A Tax-saving Opportunity For Illinois Business Owners
If you are a business owner with a partnership, LLC or S-Corp in Illinois, the pass-through entity tax provision might mean a lower overall tax bill. Here’s how it works.
If you are a business owner with a partnership, LLC or S-Corp in Illinois, there is some likely good news on the tax front. Illinois has joined more than 30 other states in introducing a pass-through entity (PTE) tax, which may help reduce your overall tax bill for the tax years ending before January 1, 2026.1
How it works
This provision makes it possible to elect to have your state of Illinois tax withheld by your business, then receive a personal credit for the amount that was withheld. This effectively bypasses the $10,000 cap on your United States federal state and local tax (SALT) deduction, as you get a deduction at the business level for all the income you earn from your business.2
This may be true even if your $10,000 cap is being filled up by your other state of Illinois taxes, for example, on your investment portfolio or real estate. This could be especially valuable given the high property tax rates for many in Illinois.3
We suggest you think of it as shifting the payment of state income taxes to your business and then having your business fully deduct those state taxes for federal tax purposes. The deduction is then passed to you when it would otherwise have been capped.4
Whom can this help?
The PTE tax can potentially benefit owners of partnerships (other than a publicly traded partnership under Internal Revenue Code (IRC) Section 7704), LLCs and S-Corps in the state of Illinois. It is worth noting that 31 states in total have a similar provision in their tax code that should be active for 2022–2025.5 Under current law, this strategy to transfer the deduction to the business will no longer be necessary after the SALT tax cap sunsets on January 1, 2026, without Congress taking action to extend it.6
What we think you should watch out for
If you are going to have your business make these elective tax payments, the business must remit them quarterly by the 15th day of the 4th, 6th, 9th and 12th months of its tax year.7 Estimating and remitting these payments could create some challenges, particularly if your cash flow or balance sheet is uneven during the year. It will also create a new item for your accountant to track from quarter to quarter.
Overall, the introduction of a PTE tax could be welcome news for many Illinois business owners. If you are considering how best to take advantage of this provision, consult with your tax professional or wealth advisor.
1 https://tax.illinois.gov/research/taxinformation/income/partnership.html
2 https://tax.illinois.gov/research/publications/pubs/pass-through-information.html
3 https://www.civicfed.org/civic-federation/blog/new-report-illinois-property-taxes-among-highest-nation
4 https://tax.illinois.gov/research/publications/pubs/pass-through-information.html
5 https://ca01.l.antigena.com/l/gPsicVzQRRn3B4eeBGJjI-g3G7cPKePBl552N6gpFkKC7XOykCmsFBavJYZEMnFyZ3gi3JfRJCuGLyCxVNLnIV5u5YhaUj5GWKhhhV8-N2Krj8~EO6En6op-zVpkaXI~LWY6~4rYfr-IZ7_KPEmA2ftWJRSH_-ySgGjfR4TbpeHuwg2CV77_S_wAMPl-YiAME_TSXlkMAF6XjHV
6 https://www.cnbc.com/2022/04/20/supreme-court-rejects-salt-limit-challenge-from-new-york-new-jersey.html#:~:text=The%20U.S.%20Supreme%20Court%20has,restoring%20the%20full%20tax%20break.
7 https://tax.illinois.gov/research/taxinformation/income/partnership.html
ABOUT THE AUTHOR
Charles Murin
Charlie is a Wealth Advisor in our Itasca, IL, office. Previously, he served at legacy firm BDF, where he was an active member of the firm’s Financial Planning Committee, responsible for developing and improving the firm’s multifaceted planning process. He earned a Bachelor of Science from the University of Illinois in Consumer Economics with a concentration in financial planning. Charlie has his Series 65 license and is a CERTIFIED FINANCIAL PLANNER™ professional.
