On June 17, 2021, Illinois Gov. J.B. Pritzker signed into law Senate Bill 2017, the fiscal year 2022 budget implementation bill, making various state tax code changes including requiring an addback for global intangible low-taxed income (GILTI) deductions, decoupling of bonus depreciation, temporarily limiting net operating losses and suspending the phase-out of the state franchise tax. The tax changes are expected to raise about $655 million in additional revenue next fiscal year.
In 2018, the Illinois Department of Revenue issued guidance explaining that the state's subtraction for foreign dividends would apply to GILTI. Effective for taxable years ending on or after June 30, 2021, Senate Bill 2017 requires taxpayers to add back the GILTI deductions allowed under section 250(a) and add back the deductions related to sections 243(e), certain dividends from foreign corporations, and 245A(a), dividends received from a specified 10% owned foreign corporation.
Effective Jan. 1, 2022, Senate Bill 2017 decouples from the 100% depreciation deduction allowed under section 168(k). The bill provides that for property on which a bonus depreciation deduction was taken in a taxable year ending on or after Dec. 31, 2021, the depreciation deduction is that which would be allowed on the property if the taxpayer had made the election under section 168(k)(7) to not claim bonus depreciation on the property.
Net operating loss limitations
Senate Bill 2017 imposes an annual $100,000 net operating loss deduction limit on corporations through tax year 2024, a provision that previously existed for tax years ending on or after Dec. 31, 2012 and prior to Dec. 31, 2014. It is by far the largest revenue raiser in the law, expected to generate $314 million in 2022. The law will allow businesses to claim excess losses beginning in 2025.
Illinois franchise tax
The Illinois franchise tax was scheduled to be completely repealed by 2024 through an annual schedule that increases the amount of exempt liability. The tax is imposed at a rate of 0.1% on either paid in capital or property in the state. Senate Bill 2017 suspends the currently scheduled phase-out, exempting only the first $1,000 in liability for periods on or after Jan. 1, 2021. The change is expected to raise about $20 million in 2022.
The new law contains several significant changes that will effect virtually all Illinois business taxpayers. The net operating loss limitation, although temporary, will likely affect many businesses in a negative way. However, the governor’s office indicates that only 20% of the Illinois taxpayers will be affected. Loss limitations could impact a company’s cash flow.
The franchise tax repeal suspension will create fewer burdens in the short run for most businesses. The decoupling from the 100% depreciation may provide planning opportunities for businesses in the process of purchasing equipment subject to section 168(k). The addback of the foreign dividends in the GILTI calculation is an interesting development. Most states have been moving away from taxing GILTI in general. The inclusion of the foreign dividends may create constitutional issues depending on how the law is implemented. In any event, all businesses should be aware of these changes and their likely effect on their tax burdens in the state. Consult your state and local tax professional for more information.