- Illinois 2007 Tax Legislation: Franchise Tax Amnesty Expires on March 17; Important Income Tax Amendments
- March 17, 2008
- Law Firm: Winston & Strawn LLP - Chicago Office
In 2007, the Illinois General Assembly rejected a gross receipts tax proposed by Governor Blagojevich. Instead, the General Assembly passed legislation, signed into law as Public Acts 95-0233 and 95-0707, implementing a franchise tax amnesty program and adopting a variety of amendments to the Illinois Income Tax Act.
Franchise Tax Amnesty
Corporations are annually required to pay to the Illinois Secretary of State a franchise tax for the privilege of conducting business in Illinois. The tax is equal to 1/10th of 1% of the corporation's stated capital allocated to Illinois, based on business activities conducted and property located within Illinois. Key features of the new amnesty program, which is administered by the Secretary of State, are:
- Limited Amnesty Program Period. The amnesty program runs from February 1, 2008 through March 17, 2008. To qualify for amnesty, delinquent franchise taxes must be disclosed on forms available on the Secretary of State's web site (http://www.cyberdriveIllinois.com), paid to, and accepted by the Secretary of State within the amnesty period. Note, the Secretary of State routinely rejects franchise tax filings for minor discrepancies. Accordingly, corporations intending to participate in amnesty should do so as soon as possible in order to allow sufficient time to resolve potential filing discrepancies prior to the March 17 amnesty deadline.
- Eligible Corporations. Corporations that have not previously filed franchise tax returns, as well as corporations that have simply underreported franchise taxes, are eligible for amnesty. Corporations that are the subject of a criminal investigation or are the subject of civil or criminal action for failure to pay franchise taxes are not eligible for amnesty. The amnesty program does not extend to limited liability companies, limited partnerships, limited liability partnerships, and the (non-franchise tax) fees to which they are subject.
- Disclosure Period. Corporations that have previously failed to file franchise tax returns must pay taxes due for all delinquent years to qualify for amnesty. Corporations that have previously filed franchise tax returns, but simply underreported taxes on those returns, are required to disclose and pay delinquent taxes for the most recent four year period, instead of the normal seven year statute of limitations period.
- Benefits of Disclosure. The primary benefit of amnesty is that the 10% penalty for delinquent franchise taxes and interest currently accruing at the rate of 1% per month on delinquent taxes are automatically waived. Corporations that fail to participate in amnesty remain subject to the 10% penalty, and the interest rate on delinquent taxes will increase from 1% to 2% and apply retroactively for past periods of delinquency as well as for future periods of delinquency.
Income Tax Amendments
The income tax amendments are effective for tax years ending on or after December 31, 2008. They include adjustments to the computation of taxable income, apportionment methods, and tax withholding procedures. Highlights are summarized below.
- Adjustment to Computation of Taxable Income to Negate Income Shifting to Other Tax Jurisdictions. Corporations are required to add back to taxable income deductions for interest, royalties, and insurance premiums paid to certain corporate affiliates. These affiliates include those that meet the legal requirements for inclusion in the taxpayer's unitary business group, with the exception that they do not have to use the same apportionment method as the taxpayer. The purported purpose for this amendment is to limit the ability of Illinois corporate taxpayers to shift income to their affiliates located in "tax haven" jurisdictions.
- Adjustments to Apportionment of Taxable Income Adopt Market Based Sourcing.
- Service Income. Under the legislation, income from the performance of services is now apportioned to Illinois to the extent the benefit of such services is enjoyed — i.e., the market for the services is — within Illinois. Under former Illinois law, such income was sourced to Illinois to the extent the preponderance of the services (measured by costs of performance) were performed within Illinois.
- Financial Institution Interest Income. Similarly, interest income earned by financial institutions is now sourced to Illinois to the extent the payor of the interest income is within Illinois. Under former Illinois law, such interest income was sourced to Illinois if the interest income was received by the financial organization within Illinois.
- Adjustments Requiring Withholding and Remittance of Tax by Pass-Through Entities. The amendments also adopt a provision, commonly found in other state income tax statutes, requiring pass-through entities — partnerships, S Corporations, and trusts — to withhold from nonresident partners, shareholders, and beneficiaries and remit to the Department of Revenue, income tax applicable to their distributive share of business income apportionable to Illinois.