Earlier this year, Illinois enacted a pass-through entity tax (PTE) that allows S Corporation and partnerships to elect to be taxed at entity level for income tax that otherwise would have been payable and deductible by its partners / shareholders. With this election, the tax on the business income is now considered imposed on the S-Corporation or Partnership instead of the individual owner(s) and thus deductible for federal income tax purposes. This reduces the ordinary income of the business and allows its owners to avoid the $10,000 SALT limitation imposed by the Tax Cuts and Jobs Act of 2017.

Illinois PTE Tax Election Rules:

  • Applies to tax years ending on or after December 31, 2021, and before January 1, 2026
  • PTE tax is an annual election made on the IL-1120-ST or IL 1065. The election is irrevocable for that tax year.
  • Applies to both IL resident and nonresident S-Corporation shareholders/partners.
  • The tax rate is 4.95%. The election can be made for ALL owners of an S-Corporation or Partnership. If the owner is another S-Corporation or Partnership, then the credit passes through to the owners of those entities.
  • While you can deduct this tax for federal tax purposes you will have to add this back for Illinois purposes.
  • Estimated tax payments are waived for 2021, but if you expect your liability to be greater than $500 in 2022 you’ll have to set up Illinois ES tax payments to be paid by the entity.
  • IMPORTANTTiming for making the tax payment: For state tax purposes you have until the due date of the tax return, including extensions to make the payment. However, to secure the federal deduction, payments must be made before the end of the tax year (i.e. to secure the 2021 deduction, tax payments must be made by 12/31/21).

Do not hesitate to reach out with questions and be sure to contact your Bronswick Benjamin PC trusted advisor to see if this election can be beneficial to you and your business.

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