Illinois Enacts SALT Cap Workaround

On August 27, 2021, Governor Pritzker signed into law the Optional Pass-Through Entity Tax, a state and local tax cap (“SALT Cap”) workaround for partnerships and S corporations for tax years 2021 – 2025. (Please see our prior release.) The SALT Cap workaround allows the partnership or S corporation to elect to pay income tax on its Illinois net income and the partners and shareholders to circumvent the $10,000 cap on SALT itemized deductions on their federal individual income tax returns.

At this time, we are waiting for additional guidance on the process and timing for electing the IL PTE tax for tax year 2021 from the Illinois Department of Revenue including estimated payments. However, we have included information below on what we currently know from the bill that was passed:

  • Applicable Tax Years: This election is effective for tax years ending on or after December 31, 2021 and beginning prior to January 1, 2026. If the federal state and local tax cap is repealed, this election will be revoked.
  • Election: This election must be made annually, and once made, is irrevocable for that tax year. Additional guidance from the Illinois Department of Revenue is required to determine the form and date of the election.
  • Tax Rate: The tax rate is 4.95% of Illinois net income.
  • Eligible Taxpayers: Partnerships and S-corporations are eligible to make this election.
  • Credit: The taxpayer is allowed an amount equal to 4.95% of the partner or shareholder’s distributive share of the Illinois net income of the electing partnership or S-corporation.
  • Nonresident: A nonresident is not required to file an Illinois tax return if the only source of net income is from the entity making the PTE tax election and the credit allowed to the partner equals or exceeds the individual’s liability for the tax imposed.

Other notable states that have recently passed a PTE tax workaround include California and New York. Each state’s PTE tax varies. It is important to review these elections with your tax professional to determine if the elections are available and would be beneficial for you and your business. Please consult your Miller Cooper tax advisor.

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