". The term "trust company" means a corporation organized under the laws of the State of Illinois for the purpose of accepting and executing trusts [205 ILCS 620/1-5.11], and that has received a certificate of authority to accept trusts from the Commissioner of Banks and Real Estate under 205 ILCS 620/2-4.
A) Characteristic Services. A trustee performs services as a fiduciary on behalf of the trust's beneficiaries. A trustee is entitled to compensation for expenses incurred on behalf of the trust and to reasonable compensation for services rendered (see 760 ILCS 5/7). Under Illinois law, a trustee may continue an unincorporated business on behalf of the trust in certain circumstances (see 760 ILCS 5/4.23 and 4.24). A trustee may act as an advisor or manager of a mutual fund in which trust funds are invested, without having to reduce or waive its compensation for such services when provided to a trust (see 760 ILCS 5/5.2). However, the trustee is not entitled to any profit from any business it conducts on behalf of a trust or beneficiary, but only to compensation for services rendered to the trust. Accordingly, the gross income from characteristic services of a trust company shall include only trustees' fees or other compensation receivable for services rendered as a trustee on behalf of trusts. Amounts received for services provided other than as a trustee, such as fees received as an advisor or manager of a mutual fund in which trust funds are invested, are not gross income from characteristic services of a trust company.
B) Regulation. A trust company conducting business within Illinois is subject to the Corporate Fiduciary Act [205 ILCS 620]. Some types of regulated entities, such as national banks, are authorized by law to engage in trust activities (see 12 USC 92a). Any entity operating in any other state must be licensed or subject to regulation by any equivalent authority in that state.
3) Entities engaged in the business of a "savings bank". The term "savings bank" means a taxpayer which is predominantly engaged in the business of an entity that is either chartered as a federal savings bank under the Home Owners' Loan Act (12 USC 1462 and 1464(a)) and whose investments comply with the guidelines of 12 USC 1464(c) or of an entity which has been issued a certificate of organization by the Commissioner of Savings and Loan Associations under the Savings Bank Act [205 ILCS 205/3007] and that, as required by 205 ILCS 205/1009, maintains at least 60% of its total assets in qualifying "domestic savings and loan association" assets described in section 7701(a)(19) of the Internal Revenue Code. The qualifying assets listed in Section 7701(a)(19) are cash, federal and municipal obligations, loans secured by deposits or shares in the lender, residential real estate loans, educational loans, and related investments. The terms "bank", "savings and loan association", "building and loan association", "industrial bank" and "cooperative bank" are sometimes used in the laws of other states to refer to entities engaged in the same business as a "savings bank" as defined in Illinois or federal law. Notwithstanding that an entity does or does not come within the meaning of any of these terms for any other purpose, the determination of whether the entity is engaged in the business of a "savings bank" for purposes of the IITA shall be made pursuant to the following standards:
A) Characteristic Services. The business of a savings bank consists principally of acquiring the savings of the public and investing in loans (section 7701(a)(19)(B) of the Internal Revenue Code). In general, qualifying loans are related to residential real estate. An entity that does not take deposits from the public and invest the deposited funds primarily in qualifying loans to the public is not a savings bank for purposes of the IITA. For purposes of applying the 80% of gross income test in subsection (b) of this Section, examples of gross income from characteristic services of a savings bank include:
i) application and origination fees, points, interest, late payment fees and other charges received in connection with loans or with commitments to make loans or provide other credits;
ii) service charges and early withdrawal or other penalties received in connection with deposit accounts;
iii) loan servicing fees and charges received in connection with syndicated loans or loans sold to third parties; and
iv) discounts and gains realized on the purchase or resale of loans.
Examples of items of income that are not gross income from the characteristic services of a savings bank include rental income from real estate; gains from sale of property obtained in foreclosure or settlement of loans; interest and dividends received from, and gains realized on the sale or exchange of, securities.
B) Regulation. No entity is a savings bank for purposes of the IITA unless it is subject to regulation by the Commissioner of Banks and Real Estate under the Savings Bank Act [205 ILCS 205/1003], the Office of Thrift Supervision (12 USC 1461), or the appropriate authority of another state responsible for regulating savings banks.
4) Entities engaged in the business of a "land bank". The term "land bank" was defined in federal law to mean a federally chartered association organized to make loans on farm security at low interest rates as governed by 12 USC, ch. 23 (Farm Credit System). Under the Agricultural Credit Act of 1987 (P.L. 100-233), the federal land banks were merged with the Federal Intermediate Credit Banks which had also been created under the Farm Credit System. Under current law, the surviving entities are exempt from state income taxation (see 12 USC 2098).
A) Characteristic Services. Congress established the federal land banks as cooperatives to encourage farmer and rancher ownership and control over a system of credit for agriculture. The characteristic service of a land bank is making loans to farmers. Gross income from characteristic services of a land bank include application and origination fees, points, interest, late payment fees and other charges received in connection with loans to farmers and ranchers.
B) Regulation. Federal land banks are not subject to Illinois taxation. A land bank that was not created under federal statute must be subject to any regulation by any authority equivalent to the Farm Credit System regulation as may exist in the state or country of incorporation or commercial domicile of the land bank.
5) Entities engaged in the business of a "safe deposit company". The term "safe deposit company" means an entity licensed by the Department of Financial Institutions under the Safety Deposit License Act [240 ILCS 5/22] to engage in the business of renting or permitting the use of, for compensation, safety deposit boxes, safes, vaults or other facilities for the safekeeping of personal property (see 240 ILCS 5/2). The Safety Deposit License Act does not apply to banks, savings and loans, credit unions, warehouses, or grain storage companies (see 240 ILCS 5/3).
A) Characteristic Services. A safe deposit company provides facilities for the safekeeping of personal property in safes or vaults, as compared to warehouses. Gross income from the characteristic services of a safe deposit company includes rental income or similar charges for safe deposit boxes.
B) Regulation. Safe deposit companies doing business in Illinois must be licensed by the Department of Financial Institutions. An entity operating in any other state must be licensed or subject to regulation by any equivalent authority in that state.
6) Entities engaged in the business of a "savings and loan association". The term "savings and loan association" means a federal savings and loan association chartered under the Home Owners' Loan Act of 1933 (12 USC 1462 and 1464(a)) whose investments comply with the guidelines of 12 USC 1464(c) or a savings and loan association organized under the Illinois Savings and Loan Act of 1985 [205 ILCS 105/2-6] and whose investments comply with the requirements of 205 ILCS 105/5-1 through 5-16. In particular, 205 ILCS 105/5-3 provides that savings and loan associations must generally make their assets available to make loans to their members secured by the members' shares or for residential real estate purchase, construction and related matters under 205 ILCS 105/5-2. The Internal Revenue Code provides special rules for savings and loan associations, which are defined in section 7701(a)(19) of the Internal Revenue Code as depository institutions that invest at least 60% of their assets in cash, federal and municipal obligations, loans secured by deposits or shares in the lender, residential real estate loans, educational loans, and related investments. The terms "bank", "savings bank", "building and loan association" and "cooperative bank" are sometimes used in the laws of other states or of other countries to refer to entities engaged in the same business as a "savings and loan association" as defined in Illinois or federal law. Notwithstanding that an entity does or does not come within the meaning of any of these terms for any other purpose, the determination of whether the entity is engaged in the business of a "savings and loan association" for purposes of the IITA shall be made pursuant to the following standards:
A) Characteristic Services. The business of a savings and loan association consists principally of acquiring the savings of the public and investing in loans (section 7701(a)(19)(B) of the Internal Revenue Code). An entity that does not take deposits and invest primarily in qualifying loans is not a savings and loan association for purposes of the IITA. For purposes of applying the gross income test in subsection (b) of this Section, examples of gross income from characteristic services of a savings and loan association include:
i) application and origination fees, points, interest, late payment fees and other charges received in connection with loans or with commitments to make loans or provide other credits;
ii) service charges and early withdrawal or other penalties received in connection with deposit accounts;
iii) loan servicing fees and charges received in connection with syndicated loans or loans sold to third parties; and
iv) discounts and gains realized on the purchase or resale of loans.
Examples of items of income that are not gross income from the characteristic services of a savings and loan association include rental income from real estate; gains from sale of property obtained in foreclosure or settlement of loans; interest and dividends received from, and gains realized on the sale or exchange of, securities.
B) Regulation. No entity is a savings and loan association for purposes of the IITA unless it is subject to regulation by the Office of Banks and Real Estate under the Savings Bank Act [205 ILCS 105/7-1], the Office of Thrift Supervision (12 USC 1462), or the appropriate authority (if any) of another state responsible for regulating savings and loan associations.
7) Entities engaged in the business of a "credit union". Federal credit unions that have received a charter under 12 USC 1754 are exempt from state income taxation (see 12 USC 1768). Under present law, only "cooperative, non-profit" credit unions may be incorporated under the Illinois Credit Union Act or permitted to do business in Illinois (see 205 ILCS 305/1.1 (defining "credit union") and 7 (permitting credit unions chartered in other states to do business in Illinois)). Under current law, a credit union doing business in Illinois is most likely exempt from Illinois Income Tax pursuant to IITA Section 205(a) and 12 USC 501(a) and (c)(14). 12 USC 1753(5) and 205 ILCS 305/2(2)(b) each require an entity applying for permission to organize as a credit union to define the class of persons entitled to membership.
A) Characteristic Services. 12 USC 1752(a)(1) provides that a federal credit union is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes and 12 USC 1757(7) requires a federal credit union to invest its funds in loans to its members, bank accounts, government securities and in other credit unions. 205 ILCS 305/1.1 defines "credit union" to mean a cooperative, non-profit association, incorporated for the purposes of encouraging thrift, creating a source of credit at a reasonable rate of interest, and providing an opportunity for its members to use and control their own money in order to improve their economic and social conditions, and 205 ILCS 305/59 allows credit unions to invest only in loans to members, bank accounts, government securities and other credit unions. The characteristic services of a credit union involve taking interest-paying deposits from its members and making loans to its members. For purposes of applying the gross income test in subsection (b) of this Section, examples of gross income from characteristic services of a credit union include:
i) application and origination fees, points, interest, late payment fees and other charges received in connection with loans or with commitments to make loans to members; and
ii) service charges and early withdrawal or other penalties received in connection with deposit accounts.
Examples of items of income that are not gross income from the characteristic services of a credit union include interest and other income from loans to non-members; rental income from real estate; gains from sale of property obtained in foreclosure or settlement of loans; interest and dividends received from, and gains realized on the sale or exchange of, securities.
B) Regulation. In order for an entity to qualify as a credit union, an entity must be subject to regulation by any appropriate authority in the state of organization, and the class of persons entitled to membership in the entity must be defined by law or approved by the appropriate state authority.
8) Entities engaged in the business of a "currency exchange". The term "currency exchange" means an entity licensed by the Director of Financial Institutions under the Currency Exchange Act [205 ILCS 405/4] for purposes of engaging in the business of, and providing facilities for, cashing checks, drafts, money orders or any other evidences of money for a consideration or selling or issuing money orders in the entity's own name [205 ILCS 405/1].
A) Characteristic Services. Currency exchanges cash checks and other evidences of money for the general public, and may issue money orders. Currency exchanges are not permitted to accept any form of deposit or bailment of money (see 205 ILCS 405/3). The gross income from characteristic services of a currency exchange is the fees or other charges for cashing checks or issuing money orders. Interest or other income earned from investment of funds received from the issuance of money orders during the period between the issuance of a money order and its clearance is not gross income from a characteristic service of a currency exchange.
B) Regulation. A currency exchange doing business in Illinois must be licensed by the Director of Financial Institutions and meet certain bonding requirements to protect its customers. An entity operating in any other state must be licensed or subject to regulation by any equivalent authority in that state.
9) Entities engaged in the business of a "small loan company". The term "small loan company" means an entity licensed by the Director of Financial Institutions under the Consumer Installment Loan Act [205 ILCS 670/1] for the purpose of making loans in a principal amount not exceeding $25,000. Small loan companies are required to disclose the terms of their loans pursuant to specific statutory requirements or in conformity with the federal Truth in Lending Act (see 205 ILCS 670/16 (referencing 15 USC 1601)). The predecessor of the Consumer Installment Loan Act, the Small Loans Act (Ill. Rev. Stat., ch. 74, par. 27 (1933)), was held to apply only to lenders, and not to persons selling goods or services on a credit or installment basis. (See, e.g., Wernick v. National Bond and Investment Co., 276 Ill. App. 84 (1934).)
A) Characteristic Services. Small loan companies are permitted to make loans not exceeding an aggregate principal amount of $25,000 to any obligor and for terms not exceeding 121 months. A credit or installment sale of goods or services is not a characteristic service of a small loan company. Gross income from the provision of the characteristic services of a small loan company includes loan application and origination fees, interest, late payment charges and similar amounts realized in connection with loans not exceeding the principal amount of $25,000 and for terms not exceeding 121 months. Amounts received or accrued in connection with any loan for a principal amount in excess of $25,000 or for a term in excess of 121 months are not gross income from the provision of the characteristic services of a small loan company. Finally, because 205 ILCS 670/21 provides that the Consumer Installment Loan Act does not apply to persons making loans to business associations or corporations, or to sole proprietors of businesses for the purpose of carrying on or acquiring such businesses, amounts received in connection with such business loans are not gross income from the provision of the characteristic services of a small loan company.
B) Regulation. A small loan company operating in Illinois must be licensed by the Director of Financial Institutions. An entity operating in any other state must be licensed or subject to regulation by any equivalent authority in that state. In all cases, the entity must comply with the regulations issued by the Board of Governors of the Federal Reserve System under the Truth in Lending Act.
10) Entities engaged in the business of a "sales finance company". The term "sales finance company" has the meaning provided in subsection (d)(10)(A) or (B):
A) Under IITA Section 1501(a)(8)(C)(i), the term "sales finance company" means an entity primarily engaged in one or more of the following businesses: the business of purchasing customer receivables, the business of making loans upon the security of customer receivables, the business of making loans for the express purpose of funding purchases of tangible personal property or services by the borrower, or the business of finance leasing. For purposes of this subsection (d)(10)(A), a "customer receivable" means:
i) A retail installment contract or retail charge agreement within the meaning of the Sales Finance Agency Act [205 ILCS 660/2], the Retail Installment Sales Act [815 ILCS 405/2.6 and 2.7], or the Motor Vehicle Retail Installment Sales Act [815 ILCS 375/2.5];
ii) An installment, charge, or similar contract or agreement arising from the sale of tangible personal property or services in a transaction involving a deferred payment price payable in one or more installments subsequent to the sale;
iii) The outstanding balance of a contract or agreement described in subsection (d)(10)(A)(i) or (ii) of this Section; or
iv) A loan, or balance under a loan, made by a lender for the express purpose of funding purchases of tangible personal property or services by the borrower.
A customer receivable need not provide for payment of interest on deferred payments. A sales finance company may purchase a customer receivable from, or make a loan secured by a customer receivable to, the seller or lender in the original transaction or from or to a person who purchased the customer receivable directly or indirectly from that seller or lender.
Example 1: A manufacturer sells a product to a retailer. Payment is due 7 days after issuing the sales invoice. An account receivable is recorded when the invoice is issued. The receivable would constitute a customer receivable.
Example 2: An entity purchases or otherwise acquires customer receivables or finance leases. The entity sells those customer receivables or finance leases to a third party and enters into an agreement to service such receivables or finance leases in exchange for a fee. The purchase, sale and/or servicing of such receivables or finance leases is a business of a "sales finance company".
B) Under IITA Section 1501(a)(8)(C)(ii), the term "sales finance company" also means a corporation meeting each of the following criteria:
i) The corporation must be a member of an "affiliated group" within the meaning of section 1504(a) of the Internal Revenue Code, determined without regard to section 1504(b) of the Internal Revenue Code;
ii) More than 50% of the gross income of the corporation for the taxable year must be interest income derived from qualifying loans. A "qualifying loan" is a loan made to a member of the corporation's affiliated group that originates customer receivables or to whom customer receivables originated by a member of the affiliated group have been transferred, to the extent the average outstanding balance of loans from that corporation to members of its affiliated group during the taxable year do not exceed the limitation amount for that corporation. The "limitation amount" for a corporation is the average outstanding balances during the taxable year of customer receivables originated by all members of the affiliated group. If the average outstanding balances of the loans made by a corporation to members of its affiliated group exceed the limitation amount, the interest income of that corporation from qualifying loans shall be equal to its interest income from loans to members of its affiliated group times a fraction equal to the limitation amount divided by the average outstanding balances of the loans made by that corporation to members of its affiliated group;
iii) The total of all shareholder's equity (including, without limitation, paid-in capital on common and preferred stock and retained earnings) of the corporation plus the total of all of its loans, advances, and other obligations payable or owed to members of its affiliated group may not exceed 20% of the total assets of the corporation at any time during the tax year; and
iv) More than 50% of all interest-bearing obligations of the affiliated group payable to persons outside the group determined in accordance with generally accepted accounting principles must be obligations of the corporation.
Example 3: In connection with the conduct of its business, A Corporation either originates customer receivables (as defined in subsection (d)(10)(A) of this Section), or is transferred customer receivables from one or more of its affiliates. B Corporation, a wholly-owned subsidiary of A and a member of its affiliated group, conducts business exclusively in State X, its commercial domicile. B issues commercial paper and other debt obligations and uses the proceeds to make loans to A or other members of the affiliated group. B Corporation derives more than 50% of its gross income from interest on making "qualifying loans" to A or other members of the affiliated group. Assuming B also meets the tests in subsections (d)(10)(B)(iii) and (iv) of this Section, B would constitute a "sales finance company" as defined in IITA Section 1501(a)(8)(C)(ii).
C) Characteristic Services. A "sales finance company" is defined by its characteristic services in subsections (d)(10)(A) and (B) of this Section. A company satisfies the primary test of subsection (d)(10)(A) of this Section if more than 50% of its gross income is from its characteristic services.
D) Regulation. There is no requirement that a sales finance company that meets the definition provided in subsection (d)(10)(A) or (B) of this Section be subject to license or regulation by any state or federal authority.
11) Entities engaged in the business of an “investment company”. The term “investment company” means an entity that comes within the meaning of 15 USC 80a-3 and is predominantly engaged in the business of investing, reinvesting and trading in securities.
A) Characteristic Services. In the Investment Company Act of 1940, 15 USC 80a-3 defines an investment company as an entity engaged in the business of investing, reinvesting and trading in securities. Accordingly, the characteristic services of an investment company are the raising of capital from investors in order to purchase capital securities of other entities. Gross income from the characteristic services of an investment company includes interest, dividends and gains from sales of securities.
B) Regulation. In order to be characterized as an investment company under the IITA, an entity doing business in the United States must be registered as an investment company with the Securities and Exchange Commission under the Investment Company Act of 1940. Any entity that is not doing business in the United States must be subject to the equivalent authority (if any) in its country of formation or commercial domicile.
e) The term "bank" includes the following entities, regardless of whether the entity is engaged in the characteristic business of a bank as described in subsection (d)(1) of this Section. An entity described in this subsection (e) is a bank even if it qualifies as a financial organization under one of the provisions of subsection (d) of this Section:
1) any entity that is regulated by the Comptroller of the Currency under the National Bank Act, or by the Federal Reserve Board, or by the Federal Deposit Insurance Corporation.
A) An "entity regulated by the Comptroller of the Currency under the National Bank Act" means a national banking association formed under 12 USC 21.
B) An "entity regulated by the Federal Reserve Board" means a member of the Federal Reserve System under the provisions of 12 USC 222 or 12 USC 321.
C) An "entity regulated by the Federal Deposit Insurance Corporation" means an insured depository institution under 12 USC 1814.
2) any federally or State chartered bank operating as a credit card bank. A "credit card bank" is the common term for an entity that comes within the definition of "bank" for purposes of the Bank Holding Company Act of 1956 (12 USC 1841(c)(1)), but that is excluded from being treated as a bank under 12 USC 1841(c)(2)(F).
f) Entities Engaged in the Business of a "Bank Holding Company". The term "bank holding company" means an entity that directly or indirectly owns, controls or has power to vote 25% or more of any class of voting securities of any bank or of any other bank holding company (see 12 USC 1841(a)), and which is registered with the Board of Governors of the Federal Reserve System under Section 1844(a) of the Bank Holding Company Act of 1956 (12 USC 1844(a)).
g) Special Rule for Persons Owned by a Bank or Bank Holding Company. The term "financial organization" under the Illinois Income Tax Act includes any person that is owned by a bank (within the meaning of subsection (d)(1) of this Section or subsection (e) of this Section) or by a bank holding company (within the meaning of subsection (f) of this Section). For purposes of this provision, the term "person" includes only those persons in which a bank holding company may acquire and hold an interest, directly or indirectly, under the provisions of the Bank Holding Company Act of 1956 (12 USC 1841) and Regulation Y promulgated thereunder by the Board of Governors of the Federal Reserve System (12 CFR 225), and does not include any person that must be disposed of within certain required time limits under the Bank Holding Company Act of 1956. Under this provision, an entity that would not otherwise be a "financial organization" is deemed to be a financial organization for any period during which it is owned by a bank or bank holding company. For example, prior to the enactment of Public Law 106-102, 12 USC 1843(c)(8) authorized bank holding companies to own insurance companies in certain circumstances. 12 USC 1843(c)(8) allows a bank holding company that owned an insurance company prior to November 12, 1999, to continue to own that insurance company. An insurance company owned by a bank holding company is a "financial organization" for purposes of the IITA, even though the insurance company would not otherwise be a financial organization. The fact that an entity that is not owned by a bank holding company would be a financial organization under this provision if it were owned by a bank holding company, or that the entity in the past may have been owned by a bank holding company and therefore characterized as a financial organization, is irrelevant to the determination of whether the entity is a financial organization.
h) Effective Dates and Elections. Public Act 89-711 amended the definition of "financial organization" in IITA Section 1501(a)(8) by adding the definition of "bank" in IITA Section 1501(a)(8)(B) and the definition of "sales finance company" in IITA Section 1501(a)(8)(C).
1) Application of IITA Section 1501(a)(8) to taxable years beginning on or before December 31, 1996. The General Assembly declared in IITA Section 1501(a)(8)(D) that the definitions of the terms "bank" and "sales finance company" in IITA Section 1501(a)(8)(B) and (C) are declaratory of existing law and apply retroactively for all tax years beginning on or before December 31, 1996. No other definitions were changed. Accordingly, except as provided in this subsection (h), the interpretations of the statutory definitions contained in subsections (a) through (g) apply retroactively and for all purposes to all taxable years.
2) For taxable years beginning on or before December 31, 1996, Public Act 89-711 provides that the definitions of "bank" and "sales finance company" shall apply to all original returns; to all amended returns filed within 30 days after the effective date of the Act; to all math error notices issued by the Department under IITA Section 903(a); to all Notices of Deficiency issued by the Department under IITA Section 904(a); to all notices of denial of refund claims issued under IITA Section 909(e); and to all assessments of erroneous refunds made under IITA Section 912.
A) Public Act 89-711 imposes no time limit for the filing of an original return applying its provisions to taxable years beginning on or prior to December 31, 1996. Accordingly, taxpayers may file original returns claiming financial organization status under the amended definitions of "bank" and "sales finance company" at any time, provided that such returns are filed within the applicable statute of limitations period and meet all other relevant requirements of the IITA.
B) Taxpayers required to file amended returns in order to claim financial organization status for a taxable year beginning on or prior to December 31, 1996, were required to do so on or before March 17, 1997, which was 30 days after the enactment of Public Act 89-711.
C) In the case of a taxpayer that had claimed financial organization status on an original or amended return and whose status as a financial organization was denied by the Department, IITA Section 1501(a)(8)(D) provides that the amended definitions of "bank" and "sales finance company" apply to the Notice of Deficiency or notice of denial of refund claim issued by the Department after review of such return.
i) If the Notice of Deficiency or notice of denial has not become final, a taxpayer with a matter pending before the Office of Administrative Hearings of the Illinois Department of Revenue for a particular taxable year may raise as an issue the taxpayer's status as a "bank" or "sales finance company" by the making of a motion in conformance with the rules on motion practice as set forth in 86 Ill. Adm. Code 200.185.
ii) If the Notice of Deficiency or notice of denial has become final, and the taxpayer is not contesting the Department's action in the courts under the Administrative Review Law [735 ILCS 5/Art. III] or the State Officers and Employees Money Disposition Act [30 ILCS 230], the taxpayer must have filed a timely amended return as set forth in subsection (h)(2)(B) of this Section in order to assert a claim that it qualifies as a "bank" or "sales finance company" under the amended definitions.
iii) A taxpayer with a matter pending before the courts of this State for a particular taxable year must request treatment as a "bank" or "sales finance company" by the making of a motion in conformance with the rules of the court.
3) Election under IITA Section 1501(a)(8)(E). IITA Section 1501(a)(8)(E) provides that, for all taxable years beginning on or before December 31, 1996, a taxpayer that falls within the definition of a "financial organization" under Section 1501(a)(8)(B) or (C) of the IITA, but who does not fall within the definition of a "financial organization" under the Proposed Regulations issued by the Department of Revenue on July 19, 1996 (20 Ill. Reg. 9488) may irrevocably elect to apply the Proposed Regulations for all of those years as though the Proposed Regulations had been lawfully promulgated, adopted, and in effect for all of those years.
A) In order to support a claim for refund, the election must have been filed by March 17, 1997. Procedures for making an election which would support a claim for refund were published in Emergency Rule 100.9710 (21 Ill. Reg. 2969).
B) A taxpayer who has filed an original or amended return for any taxable year beginning on or before December 31, 1996, as a non-financial organization and that wishes to elect to be bound by the July 19, 1996, proposed rules solely for the purpose of preserving its return position, and not for purposes of claiming a refund for any year, may file an election document meeting the following requirements:
i) The election document must state on the first page "Financial Organization Election to Apply Proposed Rules Under Public Act 89-711 – No Refund Claim".
ii) The election document must be filed prior to the issuance of any Notice of Deficiency or notice of claim denial that is based in whole or in part on the retroactive application of Public Act 89-711 to treat the taxpayer as a financial organization.
iii) The election document must list all members of the unitary business group to whom the election applies. The election shall be binding on all such members, whether or not listed, and the Department may enforce such election against such members. In addition, no refund claimed after the effective date of Public Act 89-711 shall be allowed to the extent such refund results from the application of the July 19, 1996, proposed rules to any such member.
C) All elections to apply the July 19, 1996, proposed rules, whether made by amended return or by an election document, shall be sent to the following address:
Deputy General Counsel – Income Tax
Legal Services Office – Room 5-500
Illinois Department of Revenue
P.O. Box 19014
Springfield, Illinois 62794-9014
D) Effect of election.
i) Effect on "banks" as defined in IITA Section 1501(a)(8)(B). Public Act 89-711 expanded the definition of the term "bank" to include entities described in subsection (e) of this Section, without regard to the actual business activities of the entity. A taxpayer governed by an election under this subsection (h) must be engaged in the business of a "bank" as described in subsection (d)(1) of this Section in order to be characterized as a bank. For example, under IITA Section 1501(a)(8)(B), a "credit card bank" is characterized as a "bank" even though a credit card bank is prohibited from accepting deposits from the public. A credit card bank governed by an election under this subsection (h) therefore cannot be a "bank" under subsection (d)(1) of this Section. Note, however, that a credit card bank governed by such an election may qualify as a financial organization under some other provision of this Section; in particular, a credit card bank may be engaged in the business of a sales finance company as defined in subsection (i)(3)(D)(ii) of this Section.
ii) Effect on "sales finance companies" as defined in IITA Section 1501(a)(8)(C). Public Act 89-711 expanded the definition of "sales finance company" to include entities that buy, or make loans secured by, installment agreements or charge agreements of corporations and businesses and to include entities which are primarily engaged in the business of a sales finance company. An entity governed by an election under this subsection (h) will be a sales finance company only if: it is engaged in the business of buying, or making loans secured by, installment agreements and charge agreements arising from retail purchases for personal, family or household use; more than 80% of its gross income is derived from transactions characteristic of a financial organization; and it meets the other requirements of subsection (d)(10) of this Section.
iii) An election made under Section 1501(a)(8)(E) applies only to taxable years beginning on or before December 31, 1996. For all subsequent taxable years, the provisions of Section 1501(a)(8) as amended in Public Act 89-711 and interpreted in subsections (a) through (h) of this Section shall apply.
iv) Section 1501(a)(8)(E) provides that the election applies to those members of the taxpayer's unitary business group who are ordinarily required to apportion business income under the same subsection of Section 304 of the IITA. An election made by one or more such members is binding on all such members, whether or not they expressly joined in the election, and the Department may enforce such election either directly or by offsetting any refund payable to the taxpayer as the result of the election by any underpayment of any other taxpayer to whom such election also applies to the extent such underpayment results from the making of the election.
i) Effective January 1, 2000, Public Act 91-535 amended the definition of the term "sales finance company" in IITA Section 1501(a)(8)(C). The General Assembly declared the definition of the term "sales finance company" in Public Act 91-535 to be declaratory of existing law. Accordingly, except as provided in this subsection (i), the interpretation of the term "sales finance company" shall apply retroactively and for all purposes to all taxable years.
1) The definition of "sales finance company" provided by Public Act 91-535 shall apply to all original returns; to all amended returns; to all math error notices issued by the Department under IITA Section 904(a); to all Notices of Denial of refund claims issued under IITA Section 909(e); and to all notices of erroneous refunds made under IITA Section 912.
A) Public act 91-535 imposes no time limit for the filing of an original or amended return applying its provisions to a particular taxable year. Accordingly, taxpayers may file original or amended returns claiming financial organization status under the amended definition of "sales finance company" at any time, provided that such returns are filed within the applicable statute of limitations period and meet all other relevant requirements of the IITA.
B) In the case of a taxpayer that had claimed financial organization status on an original or amended return and whose status as a financial organization was denied by the Department:
i) If the Notice of Deficiency or Notice of Denial has not become final, a taxpayer with a matter pending before the Office of Administrative Hearings of the Illinois Department of Revenue for a particular taxable year may raise as an issue the taxpayer's status as a "sales finance company" by making of a motion in conformance with the rules on motion practice as set forth in Section 100.185 of this Part.
ii) If the Notice of Deficiency or Notice of Denial has become final, and the taxpayer is not contesting the Department's action in the courts under the Administrative Review Law [735 ILCS 5/Art. III] or the State Officers and Employees Money Disposition Act [30 ILCS 230], the taxpayer must have filed a timely amended return as set forth in subsection (h)(2)(B) of this Section in order to assert a claim that it qualifies as a "sales finance company" under the amended definition.
iii) A taxpayer with a matter pending before the courts of this State for a particular taxable year must request treatment as a "sales finance company" by the making of a motion in conformance with the rules of the court.
(Source: Amended at 27 Ill. Reg. 13536, effective July 28, 2003)
Section 100.9715 Transportation Companies (IITA Section 304(d))
a) Transportation company. The term "transportation company" means any person deriving 80 percent or more of its gross income, averaged over a period of three years, which includes the current tax year and the immediately preceding two tax years, from furnishing transportation services and ancillary services.
1) For purposes of this subsection (a), gross income shall include only amounts that are received in the ordinary course of the person's regular business activities and that are included in net income under the IITA. For purposes of determining whether a person is predominantly engaged in the business activities of a transportation company when a person is formed in a current tax year or in its immediately preceding tax year, only the years for which the person is in existence will be used in determining whether the person meets the 80 percent test.
2) The treatment of items of income that are not included in apportionable business income is not affected by the classification of the person as a transportation company, and those items are therefore disregarded for purposes of the gross income test. For example, interest received on United States Treasury obligations is excluded from Illinois base income and, accordingly, is disregarded for purposes of determining whether the business income of a person should be apportioned using the transportation company formula. Similarly, dividends received by a corporation shall be disregarded to the extent the dividends are deducted from federal taxable income under 26 USC 243 or are subtracted in the computation of Illinois base income under IITA Section 203(b)(2)(O).
3) In the case of a sale or disposition of any asset (whether tangible or intangible, and whether the asset is part of the person's stock in trade) that occurs in the ordinary course of a person's regular business activities, only the net gain shall be taken into account for purposes of the gross income test. Thus, for example, gross income from the sale of inventory is equal to its gross receipts minus the cost of goods sold, while gross income from the sale of stock is equal to the sales price minus any brokerage commission and minus the person's basis in the stock. If gross income from a transaction is negative, the loss shall not be considered for purposes of the gross income test.
4) Income that results from transactions outside the ordinary course of a person's regular business activities is not taken into account for the purposes of the gross income test. For example, amounts received from the sale of a person's headquarters shall be disregarded, whether or not the gain is characterized as business income.
5) In applying the gross income test, a person's transactions with a person to which it is related (including transactions with a member of the person's unitary business group that are eliminated in combination under Section 100.3320(d) of this Part) shall be treated in the same manner as transactions between the person and an unrelated person, subject in all cases to the authority of the Department under IITA Section 404 to make such adjustments as are necessary to properly reflect each party's Illinois business activities.
b) Transportation services. The term "transportation services" means the movement of freight or passengers by air, land or water, or the movement of liquid or gaseous substances by pipeline, performed by the taxpayer. Transportation services include intermodal services, which means the movement of freight by more than one form of carrier during a single movement without handling the freight itself when changing modes. For purposes of this Section, "freight" means any item, other than an individual passenger, that is transported for consideration.
c) Ancillary services. "Ancillary services" means those services generally provided to customers in connection with the provision of transportation services, and that are provided by the same person who is performing the connected transportation service. Ancillary services include, but are not limited to:
1) transfer of freight from one bulk packaging to another bulk packaging or between a bulk packing and a non-bulk packaging for purposes of continuing the movement of the freight in commerce;
2) with regard to railroads, the in-transit sale of food or beverages, switching, transportation detention charges, and packing and warehousing;
3) with regard to airlines, the in-flight rental of pillows, blankets or headsets, the in-flight sale of food or beverages, baggage services, and changing or cancelling reservations; and
4) with regard to trucking companies:
A) packing and warehousing; and
B) notwithstanding the requirement that ancillary services must be provided by the same person who is performing the connected transportation service, furnishing vehicles with drivers (including owner-operators) to another transportation company under a lease or similar arrangement.
(Source: Added at 42 Ill. Reg. 19190, effective October 12, 2018)
Section 100.9720 Nexus
a) IITA Section 201(a) imposes the Illinois Income Tax, a tax measured by net income, on individuals, corporations, trusts and estates for the privilege of earning or receiving income in or as a resident of this State. IITA Section 201(c) imposes a second tax measured by net income, the Personal Property Tax Replacement Income Tax, on corporations, partnerships and trusts for the privilege of earning or receiving income in or as a resident of this State. In general, a resident of this State will always be subject to these taxes. Activity conducted in interstate commerce may establish sufficient nexus with Illinois to permit imposition of these taxes on a non-resident taxpayer, as well, when the non-resident earns or receives income in this State within the meaning of the IITA. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076 (1977); Quill v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904 (1992). However, the fact that Article 3 of the IITA requires a non-resident taxpayer to allocate or apportion income to this State does not create a presumption that the taxpayer has nexus.
b) Standards for determining sufficient tax nexus are found in federal statutes regulating interstate commerce, in United States Constitutional jurisprudence, and in Illinois tax statutes.
c) The scope of federal statutes limiting nexus for imposition of Illinois income and replacement taxes are described in this subsection (c):
1) Public Law 86-272. In 1959, Congress enacted PL 86-272 (15 USC 381-384), which prohibits states and their political subdivisions from imposing a net income tax on nonresident taxpayers who operate primarily in interstate commerce and whose activity within a state is limited. PL 86-272 provides in pertinent part:
A) No state or political subdivision thereof shall have the power to impose . . . a net income tax on the income derived within such state by any person from interstate commerce if the only business activities within such state by or on behalf of such person during such taxable year are either, or both of the following:
i) the solicitation of orders by such person, or his representative, in such state for sales of tangible personal property, which orders are sent outside the state for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the state; and
ii) the solicitation of orders by such person, or his representative, in such state in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in subsection (c)(1)(A)(i).
B) The provisions of subsection (c)(1)(A) of this Section shall not apply to the imposition of a net income tax by any State or political subdivision thereof, with respect to –
i) Any corporation which is incorporated under the laws of such state; or
ii) any individual who, under the laws of such state, is domiciled in, or a resident of, such state.
C) For the purposes of subsection (c)(1)(A) of this Section, a person shall not be considered to have engaged in business activities within a state during any taxable year merely by reason of sales in such state, or the solicitation of orders for sales in such state, of tangible personal property on behalf of such person by one or more independent contractors whose activities on behalf of such person in such state consist solely of making sales, or soliciting orders for sales, of tangible personal property.
D) For purposes of this subsection (c)(1) –
i) The term "independent contractor" means a commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for the sale of tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities; and
ii) the term "representative" does not include an independent contractor.
2) The terms of PL 86-272 affect nexus for taxation under the IITA according to the following principles:
A) If a nonresident taxpayer's activities exceed "mere solicitation", as set forth in subsection (a) of PL 86-272 (subsection (c)(1)(A) of this Section), it obtains no immunity under that federal statute. The taxpayer is subject to Illinois income tax and personal property tax replacement income tax for the entire taxable year and its business income is apportioned under IITA Section 304. Whether a nonresident taxpayer's conduct exceeds "mere solicitation" depends upon the facts in each particular case.
B) Nature of Property Being Sold
i) PL 86-272 immunizes solicitation only for sale of tangible personal property. Efforts to sell intangibles, such as services, franchises, patents, copyrights, trademarks and service marks, are not protected, nor is solicitation for the leasing, renting or licensing of tangible personal property.
ii) The sale, delivery and the solicitation for the sale or delivery of any type of service that is not either ancillary to solicitation, or otherwise set forth as a protected activity under subsection (c)(5), is also not protected under PL 86-272 or this Section.
C) Solicitation of Orders. Solicitation of orders means speech or conduct that explicitly or implicitly invites an order and activity ancillary to invitations for an order.
i) To be ancillary to invitations for orders, an activity must serve no independent business function for the seller apart from its connection to the solicitation of orders.
ii) Activity that a seller would engage in apart from soliciting orders shall not be considered ancillary to the solicitation of orders.
iii) Assignment of an activity to a salesperson does not, merely by such assignment, make that activity ancillary to solicitation of orders.
iv) Activity that attempts to promote sales is not ancillary, nor is activity that facilitates sales. PL 86-272 only protects ancillary activity that facilitates the invitation of an order.
D) De minimus activities are those that, when taken together, establish only a trivial additional connection with this State. An activity regularly conducted within this State on a regular or systematic basis or pursuant to a company policy (whether such policy is in writing or not) shall normally not be considered trivial. Whether an activity consists of a trivial or non-trivial additional connection with this State is to be measured on both a qualitative and quantitative basis. If the activity either qualitatively or quantitatively creates a non-trivial connection with this State, then the activity exceeds the protection of PL 86-272. The amount of unprotected activities conducted within this State relative to the amount of protected activities conducted within this State is not determinative of the issue of whether the unprotected activities are de minimus. The determination of whether an unprotected activity creates a non-trivial connection with this State is made on the basis of the taxpayer's entire business activity, not merely its activities conducted within this State. An unprotected activity that would not be de minimus if it were the only business activity of the taxpayer conducted in this State will not be de minimus merely because the taxpayer also conducts a substantial amount of protected activities within this State, nor will an unprotected activity that would be de minimus if conducted in conjunction with a substantial amount of protected activities fail to be de minimus merely because no protected activities are conducted in this State.
3) Listing of Specific Unprotected and Protected Activities.
A) Subsection (c)(4) lists specific activities that are considered to be beyond "mere solicitation" and, therefore, unprotected by PL 86-272.
B) Subsection (c)(5) lists specific activities that are considered by this State to be "protected activities". Included on the list of "protected activities" are those specific activities that are protected by PL 86-272 and those specific activities that this State, in its discretion, deems worthy of protection. Inclusion of an activity on the listing of "protected activities" is neither a declaration nor an admission by this State that the activity must be afforded protection under PL 86-272.
4) Unprotected Activities. The following activities (assuming they are not de minimus) do not constitute "mere solicitation" of orders, nor are they ancillary, nor otherwise protected under PL 86-272. If one or more of the following activities are conducted within this State, an otherwise protected nonresident taxpayer shall become subject to taxation by Illinois.
A) Making repairs or providing maintenance or service to the property sold or to be sold.
B) Collecting current or delinquent accounts, whether directly or by third parties, through assignment or otherwise.
C) Investigating credit worthiness.
D) Installation or supervision of installation at or after shipment or delivery.
E) Conducting training courses, seminars or lectures for personnel other than personnel involved only in solicitation of sales of tangible personal property.
F) Providing any kind of technical assistance or services, including, but not limited to, engineering assistance or design service, when one of the purposes of the assistance or service is other than the facilitation of the solicitation of orders.
G) Investigating, handling, or otherwise assisting in resolving customer complaints, other than mediating direct customer complaints when the sole purpose of such mediation is to ingratiate the sales personnel with the customer.
H) Approving or accepting orders.
I) Repossessing property.
J) Securing deposits on sales.
K) Picking up or replacing damaged or returned property.
L) Hiring, training, or supervising personnel, other than personnel involved only in solicitation.
M) Maintaining a sample or display room in excess of two weeks (14 days) at any one location within the State during the tax year.
N) Carrying samples for sale, exchange or distribution in any manner for consideration.
O) Owning, leasing, or maintaining any of the following facilities or property in-state:
i) Repair shop.
ii) Parts department.
iii) Any kind of office other than an in-home office as described as permitted under subsections (c)(4)(Q) and (c)(5)(B).
iv) Warehouse.
v) Meeting place for directors, officers, or employees.
vi) Stock of goods other than samples for sales personnel or that are used entirely ancillary to solicitation.
vii) Telephone answering service that is publicly attributed to the nonresident or to an employee or agent of the nonresident in his or her representative status.
viii) Mobile stores, i.e., vehicles with drivers who are sales personnel making sales from the vehicles.
ix) Real property or fixtures to real property of any kind.
P) Consigning stock of goods or other tangible personal property to any person, including an independent contractor, for sale.
Q) The maintenance of any office or other place of business in this State that does not strictly qualify as an "in-home" office as described in subsection (c)(5)(M) shall, by itself, cause the loss of protection under PL 86-272. A telephone listing or other public listing within the State for the nonresident or for an employee or other representative of the nonresident in such capacity or other indication through advertising or business literature that the nonresident or its employee or representative can be contacted at a specific address within the State shall normally be determined as the nonresident maintaining within this State an office or place of business attributable to the nonresident or to its employee or representative in a representative capacity. However, the normal distribution and use of business cards and stationary identifying the employee's or representative's name, address, telephone and fax numbers and affiliation with the nonresident shall not, by itself, be considered as advertising or otherwise publicly attributing an office to the nonresident or to its employee or other representative.
R) Entering into franchising or licensing agreements; selling or otherwise disposing of franchises and licenses; or selling or otherwise transferring tangible personal property pursuant to such franchise or license by the franchiser or licensor to its franchisee or licensee within the State.
S) Conducting any activity that is not on the list of "protected activities" in subsection (c)(5), and that is not entirely ancillary to requests for orders, even if the activity helps to increase purchases.
5) Protected Activities. The following in-state activities will not cause the loss of immunity for otherwise protected sales:
A) Soliciting orders for sales by any type of advertising.
B) Soliciting orders for sales by an in-state resident employee or representative of the nonresident, so long as that person does not maintain or use any office or place of business in the State besides an "in-home" office as described in subsection (c)(5)(M).
C) Carrying samples and promotional materials only for display or for distribution without charge or other consideration.
D) Furnishing and setting up display racks and advising customers on the display of the nonresident's products without charge or other consideration.
E) Providing automobiles to sales personnel for their use in conducting protected activities.
F) Passing orders, inquiries and complaints on to the home office.
G) Missionary sales activities; i.e., the solicitation of indirect customers for the nonresident's goods. For example, a manufacturer's solicitation of retailers to buy the manufacturer's goods from the manufacturer's wholesale customers would be protected if those solicitation activities are otherwise immune.
H) Coordinating shipment or delivery without payment or other consideration and providing information relating to shipment or delivery either prior or subsequent to the placement of an order.
I) Checking of customers' inventories without charge (for re-order, but not for other purposes such as quality control).
J) Maintaining a sample or display room for two weeks (14 days) or less at any one location within the State during the tax year.
K) Recruiting, training or evaluating sales personnel, including occasionally using homes, hotels or similar places for meetings with sales personnel.
L) Mediating direct customer complaints when the purpose is solely for ingratiating the sales personnel with the customer and facilitating requests for orders.
M) Owning, leasing, using or maintaining personal property for use in the employee's or representative's "in-home" office located within the residence of the employee or other representative that is not publicly attributed to the nonresident or to the employee or other representative of the nonresident in a representative capacity or automobile, when that use is solely limited to the conducting of protected activities. Therefore, the use of personal property such as a cellular telephone, facsimile machine, duplicating equipment, personal computer and computer software, shall not, by itself, remove the protection under this Section, so long as the use of the office is limited to:
i) soliciting and receiving orders from customers;
ii) transmitting orders outside the State for acceptance or rejection by the nonresident; or
iii) other activities that are protected under PL 86-272 or this Section.
N) Shipping or delivering goods into this State by means of vehicles or other modes of transportation owned or leased by the nonresident taxpayer or by means of private carrier, whether by motor vehicle, rail, water, air or other carrier and irrespective of whether a shipment or delivery fee or other charge is imposed, directly or indirectly, upon the purchaser.
6) Independent Contractors. PL 86-272 provides immunity to certain in-state activities, if conducted by an independent contractor, that would not be afforded if performed by the nonresident or its employees or other representatives.
A) Notwithstanding the provisions of subsection (c)(4), independent contractors may engage in the following limited activities in the State without the nonresident's loss of immunity:
i) soliciting sales;
ii) making sales;
iii) maintaining an office.
B) Sales representatives who represent a single principal are not considered to be independent contractors and are subject to the same limitations as those provided under PL 86-272 and this Section.
C) Maintenance of a stock of goods in the State, by the independent contractor under consignment or any other type of arrangement with the nonresident, except for purposes of display and solicitation, shall remove the protection.
7) Application of Destination State Law in Case of Conflict.
A) When it appears that Illinois and one or more other states that are signatories to the "Statement of Information concerning practices of the Multistate Tax Commission and Signatory States under PL 86-272" have included or will include the same receipts from a sale in their respective sales factor numerators, at the written request of the nonresident, the states will, in good faith, confer with one another to determine which state should be assigned the receipts. The conference shall identify what law, regulation or written guideline, if any, has been adopted in the state of destination with respect to the issue. The state of destination shall be that location at which the purchaser or its designee actually receives the property, regardless of F.O.B. (Free on Board) point or other conditions of sale.
B) In determining which state is to receive the assignment of the receipts at issue, preference shall be given to any clearly applicable law, regulation or written guideline that has been adopted in the state of destination. However, except in the case of the definition of what constitutes "tangible personal property", Illinois is not required by this Section to follow any other state's law, regulation or written guideline should Illinois determine that to do so:
i) would conflict with Illinois laws, regulations, or written guidelines; and
ii) would not clearly reflect the income-producing activity of the nonresident within Illinois.
C) Notwithstanding any provision set forth in this Section to the contrary, as between Illinois and any other signatory state, Illinois agrees to apply the definition of "tangible personal property" that exists in the state of destination to determine the application of PL 86-272 and issues of throwback, if any. Should the state of destination not have any applicable definition of tangible personal property so that it could be reasonably determined whether the property at issue constitutes tangible personal property, then each signatory state may treat the property in any manner that would clearly reflect the income-producing activity of the nonresident within that state.
8) Application of this Section to Foreign Commerce
A) PL 86-272 specifically applies, by its terms, to "interstate commerce" and does not directly apply to foreign commerce. The states are free, however, to apply the same standards set forth in PL 86-272 to business activities in foreign commerce to ensure that foreign and interstate commerce are treated on the same basis. Such an application also avoids the necessity of expensive and difficult efforts in the identification and application of the varied jurisdictional laws and rules existing in foreign countries.
B) Illinois will apply the provisions of PL 86-272 and of this Section to business activities conducted in foreign commerce. Therefore, whether business activities are conducted by a nonresident selling tangible personal property into a country outside of the United States from a point within Illinois or by a nonresident selling such property into Illinois from a point outside of the United States, the principles under this Section apply equally to determine whether the sales transactions are protected and the nonresident is immune from taxation in either Illinois or in the foreign country, as the case might be, and whether, if applicable, Illinois will apply its throwback provisions.
9) Application to Corporation Incorporated in this State or to a Person Resident or Domiciled in this State. The protection afforded by PL 86-272 and this Section does not apply to any corporation incorporated within Illinois or to any person who is a resident of or domiciled in Illinois.
10) Registration or Qualification to do Business. A business that registers or otherwise formally qualifies to do business within Illinois does not, by that fact alone, lose its protection under PL 86-272.
11) Loss of Protection for Conducting Unprotected Activity During Part of a Tax Year. The protection afforded under PL 86-272 and this Section shall be determined on a tax year by tax year basis. Therefore, if at any time during a tax year the nonresident conducts activities that are not protected under PL 86-272 or this Section, no income earned or received in this State by the nonresident during any part of that tax year shall be protected from taxation under PL 86-272 or this Section.
d) Illinois Statutory Provisions. PA 88-361 amended the Illinois Income Tax Act to provide that a person not otherwise subject to the tax imposed under the IITA shall not become subject to the tax imposed by the IITA by reason of:
1) that person's ownership of tangible personal property located at the premises of a printer in this State with which the person has contracted for printing; or
2) activities of the person's employees or agents located solely at the premises of a printer and related to quality control, distribution, or printing services performed by a printer in the State with which the person has contracted for printing. (IITA Section 205(f))
e) U.S. Constitutional Jurisprudence. If not protected by U.S. or Illinois statute, an income-producing activity may, nonetheless, be protected from State taxation by principles of U.S. Constitutional jurisprudence. Controlling decisions that assert protections afforded by the Interstate Commerce Clause, the Foreign Commerce Clause and the Due Process Clause are accepted by this State as limitations on the reach of its income tax and personal property tax replacement income tax statutes. However, nothing stated in this subsection (e) shall prevent Illinois from challenging taxpayer assertions of U.S. Constitutional protection.
f) Application of the Joyce Rule. In determining whether the activity of a nonresident taxpayer conducted in this State is sufficient to create nexus for application of Illinois income tax or replacement tax, the principles established in Appeal of Joyce Inc., Cal. St. Bd. of Equal. (11/23/66), commonly known as the "Joyce rule", shall apply. Only activity conducted by or on behalf of the nonresident taxpayer shall be considered for this purpose. Because the income of a partnership, a Subchapter S corporation or any other pass-through entity is treated as income of its owners, activity of a pass-through entity is conducted on behalf of its owners. Activity conducted by any other person, whether or not affiliated with the nonresident taxpayer, shall not be considered attributable to the taxpayer, unless the other person was acting in a representative capacity on behalf of the taxpayer.
(Source: Amended at 26 Ill. Reg. 17250, effective November 18, 2002)
Section 100.9730 Investment Partnerships (IITA Section 1501(a)(11.5))
a) For taxable years ending on or after December 31, 2004, an "investment partnership" is exempt from Illinois income taxation. (IITA Section 205(b)) For tax years ending before December 31, 2023, the term "investment partnership" means any entity that is treated as a partnership for federal income tax purposes and that meets each of the following requirements:
1) No less than 90% of the partnership's cost of its total assets consists of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership. (IITA Section 1501(a)(11.5)(A)(i)) The "asset test" under this subsection (a)(1) is applied for each taxable year by computing the percentage of the partnership's cost of its total assets that consists of qualifying investment securities, deposits at banks or financial institutions, and office space and equipment as of the beginning of the taxable year and as of the end of each month of the taxable year, and then computing the average of those percentages; and
2) No less than 90% of its gross income consists of interest, dividends, and gains from the sale or exchange of qualifying investment securities. (IITA Section 1501(a)(11.5)(A)(ii)) The "gross income test" under this subsection (a)(2) is computed separately for each taxable year on the basis of gross income for the entire taxable year, determined using the method of accounting used for federal income tax purposes for the taxable year; and
3) The partnership is not a dealer in qualifying investment securities. (IITA Section 1501(a)(11.5)(A)(iii))
A) A partnership is a dealer in qualifying investment securities if it regularly purchases qualifying investment securities from or sells qualifying investment securities to customers in the ordinary course of a trade or business or regularly offers to enter into, assume, offset, assign or otherwise terminate positions in qualifying investment securities with customers in the ordinary course of a trade or business. (IRC Section 475(c)(1))
B) A partnership that, at any time during a taxable year, holds or derives gross income from any qualifying investment security in which it is a dealer shall not qualify as an investment partnership for that taxable year.
b) For tax years ending on or after December 31, 2023, the term "investment partnership" means any entity that is treated as a partnership for federal income tax purposes and that meets each of the following requirements:
1) No less than 90% of the partnership's cost of its total assets consists of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership. (IITA Section 1501(a)(11.5)(A-5)(i)) The "asset test" under this subsection (b)(1) is applied for each taxable year by computing the percentage of the partnership's cost of its total assets that consists of qualifying investment securities, deposits at banks or financial institutions, and office space and equipment as of the beginning of the taxable year and as of the end of each month of the taxable year, and then computing the average of those percentages; and
2) No less than 90% of its gross income consists of interest, dividends, gains from the sale or exchange of qualifying investment securities, and the distributive share of partnership income from lower-tier partnership interests meeting the definition of qualifying investment security under subsection (c)(13). For purposes of this subsection (b)(2), "gross income" does not include income from partnerships that are operating at a federal taxable loss. (IITA Section 1501(a)(11.5)(A-5)(ii)) The "gross income test" under this subsection (b)(2) is computed separately for each taxable year on the basis of gross income for the entire taxable year, determined using the method of accounting used for federal income tax purposes for the taxable year.
c) "Qualifying investment securities" means and includes only:
1) Common stock, including preferred or debt securities convertible into common stock, and preferred stock. (IITA Section 1501(a)(11.5)(B)(i)) "Stock" means shares in an association, joint stock company, or insurance company. (IRC Section 7701(a)(7)) "Stock" includes any interest in a publicly traded partnership that is treated as a corporation under IRC Section 7704.
2) Bonds, debentures, and other debt securities. (IITA Section 1501(a)(11.5)(B)(ii)) "Debt security" means any note, bond, debenture or other evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing. (See 26 CFR 1.864-2(c)(2)(i) (2007).)
3) Foreign and domestic currency deposits secured by federal, state, or local governmental agencies. (IITA Section 1501(a)(11.5)(B)(iii)) "Currency deposits secured by federal, state or local government agencies" means any balance in a demand or time deposit at a bank, savings and loan, or similar financial institution and that is insured by the Federal Deposit Insurance Corporation or by a similar deposit insurance agency of a state or local government, including any balance in an otherwise insured account that is in excess of any insurance limit. Deposits secured by a foreign government agency, but not by an agency of the federal or of a state or local government, do not qualify.
4) Mortgage or asset-backed securities secured by federal, state, or local governmental agencies. (IITA Section 1501(a)(11.5)(B)(iv)) Examples of mortgage-backed securities secured by a federal agency include securities issued or backed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Government National Mortgage Association. Similar securities issued by a similar agency of a state or local government also qualify. Mortgage or asset-backed securities secured by a foreign government do not qualify under this subsection (c)(4).
5) Repurchase agreements and loan participations. (IITA Section 1501(a)(11.5)(B)(v))
A) A repurchase agreement is a secured loan in which the loan agreement takes the form of a purchase by the lender of the collateral with the borrower agreeing to repurchase the collateral at a future date. See Nebraska Dept. of Revenue v. Loewenstein, 513 U.S. 123 (1994). A repurchase agreement is a qualified investment security only if the item that is sold subject to repurchase is a qualified investment security.
B) A loan participation is an undivided fractional interest in a loan that is acquired by the participant by means of a sale of such undivided fractional interest by the lead lender to the participant, in contrast to a loan syndication, which is a loan made by an agent on behalf of a group of lenders or syndicate in which the member of the lender group or syndicate is a lender in the original loan. Generally, the borrower's obligations in a loan participation run only to the lead lender and not to the participant, and the participant's interest is generally limited to an undivided fractional interest in payments of principal or interest under the loan agreement between the lead lender and the borrower.
6) Foreign currency exchange contracts and forward and futures contracts on foreign currencies. (IITA Section 1501(a)(11.5)(B)(vi))
7) Stock and bond index securities and futures contracts and other similar financial securities and futures contracts on those securities. (IITA Section 1501(a)(11.5)(B)(vii))
8) Options for the purchase or sale of any of the securities, currencies, contracts, or financial instruments described in subsections (c)(1) through (7). (IITA Section 1501(a)(11.5)(B)(viii))
9) Regulated futures contracts. (IITA Section 1501(a)(11.5)(B)(ix)) A regulated futures contract is a contract bought, sold or traded on a regulated exchange, such as the Chicago Board of Trade.
10) Commodities (not described in section 1221(a)(1) of the Internal Revenue Code) or futures, forwards, and options with respect to such commodities, provided, however, that any item of a physical commodity to which title is actually acquired in the partnership's capacity as a dealer in such commodity shall not be a qualifying investment security. (IITA Section 1501(a)(11.5)(B)(x)) IRC Section 1221(a)(1) provides that stock in trade of the taxpayer or other property of a kind that would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business are not capital assets.
11) Derivatives. (IITA Section 1501(a)(11.5)(B)(xi)) A derivative is:
A) An interest rate, currency (of a kind customarily dealt in on an organized commodity exchange), equity, commodity or notional principal contract; or
B) An evidence of an interest, or a derivative financial instrument (including any option, forward contract, short position and any similar financial instrument), in any:
i) Commodity;
ii) Currency of a kind customarily dealt in on an organized commodity exchange;
iii) Share of stock under subsection (c)(1);
iv) Partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust;
v) Note, bond, debenture or other evidence of indebtedness; or
vi) Notional principal contract.
12) A partnership interest in another partnership that is an investment partnership. (IITA Section 1501(a)(11.5)(B)(xii))
13) For tax years ending on or after December 31, 2023, a partnership interest that, in the hands of the partnership, qualifies as a security within the meaning of 15 U.S.C. 77b(a)(1). (IITA Section 1501(a)(11.5)(B)(xiii))
d) Items that are not "qualified investment securities" include:
1) Loans, other than loan participations and repurchase agreements that are characterized as loans.
2) Bank deposits that are not insured by the federal government or by one of the states.
3) Securities, for tax years ending on or after December 31, 2023, subject to the dealer accounting rules in IRC Section 475 (26 U.S.C. 475).
e) Cost of Assets. For purposes of applying the "cost of assets" test in IITA Sections 1501(a)(11.5)(A)(i) and 1501(a)(11.5)(A-5)(i), the cost of an asset shall be determined for federal income tax purposes without regard to depreciation or amortization of the asset, except that the cost of an asset shall include any accrued interest or discount, and shall be reduced by any premium amortization, that has been recognized in the computation of federal taxable income of the partnership and that is included on the partnership's balance sheet as of the date the cost of assets is determined.
f) Gross Income. For purposes of applying the "gross income" test in IITA Sections 1501(a)(11.5)(A)(ii) and 1501(a)(11.5)(A-5)(ii):
1) "Gross income" means income minus costs of sales or basis in an asset sold or traded, but without reduction for any other expenses or deductions. For purposes of this Section, gross income does not include any item of income that is excluded from base income of the partnership, either because it is excluded from federal taxable income of the partnership or because it is subtracted from taxable income in computing base income, and gross income does not include income that results from transactions outside the ordinary course of a partnership's regular activities. For example, amounts received from the sale of an entity's office equipment shall be disregarded, whether or not the gain is characterized as business income. For tax years ending on or after December 31, 2023, "gross income" does not include income from partnerships that are operating at a federal taxable loss.
2) "Interest" means "compensation for the use or forbearance of money". See Deputy v. du Pont, 308 U.S. 488, 498 (1940). Interest includes the amortization of any discount at which an obligation is purchased and is net of the amortization of any premium at which an obligation is purchased. Any amount in excess of the purchase price received in payment of an obligation purchased at an arm's-length discount shall be rebuttably presumed to be interest. Interest includes any amount received upon the sale, exchange or other disposition of an obligation to the extent that such amount represents the accrual of interest on the unpaid balance of the obligation since the most recent payment made on that obligation.
3) "Dividend" means any item defined as a dividend under IRC Section 316 and any other item of income characterized or treated as a dividend under the Internal Revenue Code.
4) "Gain from sale or exchange" of qualifying investment securities is the sum of all gains realized on the sale or exchange of qualifying investment securities, without reduction or offset for losses realized on such sales or exchanges.
5) For purposes of the gross income test, gross income derived from investment in a partnership, subchapter S corporation, trust or estate shall be characterized as if the taxpayer received the income directly and, in the case of any item of income reported to the taxpayer by the partnership, subchapter S corporation, trust or estate for federal income tax purposes as net of related expenses, include only such net amount. The provisions of this subsection (f)(5) only apply to tax years ending before December 31, 2023.
(Source: Amended at 48 Ill. Reg. 10846, effective July 11, 2024)
Section 100.9750 Corporation, Subchapter S Corporation, Partnership and Trust Defined (IITA Section 1501)
a) In general. IITA Section 102 provides that, except as otherwise expressly provided or clearly appearing from the context, any term used in the IITA shall have the same meaning as when used in a comparable context in the United States Internal Revenue Code of 1954 or any successor law or laws relating to federal income taxes and other provisions of the statutes of the United States relating to federal income taxes as such Code, laws and statutes are in effect for the taxable year.
b) Corporations. The term "corporation" includes associations, joint stock companies, insurance companies and cooperatives. Any entity, including a limited liability company formed under the Illinois Limited Liability Company Act [805 ILCS 180], shall be treated as a corporation if it is so classified for federal income tax purposes. (IITA Section 1501(a)(4))
1) 26 USC 7701(a)(3) defines "corporation" to include associations, joint stock companies, and insurance companies. This definition is identical to the definition in IITA Section 1501(a)(4), except that the IITA definition includes cooperatives. Accordingly, any entity treated as a corporation for federal income tax purposes must be treated as a corporation for all purposes of the IITA, and no entity (other than a cooperative) that is not treated as a corporation for federal income tax purposes may be treated as a corporation for purposes of the IITA. Thus, any entity electing to be taxed as a corporation under 26 CFR 301.7701(a) is a corporation for all purposes of the IITA, and any entity that elects not to be treated as a corporation separate and distinct from its owners is not a corporation separate and distinct from its owners. For example:
A) An entity that has elected to be disregarded as an entity separate from its corporate owner for any federal income tax purpose pursuant to 26 CFR 301.7701-3(a) and its corporate owner are a single corporation for the equivalent purpose of the IITA.
B) An entity eligible to elect treatment as a corporation under 26 CFR 301.7701-3(a) is deemed to have elected to be treated as a corporation if it elects to be treated as a real estate investment trust (REIT) under IITA Section 856(c)(1). (See 26 CFR 301.7701(c)(1)(v)(B).) Pursuant to 26 USC 856(i), the separate existence of a qualified REIT subsidiary is ignored, and its assets, liabilities and other items are deemed to belong to the REIT that owns the subsidiary. Accordingly, a REIT and its qualified REIT subsidiaries are a single corporation for all purposes of the IITA.
2) An entity that, despite its uninterrupted existence, is treated as a new corporation for purposes of the Internal Revenue Code shall also be treated as a new corporation separate and distinct from its deemed predecessor, for all purposes of the IITA. For example:
A) An entity that has elected to be disregarded as an entity separate from its corporate owner for any federal income tax purpose pursuant to 26 CFR 301.7701-3(a), and subsequently elects to be taxed as a corporation, is treated under 26 CFR 301.7701-3(g)(1)(iv) as a new corporation to which the assets of the entity were transferred by the corporate owner in exchange for the stock of the new corporation. Accordingly, prior to the date of the subsequent election, the entity and its corporate owner are a single corporation for the equivalent purpose of the IITA, while after that election the two entities will be separate corporations.
B) A corporation that is treated as two separate corporations (as a corporation that has sold all of its assets and as a new corporation that has purchased all of the assets) pursuant to 26 USC 338 is similarly treated as two separate corporations, one in existence before the 26 USC 338 transaction and one in existence subsequent to the transaction, for all purposes of the IITA.
3) Prior to January 1, 2009, an election to be disregarded under 26 CFR 301.7701-3(a) meant that the owner of the entity would be treated as the employer of the entity's employees for purposes of withholding. For wages paid on or after January 1, 2009, the election to be disregarded does not apply to the entity's duty to withhold federal income tax from employees. (See 26 CFR 301.7701-2(c)(2)(iv) and (e)(5).) Accordingly, an entity that has elected to be disregarded and its owner are treated as a single entity for purposes of computing the federal and Illinois income tax liability of the owner, but the entity will be treated as a corporation separate from its owner for purposes of federal and Illinois obligations to withhold tax from wages paid to employees on or after January 1, 2009.
c) Subchapter S Corporations. The term "subchapter S corporation" means a corporation for which there is in effect an election under section 1362 of the Internal Revenue Code, or for which there is a federal election to opt out of the provisions of the Subchapter S Revision Act of 1982 and have applied instead the prior federal subchapter S rules as in effect on July 1, 1982. (IITA Section 1501(a)(28))
1) Any corporation that has elected subchapter S corporation status for federal income tax purposes is automatically a subchapter S corporation for purposes of the IITA until its status as a subchapter S corporation is terminated for federal income tax purposes. No separate election is required.
2) Under 26 USC 1361(b)(3), the separate existence of a "qualified subchapter S subsidiary" is disregarded and the assets, liabilities and other items of the qualified subchapter S subsidiary are attributed to the parent subchapter S corporation. Accordingly, for all purposes of the IITA, a subchapter S corporation and its qualified subchapter S subsidiaries shall be treated as a single subchapter S corporation.
d) Partnerships. The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of the IITA, a trust or estate or a corporation. (IITA Section 1501(a)(16))
1) 26 USC 761 provides that the term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation or venture is carried on, and which is not, within the meaning of this Title 26, a corporation or a trust or estate. This definition is essentially identical to the definition in (IITA Section 1501(a)(16)). Also, IITA Section 1501(a)(16) provides that any entity, including a limited liability company formed under the Illinois Limited Liability Company Act, shall be treated as a partnership if it is so classified for federal income tax purposes. Accordingly, every entity treated as a partnership for federal income tax purposes is a partnership for purposes of the IITA, and no entity that is not treated as a partnership for federal income tax purposes is a partnership for purposes of the IITA. For example:
A) An entity that elects to be treated as a partnership for federal income tax purposes under 26 CFR 301.7701(a) is a partnership for purposes of the IITA.
B) An entity that makes an election under 26 USC 761(a) to not be treated as a partnership is not a partnership for purposes of the IITA.
C) If a partnership is treated as a continuation of another partnership pursuant to 26 CFR 1.708-1(b)(2), those partnerships are a single, continuing partnership for all purposes of the IITA.
2) As amended by Public Act 91-913, IITA Section 1501(a)(16) provides that the term "partnership" does not include a syndicate, group, pool, joint venture or other unincorporated organization established for the sole purpose of playing the Illinois State Lottery. Accordingly, notwithstanding any other provisions of this Section, an entity established for the sole purpose of playing the Illinois State Lottery is not a partnership for purposes of the IITA.
3) Under IITA Section 1501(a)(16), any member of an entity treated as a partnership shall be treated as a partner. Accordingly, any reference in the IITA to a partner refers the owners or members of any entity treated as a partnership.
e) Trusts. The term "trust" is not defined in the IITA. However, pursuant to IITA Section 102, any entity treated as a trust for federal income tax purposes under 26 CFR 301.7701-4 is a trust for all purposes of the IITA. An entity that has elected to be treated as part of an estate under 26 USC 645 is not a trust, but is part of the estate for all purposes of the IITA. Similarly, a trust whose assets, activities and income are treated as belonging to its grantor for federal income tax purposes under the "grantor trust" provisions of 26 USC 671 is not treated as a trust for Illinois income tax purposes.
(Source: Amended at 34 Ill. Reg. 12891, effective August 19, 2010)
SUBPART FF: LETTER RULING PROCEDURES
Section 100.9800 Letter Ruling Procedures
a) For Department rules concerning Private Letter Rulings, see 2 Ill. Adm. Code 1200.
b) For Department rules concerning the binding effect of Private Letter Rulings, see 2 Ill. Adm. Code 1200.
c) For Department rules concerning the recission of Private Letter Rulings, see 2 Ill. Adm. Code 1200.
(Source: Amended at 17 Ill. Reg. 19966, effective November 9, 1993)
SUBPART GG: MISCELLANEOUS
Section 100.9900 Tax Shelter Voluntary Compliance Program
a) Section 35-5(a) of the Tax Shelter Voluntary Compliance Law [35 ILCS 20/35-5(a)] provides that the Department shall establish and administer a tax shelter Voluntary Compliance Program as provided in this Section for eligible taxpayers subject to tax under the Illinois Income Tax Act. The tax shelter voluntary compliance program shall be conducted from October 15, 2004 to January 31, 2005 and shall apply to tax liabilities under Section 201 of the Illinois Income Tax Act attributable to the use of tax avoidance transactions for taxable years beginning before January 1, 2004. The Voluntary Compliance Program provides for abatement of penalties that would otherwise be imposed on underpayment or underreporting of Illinois income tax liabilities attributable to participation in tax shelters. The Tax Shelter Voluntary Compliance Law directs the Department to adopt rules, issue forms and instructions, and take such other actions as it deems necessary to implement the provisions of the Voluntary Compliance Program.
b) Definitions. For purposes of this Section:
1) Tax Avoidance Transaction. Section 35-10 of the Tax Shelter Voluntary Compliance Law [35 ILCS 20/35-10] provides that "tax avoidance transaction" means any plan or arrangement devised for the principal purpose of avoiding federal income tax. Tax avoidance transactions include, but are not limited to, "listed transactions" as defined in Treasury Regulations Section 1.6011-4(b)(2).
2) Eligible Liability
A) "Eligible Liability" means the excess, if any, of:
i) the Illinois income tax liability for a taxable year properly computed without allowing the net tax benefits of any tax avoidance transaction, over
ii) the Illinois income tax liability for that taxable year properly computed allowing the tax benefits of any tax avoidance transactions in which the taxpayer participated.
B) The Illinois income tax liabilities under subsection (b)(2)(A)(i) shall be computed without allowing the net tax benefits of any tax avoidance transaction for the taxable year at issue, whether or not such benefits are ultimately determined to be allowable and without allowing any benefits in the taxable year at issue that result from tax avoidance transactions in which the taxpayer participated in other tax years, such as, for example, by increasing any Illinois net loss or credit available to carry over into the taxable year at issue.
3) Voluntary Compliance Program Period. The "Voluntary Compliance Program Period" is October 15, 2004 through January 31, 2005, inclusive.
c) Participation in the Voluntary Compliance Program. Participation in the Voluntary Compliance Program is made separately for each taxable year. In order to participate in the Voluntary Compliance Program for a taxable year, a taxpayer must, during the Voluntary Compliance Program Period:
1) File Form VCP-1, Voluntary Compliance Participation Agreement, with an amended return reporting Illinois net income and tax for the taxable year, computed without regard to any tax avoidance transactions affecting Illinois net income for that taxable year.
A) Any taxpayer who, as a result of participating in a tax avoidance transaction, determined that it had no Illinois income tax liability for a taxable year therefore chose not to file a return for that taxable year may participate in the Voluntary Compliance Program by filing an original return for that taxable year and reporting its Illinois net income and tax for the taxable year, computed without regard to any tax avoidance transactions affecting Illinois net income or tax for that taxable year.
B) A trust, estate, exempt organization, partnership or Subchapter S corporation shall file a Form IL-843, Amended Return or Notice of Change in Income, with a revised return in the proper form.
C) A partnership or Subchapter S corporation may file a composite return for that taxable year on behalf of any partners or shareholders eligible to be included in a composite return.
D) No return filed outside the Voluntary Compliance Program Period will qualify for relief under this Section. An unprocessable return filed during the Voluntary Compliance Program Period will qualify for relief under this Section only if a processable return is filed within 30 days after the Department has issued a notice to that taxpayer that the return filed was unprocessable.
E) Failure to correct an underreporting of tax that is not the result of participation in a tax avoidance transaction shall not preclude relief under this Section.
2) Pay the full amount of the Eligible Liability, plus interest on the Eligible Liability.
A) Failure to pay any penalty or to pay any liability (or interest on such liability) other than the Eligible Liability shall not preclude relief under this Section.
B) If the Eligible Liability was eligible for amnesty under the Tax Delinquency Amnesty Act, interest that must be paid under this subsection (c)(2) shall be computed at 200% of the rate that would otherwise have been imposed under UPIA Section 3-2, as provided in UPIA Section 3-2(d).
C) In the case of a taxpayer who makes a good faith attempt to compute the correct amount of the Eligible Liability, and pays that amount during the Voluntary Compliance Program Period, failure to pay the full amount of the Eligible Liability shall not preclude relief under this Section if the full amount of the Eligible Liability (including any related penalty and interest) determined by the Department to be due is paid within 30 days after the Department has issued a Notice and Demand for the unpaid amount.
D) No payment made under protest under Section 2a.1 of the State Officers and Employees Money Disposition Act [30 ILCS 230/2a.1] shall be considered a payment made during the Voluntary Compliance Program Period under this subsection (c)(2).
3) Make the election to participate under Voluntary Compliance without Appeal or Voluntary Compliance with Appeal.
A) The election shall be made by checking the appropriate box on the Form VCP-1, Voluntary Compliance Participation Agreement.
B) Once made, the election may not be revoked.
C) A separate election shall be made for each taxable year for which the taxpayer chooses to participate in the Voluntary Compliance program.
D) No relief shall be allowed to any taxpayer for any taxable year for which the taxpayer fails to properly make the election in accordance with this subsection (c)(3).
d) Effect of Electing Voluntary Compliance without Appeal. If a taxpayer properly elects Voluntary Compliance without Appeal:
1) No claim for refund or credit shall be allowed with respect to the Eligible Liability. The taxpayer's rights to claim a refund or credit for other amounts paid that are not attributable to the tax avoidance transaction shall not be affected by this election.
2) The following penalties that are otherwise applicable to the Eligible Liability for such taxable year shall be abated:
A) The negligence penalty imposed under IITA Section 1002(a), including any doubling of the penalty under UPIA Section 3-5(d).
B) The fraud penalty imposed under IITA Section 1002(b), including any doubling of the penalty under UPIA Section 3-6(c).
C) The penalty for underpayment of tax imposed under IITA Section 1005(a), including any doubling of that penalty under UPIA Section 3-3(i).
D) The reportable transaction penalty imposed under IITA Section 1005(b).
E) The 100% interest penalty imposed under IITA Section 1005(c).
F) The underreporting penalty imposed under UPIA Section 3-3(b-15)(2).
G) In the case of an Eligible Liability reported on an original return filed during the Voluntary Compliance Program Period, the penalty for failure to pay estimated tax imposed by IITA Section 804(a), including any doubling of that penalty under UPIA Section 3-3(i).
H) Because the Voluntary Compliance Program Period will expire before the date the first disclosure of participation in a reportable transaction could be due under IITA Section 501(b), filing of an amended return during the Voluntary Compliance Program Period reversing the tax benefits of a reportable transaction will avoid penalty under IITA Section 1001(b) for failure to disclose a reportable transaction.
3) None of the penalties listed in this subsection (d)(2) shall be abated under the Voluntary Compliance Program to the extent imposed with respect to a liability assessed prior to October 15, 2004. No other penalties (including, but not limited to, any penalties for late payment of tax or underpayment of tax resulting from any underpayment other than the Eligible Liability) are abated or avoided merely by participation in the Voluntary Compliance Program. However, participation in the Voluntary Compliance Program will not affect any right the taxpayer would otherwise have to abatement of penalties or to contest the imposition of penalties.
4) The Department shall not seek civil or criminal prosecution against the taxpayer for such taxable year with respect to tax avoidance transactions, except as otherwise provided in Tax Shelter Voluntary Compliance Law.
5) A claim for a refund of the Eligible Liability by a taxpayer who has elected Voluntary Compliance without Appeal shall be denied, but filing such claim will not disqualify the taxpayer from participation in the Voluntary Compliance Program.
e) Effect of Electing Voluntary Compliance with Appeal. If a taxpayer properly elects Voluntary Compliance with Appeal:
1) Any otherwise-allowable claim for refund or credit shall be allowed with respect to the Eligible Liability, provided that, notwithstanding IITA Section 909(e), the taxpayer may not file a written protest until after either of the following:
A) the date the Department issues a notice of denial; or
B) the earlier of:
i) the date which is 180 days after the date of a final determination by the Internal Revenue Service with respect to the transactions at issue;
ii) the date that is three years after the date the claim for refund was filed; or
iii) the date that is one year after full payment of all tax, including penalty and interest.
2) Participation in the Voluntary Compliance Program with Appeal shall not affect any right the taxpayer otherwise has to claim a refund or credit or protest the denial of such claim for any amount paid other than the Eligible Liability.
3) Penalties
A) The following penalties for the taxable year that are otherwise applicable to the Eligible Liability for such taxable year shall be abated:
i) The reportable transaction penalty imposed under IITA Section 1005(b).
ii) The 100% interest penalty imposed under IITA Section 1005(c).
B) Because the Voluntary Compliance Program Period will expire before the date the first disclosure of participation in a reportable transaction could be due under IITA Section 501(b), filing of an amended return during the Voluntary Compliance Program Period reversing the tax benefits of a reportable transaction will avoid penalty under IITA Section 1001(b) for failure to disclose a reportable transaction.
C) Neither of the penalties listed in this subsection (e)(3)(A)(i) and (ii) shall be abated under the Voluntary Compliance Program to the extent imposed with respect to a liability assessed prior to October 15, 2004. No other penalties are abated or avoided merely by participation in the Voluntary Compliance Program. However, participation in the Voluntary Compliance Program will not affect any right the taxpayer would otherwise have to abatement of penalties or to contest the imposition of penalties.
4) The Department shall not seek civil or criminal prosecution against the taxpayer for such taxable year with respect to tax avoidance transactions, except as otherwise provided in the Tax Shelter Voluntary Compliance Law.
f) Failure to Comply with All Requirements for Participation in the Voluntary Compliance Program. If the Department determines that a taxpayer who has been granted relief under this Section has failed to comply with all requirements of this Section, any penalties that had been abated shall be deemed assessed as of January 31, 2005, and shall be immediately due and collectible, provided that nothing in this subsection shall preclude abatement of a penalty for reasonable cause, if otherwise applicable, or deprive the taxpayer of any process otherwise available for seeking abatement of an assessed penalty.
g) Participation in the Voluntary Compliance Program shall not be considered evidence that the taxpayer in fact engaged in a tax avoidance transaction.
(Source: Amended at 34 Ill. Reg. 3886, effective March 12, 2010)
Section 100.9910 State Tax Preparer Oversight Act [35 ILCS 35]
a) Definitions
1) Income Tax Return Preparer
A) The term "income tax return preparer" means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by the IITA or any claim for refund of tax imposed by the IITA. The preparation of a substantial portion of a return or claim for refund shall be treated as the preparation of that return or claim for refund. (IITA Section 1501(a)(26)(A))
B) A person is not an income tax return preparer if all he or she does is the following:
i) furnish typing, reproducing, or other mechanical assistance;
ii) prepare returns or claims for refunds of the employer by whom he or she is regularly and continuously employed;
iii) prepare as a fiduciary returns or claims for refunds for any person; or
iv) prepare claims for refunds for a taxpayer in response to a notice of deficiency issued to that taxpayer or in response to any waiver of restriction after the commencement of an audit of that taxpayer or of another taxpayer if a determination in the audit of the other taxpayer directly or indirectly affects the tax liability of the taxpayer whose claims he or she is preparing. (IITA Section 1501(a)(26)(B))
2) PTIN. Section 5 of the State Tax Preparer Oversight Act (STPOA) provides that the term "Preparer Tax Identification Number" or "PTIN" means the identifying number required under 26 CFR 1.6109-2(d). (STPOA Section 5)
3) EIN. The term "Employer Identification Number" or "EIN" means the identifying number assigned to an employer under 26 CFR 31.6011(b)-1.
b) Requirement to Sign Return. If a return required under the IITA is prepared by an income tax return preparer for a taxpayer, that preparer shall sign the return as preparer of that return. (IITA Section 503) This requirement shall apply only to the preparer who would be considered the "signing tax return preparer" with respect to the return by applying the provisions of 26 CFR 301.7701-15. In addition, if there is an employment relationship or association between the individual required to sign a return under this subsection and another person, the signature of that other person must be included on the filed return when required by Department forms.
c) Requirement to Include PTIN. For taxable years beginning on or after January 1, 2017, any income tax return preparer must include his or her PTIN on any tax return prepared by the income tax return preparer and filed under the IITA or any claim for refund of tax imposed by the IITA. (STPOA Section 10) This requirement shall apply only to the preparer who would be considered the "signing tax return preparer" with respect to the return or claim for refund by applying the provisions of 26 CFR 301.7701-15(b)(1), and only with respect to an income tax return preparer who holds an active PTIN at the time of filing the Illinois return or claim for refund.
d) Requirement to Include EIN. If there is an employment relationship or association between the individual required to sign a return under subsection (b) and another person, the name and EIN of that other person must be included on the filed return or claim for refund when required by Department forms.
e) Oversight Program. The Department will use the PTIN information required to be included on a filed return or claim for refund under subsection (c) for purposes of administering the enforcement provisions of subsection (f). The PTIN information allows the Department to identify preparers who prepare fraudulent or otherwise erroneous returns, and returns reflecting unsubstantiated tax positions. The Department will share and exchange PTIN information with the Internal Revenue Service on income tax return preparers who are suspected of fraud, disciplined, or barred from filing tax returns with the Department or the Internal Revenue Service. (STPOA Section 10) The Department will share similar enforcement or discipline information with other states.
f) Enforcement
1) Misconduct Investigations. The Department may investigate the actions of any income tax return preparer doing business in the State and may bar or suspend an income tax return preparer from filing returns with the Department for good cause. (STPOA Section 15) Good cause to bar or suspend an income tax return preparer may be found when a preparer engages in conduct described in 26 USC 7407(b)(1) (other than conduct subject to penalty under 26 USC 6695(a) (failure to provide the taxpayer with a copy of the return), (d) (failure to retain copies or lists of returns prepared by the preparer), (e) (failure to correct information returns) and (f) (negotiation of checks issued to taxpayers)), as if 26 USC 7407(b)(1) applied for purposes of the IITA.
2) Misconduct Hearings. Prior to imposing the enforcement provisions of subsection (f)(1), the Department will hold a hearing as provided in this subsection (f)(2). The Department shall, at least 30 days before the date set for the hearing: notify the accused in writing of the charges made and the time and place for the hearing on the charges; direct him or her to file a written answer to the charges with the Department under oath within 20 days after the service on him or her of the notice; and inform the accused that, if he or she fails to answer, disciplinary action shall be taken against him or her, as the Department may consider proper. At the time and place fixed in the notice, the Department shall proceed to hear the charges and the parties or their counsel shall be accorded ample opportunity to present any pertinent statements, testimony, evidence, and arguments. The Department may continue the hearing from time to time. In the case the person, after receiving the notice, fails to file an answer, he or she may be subject to the disciplinary action set forth in the notice. The written notice may be served by registered or certified mail to the person's address of record. All final administrative decisions of the Department under this Section shall be subject to judicial review pursuant to the Administrative Review Law [735 ILCS 5/Art. III]. The term "administrative decision" shall have the meaning ascribed in Section 3-101 of that Law. Proceedings for judicial review shall be commenced in the Circuit Court of the county in which the party applying for review resides; provided that, if the party is not a resident of this State, the venue shall be in Sangamon or Cook County. (STPOA Section 15)
3) Penalty for Omitting PTIN
A) In addition to any other penalty provided by law, any individual violating the STPOA by failing to provide his or her PTIN shall pay a civil penalty to the Department in the amount of $50 per offense, but not to exceed $25,000 per calendar year; however, no such penalty shall be imposed if it is shown that the failure is due to reasonable cause and not due to willful neglect, as determined by the Department. (STPOA Section 15(a)) The penalty under this subsection (f)(3)(A) shall apply only with respect to an income tax return preparer who holds an active PTIN at the time of filing the Illinois return or claim for refund. The penalty does not apply to an income tax return preparer who does not have an active PTIN, whether or not the preparer is required to obtain a PTIN. Reasonable cause shall be determined under the standards set forth in 86 Ill. Adm. Code 700.400. The penalty imposed under this subsection (f)(3)(A) shall not be considered tax imposed under the IITA.
B) The Department shall issue a notice of penalty liability for the amount claimed by the Department determined pursuant to subsection (f)(3)(A). Procedures for protest and review of a notice of penalty liability issued pursuant to this subsection (f)(3)(B) and assessment of the penalty due under this subsection (f)(3)(B) shall be the same as those prescribed for protest and review of a notice of deficiency set forth in IITA Section 908.
(Source: Added at 41 Ill. Reg. 6379, effective May 22, 2017)
Section 100.APPENDIX A Business Income of Persons Other Than Residents (Repealed)
Section 100.TABLE A Example of Unitary Business Apportionment (Repealed)
(Source: Repealed at 43 Ill. Reg. 10124, effective August 27, 2019)
Section 100.APPENDIX A Business Income of Persons Other Than Residents (Repealed)
Section 100.TABLE B Example of Unitary Business Apportionment for Groups Which Include Members Using Three-Factor and Single-Factor Formulas (Repealed)
(Source: Repealed at 43 Ill. Reg. 10124, effective August 27, 2019)