Matter & Substance
  September 9, 2021

Workaround for IL Tax Deduction Limit

Exciting Illinois tax news:

A bill that could save small businesses in Illinois significant money, is now on the books! The law will allow owners of partnerships, LLCs, and S-corporations to avoid the $10,000 cap on the state and local tax deduction.

A brief history:

The 2017 Tax Cuts and Jobs Act (TCJA) established a $10,000 cap on the amount of deductible state and local taxes for individual taxpayers against federal taxability. This went into effect for the years 2018 – 2025. This is commonly referred to as the SALT deduction limit.

For what tax years is this new Illinois law applicable?

The new law will be in effect for the years ending December 31, 2021 through December 31, 2025.

It is important to note, this election must be made annually by partnerships or S-Corporations – meaning you must make it each year and can elect to take it (or not) depending on your personal circumstances. It is also irrevocable – meaning if you do not take advantage of it each year, there’s no going back and refiling to receive it later.

How will the pass-through law work exactly?

When you have a pass-through entity, such as a partnership or S-corporation – the taxable income of the entity gets taxed at the individual level. For example, if you are a 50% owner in a business that makes $1 million dollars; you would owe individual Illinois taxes on $500,000.

The Illinois tax on this income would be approximately $25,000 that, combined with any real estate taxes paid, is limited to only only $10,000 as a deduction on your federal income taxes.

Under the new law, the entity can make an election to be taxed at the 4.95% entity level, rather than passing the income and tax liability through to the individual. As an entity the full amount of Illinois tax paid can be claimed as dedication against federal income tax; thereby circumventing the $10,000 individual deduction limit.

What does this mean for me, an Illinois business owner?

This new pass-through law has the potential to save owners up to 37% on their Illinois state tax liability in the form of a federal tax benefit.

How will this affect my quarterly estimated tax payments (especially the one due next week)?

The Illinois election requires that the pass-through entity pay the tax resulting from the election in installments during the year.

While we know the third quarter Illinois estimated payment is due next week on September 15, we are still waiting on some forms and guidance from the state legislature. 

As such, we encourage you to reach out to your M&S Tax Advisor as soon as possible to decide if making (or holding off on making) your individual Illinois quarterly estimated tax payment next week is prudent.

How will this affect my individual state filing? 

If you are an Illinois resident, you will report the full-year’s income exactly as you have in prior years. You will then claim the new tax credit and enjoy the savings!

If you are a non-resident filing in Illinois, the entity return can be treated as a composite and you would not be required to file an Illinois return unless you had other non pass-through entity activity in the state.

How do I take advantage of this new law? 

Your M&S Tax Advisor will evaluate the benefit of making this election to lower your overall tax liability. We will be reaching out to schedule your 2021 tax planning meetings in the next 6 weeks. Given the number of changes to laws and credits available this year, we encourage all of our clients to take advantage of this meeting.