The PTE Tax requires the partnership to make estimated payments in the same manner as individuals (in April, June, September and January). A separate election is made for each year and is irrevocable once made. ![]() The election to pay the PTE Tax is required to be made on an annual basis “at such time, and in such form and manner as prescribed” by the Illinois Department of Revenue. Corporate partners with a higher Illinois tax rate (7%) will also be allowed a credit for their distributive share of the PTE Tax (at 4.95%) and will pay the difference to the State of Illinois.ĪNNUAL ELECTION OF PTE TAX AND ESTIMATED PAYMENTS The partners in the upper-tier partnership will be allowed a credit for their distributive share of the PTE Tax paid by both partnerships. In the case of tiered partnerships, if a lower-tier partnership makes the PTE Tax election, the upper-tier partnership that also makes a PTE Tax election will exclude income allocated by the lower-tier partnership to the upper-tier partnership. Other states have avoided this problem by permitting the PTE Tax to be elected on a partner-by-partner basis rather than for the entity as a whole ( e.g., California) or by imposing the PTE Tax only upon income that is allocable to partners subject to the state’s personal income tax ( e.g., New York State). In some cases, this may be avoided by forming an upper-tier partnership for partners that are not tax exempt. As a result, any tax exempt owner of a partnership or S corporation may be required to file Illinois refund claims in order to recoup PTE Taxes paid at the entity level (including as estimated payments). ![]() The Illinois PTE Tax is paid by the partnership or S corporation on all of its Illinois net income after apportionment or allocation. It’s also computed after addback of the partnership subtraction modification for reasonable compensation of partners (including guaranteed payments to partners) and the subtraction modification for income allocable to partners or shareholders subject to the Illinois “replacement tax.” The PTE Tax does not affect the replacement tax computation. Illinois base income of a partnership or S corporation for purposes of the PTE Tax is computed without deduction of Illinois net loss carryovers or the standard exemption. As discussed below, partners and S corporation shareholders may claim a refundable Illinois credit equal to their distributive share of the Illinois PTE Tax paid by the partnership or S corporation. The tax is imposed upon the Illinois net income of the partnership or S corporation, which is equal to Illinois base income after apportionment or allocation. The Illinois PTE Tax is imposed on electing partnerships and S corporations at a rate of 4.95%, the flat income tax rate applicable to individuals. ![]() Eighteen other states have also enacted PTE Taxes and 14 of those (including Illinois) are effective for 2021. The new Illinois PTE Tax was signed into law by Governor JB Pritzker on Aug( Public Act 102-658) and applies to taxable years ending on or after December 31, 2021, and prior to January 1, 2026. In Internal Revenue Service (IRS) Notice 2020-75, the IRS announced its approval of the federal deduction of state PTE Taxes paid by the entity in circumstances where the partner or shareholder receives a state tax credit, and the PTE Tax essentially is paid in lieu of the state income tax otherwise imposed upon the partner or S corporation shareholder. State income taxes paid by individuals, whether attributable to pass-through entity income or other income, are subject to the TCJA’s $10,000 “SALT Cap.” Illinois enacted a pass-through entity tax (PTE Tax) that may be elected by partnerships and S corporations to permit a federal deduction of state income taxes that otherwise are limited to $10,000 per year from 2018 to 2025 by the Tax Cuts and Jobs Act of 2017 (TCJA).
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