The Illinois General Assembly overrode Governor Rauner's veto to pass a budget bill on July 6 of this year. Illinois Public Act 100-0022, (effective July 1, 2017), makes significant tax law changes, some specific to the manufacturing industry.
Tax Rate Changes
Illinois corporations are subject to two separate taxes, corporate income tax and replacement tax. The current corporate income tax rate is 5.25 percent and the replacement tax rate is 2.5 percent, for a combined tax rate of 7.75 percent. Note that flow through entities, like S corporations, partnerships and LLC's are subject only to a 1.5 percent replacement tax. As of July 1, the corporate income tax rate increased to 7 percent. Manufacturers with a December year end will be subject to a blended income tax rate of 6.125 percent plus the replacement tax of 2.5 percent which was not changed, resulting in a total tax of 8.625 percent. For tax years beginning on or after July 1, the combined tax for corporations will be 9.5 percent, making Illinois the 15th highest taxing state for corporations according to the 2018 Tax Foundation report.
Corporations may find some relief if the majority of their income was earned prior to July 1st. Those taxpayers may make an irrevocable election to use specific accounting to take advantage of the lower income tax rates prior to July 1. Taxpayers making this election can effectively create two tax periods and use both the old and neww tax rates for each period. This election is completed by filing Schedule SA with your Illinois income tax return. All corporations should speak with their tax adviser to see if using this election can save taxes during this hybrid income tax rate year.
Tax increases can originate by raising tax rates or removing previously allowed deductions. Unfortunately, the Illinois legislature has done both with this legislation. The IRS allows a deduction to manufacturers called the Domestic Production Activities Deduction. This is a 9 percent reduction of taxable income for qualified domestic activities. For tax years ending on or after Dec. 31, 2017, this deduction must be added back to net income for purposes of the corporate income and replacement taxes.
R & D Credit
Illinois has reinstated and made retroactive to 2016 the Research and Development credit. Taxpayers may want to consider amending their 2016 tax returns to claim this favorable tax credit.
Sales and Use Tax
Effective July 1, Illinois reinstated the sales and use tax exemption for machinery and equipment purchased for use in the graphic arts industry. Another change was the removal of the 20 percent exemption of the proceeds from the sales of gasohol. Effective July 1, 100 percent of the proceeds of gasohol are subject to sales and use tax.
Be sure to review your 2017 (and 2018) estimated tax requirements not only for your corporation, but also for its owners to avoid any underpayment penalties which could result from these recent changes in the tax law.
The new budget will continue to have a variety of implications on taxpayers both as individuals and across many industries. With additional changes unfolding, tax planning and proper financial guidance is critical to minimizing your tax burden.
• Steven Goluch is a partner with Weiss & Company LLP, a Glenview based accounting firm.