Income tax changes
Net operating loss limitation extension
House Bill 4951 includes a continuation of the net operating loss deduction limitation for an additional three years and increases the utilization cap from $100,000 to $500,000. The new threshold applies to any taxable year ending on or after Dec. 31, 2024, and prior to Dec. 31, 2027.
Financial organization apportionment
House Bill 4951 modifies the apportionment rules for sourcing receipts specific to financial organizations. Effective for tax years ending on or after Dec. 31, 2024, receipts from investment assets and activities and trading assets and activities are generally sourced to Illinois if earned in Illinois or otherwise attributable to Illinois’ marketplace. Historically, such receipts were generally sourced to the taxpayer’s fixed place of business. These changes will likely benefit Illinois-based financial organizations, while increasing taxes for out-of-state financial organizations.
Illinois franchise tax
House Bill 4951 increases the franchise tax exemption threshold. Beginning Jan. 1, 2025, the first $10,000 in liability is exempt, doubling the current exemption threshold of $5,000.
Research and development credit extension
House Bill 5005 would postpone the sunset of the research and development credit from tax years ending prior to Jan. 1, 2027, to tax years ending prior to Jan. 1, 2032.
Sales and use tax changes
Sales tax on leases
Currently, Illinois law requires lessors to pay the sales or use tax on the purchase of property that will be leased rather than imposing tax on the lease stream charges to the lessee. Illinois was one of the few states in the country to treat leases in that manner, often causing confusion for out of state lessors purchasing property in Illinois for lease. Effective Jan. 1, 2025, House Bill 4951 amends the sales and use tax code to effectively shift the imposition of the sales tax on leases from the lessor purchasing the property to the lessor’s charges to a lessee, i.e., the lease stream payments. Accordingly, purchases of property for lease will be eligible for sale for resale treatment and would therefore be exempt. However, the treatment of sales of motor vehicles, watercraft and similarly titled-property for lease remains unchanged and will continue as currently in effect.
The bill creates two new lease-related exemptions. The first allows an exemption for certain software transferred to a lessee under a license agreement meeting specific requirements. The second exemption is for property that subject to a lease tax imposed by a home rule government if such ordinance was adopted prior to Jan. 1, 2023. This exemption is practically intended to apply to the Chicago Personal Property Lease Transaction Tax, preventing such transactions from being subject to both the new Illinois sales tax on leases and the 9% Chicago tax.
Noteworthy, Maine also enacted legislation this year, effective 2025, allowing retailers to collect sales tax on the rental stream rather than imposing the tax on the purchase price of the rental property.
Retailers’ discount capped
Illinois offers retailers a 1.75% discount on sales tax timely remitted to partially reimburse retailers for the costs of collecting the tax on behalf of the state. House Bill 4951 imposes a $1,000 per month cap on the discount for tax returns due on or after Jan. 1, 2025.
Sales tax rate sourcing made consistent
Under Senate Bill 3362 and effective Jan. 1, 2025, Illinois retailers shipping goods into Illinois from out of state would be required to collect sales tax based on the destination rate. Effective 2021, the Leveling the Playing Field Act required remote sellers (those with economic nexus, but not maintaining a place of business) to collect tax based on the destination rate. However, retailers maintaining a place of business in Illinois but shipping from out of state continued to collect sales tax based on the transaction’s origin. In that scenario, if the ‘origin’ was outside of Illinois (i.e., the property was shipped from outside the state), the retailer would only collect the 6.25% Illinois state rate. Effective Jan. 1, 2025, sellers maintaining a place of business in Illinois that are selling or shipping from outside the state would collect the tax based on the destination rate. Origin sourcing would continue to apply only to retailers located in Illinois and selling from Illinois.
Direct pay permit changes
Senate Bill 3282 would impose new requirements on direct pay permit holders. Each holder of a direct pay permit must review its purchase activity for the 12-month period ending December 31 for the preceding calendar year by March 31 to verify the purchases were sourced correctly and the correct tax rate was applied. The first review under the new rules would be conducted by March 31, 2025 for the year ending Dec. 31, 2024. A $6,000 penalty will apply to direct pay holders that do not complete this purchase review. The penalty does not apply if at least 95% of the transactions for the applicable period are correctly sourced and correct taxes have been remitted, or the holder acted with ordinary business care and prudence. Additional guidance through Illinois Department of Revenue regulations is anticipated after enactment.
Full exemption for groceries
House Bill 3144 would modify how groceries are taxed in the state. Illinois is one of only about a dozen states that imposes a sales tax on groceries. Currently, a 1% state rate applies to the sale of groceries, while a small number of localities also impose a separate sales tax. Effective Jan. 1, 2026, the 1% state tax on groceries will be eliminated. However, because the 1% state tax rate was distributed to localities, the bill authorizes local jurisdictions to impose their own 1% Grocery Occupation Tax without voter approval to make up for the lost state distribution. Food prepared for immediate consumption, alcoholic beverages, candy, soda and food infused with cannabis are excluded from the new grocery exemption. The 2026 effective date for this provision allows retailers additional time to incorporate the changes. Grocers and others who sell food for off-premises consumption should prepare for a change in tax rate. Retailers would also need to consider that some localities may enact a 1% tax in response to the elimination of the state rate.
On the ballot
Enacted in early May, Senate Bill 2412 allows for a referendum on an advisory (non-binding) question asking voters whether the state constitution should be amended to create an additional 3% tax on income greater than $1 million for purposes of property tax relief. A majority vote would not create such a tax, but may guide the legislature to propose a millionaire’s tax next legislative session. It is currently unclear whether the tax would be imposed on all income (businesses and individuals), or limited to personal income of individuals. The referendum is currently scheduled for the November 2024 ballot.
Takeaways
The Illinois fiscal year 2025 budget and associated tax bills are intended to drive revenue through incremental changes. The three-year extension of the net operating loss limitation is estimated to generate a half billion dollars in revenue alone.
Numerous minor tax changes and credits were also offered including a 1% additional tax on video gaming terminal income, a motor fuels tax extension, an extension of the hotel occupancy tax to certain hotel ‘re-renters,’ and a new credit for quantum computing campuses. Additionally, a progressive rate structure for sports betting increases and extends the rate over several brackets estimated to generate $200 million in fiscal year 2025. Due to the extensive nature of the legislation, taxpayers with questions about this year’s tax bills should reach out to their Illinois state and local tax advisers.
