BACKGROUND:
The Tax Cuts and Jobs Act of 2017 established a $10,000 limitation on the amount an individual could deduct for state and local taxes (SALT). Any SALT taxes paid by the taxpayer above that $10,000 ceiling became, in effect, nondeductible. To help struggling small businesses in Illinois State Senator Win Stoller proposed Senate Bill 2531, which created a workaround to the SALT cap for pass-through entities, such as S–corporations and partnerships, by allowing them to pay the state income tax on the business at the entity level.
WHAT SENATE BILL 2531 DOES:
Senate Bill 2531 created the Pass-through Entity (PTE) tax which is an entity-level income tax that partnerships (other than publicly traded partnerships under IRC 7704) and subchapter S-corporations may elect to pay effective for tax years ending on or after December 31, 2021, and beginning prior to January 1, 2026.
The PTE tax rate is equal to 4.95 percent of the taxpayer’s net income for the taxable year. A partnership or S-corporation making the election is liable for paying the PTE tax. Shareholders and partners of a pass-through entity are then entitled to a state tax credit for the taxes paid on their share of the entity’s income and are not limited by the $10,000 SALT limitation. This credit can offset the Illinois income tax related to the pass-through entity income, but it is not allowed to reduce the Illinois Replacement Tax.
The election to pay the PTE tax is made on Form IL-1065, Partnership Replacement Tax Return or
Form IL-1120-ST, Small Business Replacement Tax Return.