June 17, 2024

Significant Changes to Illinois Income Tax Law Following HB 4951 Enactment

By John Bonk, Partner, National Co-Leader - State & Local Tax

Significant Changes to Illinois Income Tax Law Following HB 4951 Enactment State & Local Tax

Governor J.B. Pritzker recently signed House Bill 4951 (HB 4951), which impacts Illinois Taxpayers and Financial Organizations with important changes to the tax law. While there are changes to other tax types, we have focused on the income tax changes impacting apportionment and net loss deductions.

Key Changes to Financial Organization Taxation

Starting for tax years ending on or after December 31, 2024, HB 4951 introduces a revised method for calculating the amount of investment and trading income apportioned to Illinois. The new formula involves multiplying total receipts from such income by a fraction. The numerator is the organization’s Illinois-specific receipts, and the denominator is the total gross receipts from all financial organization activities, excluding investment and trading income. This adjusted figure will constitute part of the organization’s sales apportionment factor numerator.

This shift aims to align income attribution with the proportion of the financial organization’s business activities in Illinois. The adaptation reflects an evolution from the former rule where investment and trading income was assigned to the financial organization’s fixed place of business with the majority of substantive contacts. HB 4951’s approach harmonizes Illinois with the updated Multistate Tax Commission (MTC) model and practices adopted by other states.

Limitation on Net Loss Deductions (NLDs)

Additionally, HB 4951 sets a new ceiling on the Net Loss Deduction (NLD) for corporations (excluding S corporations), capping it at $500,000 per year for each tax year ending between December 31, 2024, and December 31, 2027. The counting of years toward the NLD carryover period will exclude any year where the NLD would surpass $500,000. This cap is more favorable for corporations compared to the previous $100,000 limit applicable to tax years ending between December 31, 2021, and December 31, 2024.

Implications and Actions

Financial institutions operating in Illinois should closely review these changes and prepare for their impact on tax planning and compliance strategies. Modifications to the apportionment of investment and trading income, along with the adjusted NLD cap, may necessitate a re-evaluation of tax liabilities and the structuring of financial activities.

We recommend consulting with a Marcum tax professional for a thorough understanding and application of these changes.

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