Tax Decoded | Spring 2018
Tax Reform’s Implications on Illinois
The full impacts of federal income tax reform on Illinois taxpayers are just coming into focus.
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
Like many state income tax laws, the Illinois Income Tax Act (IITA) uses the Internal
Revenue Code (IRC) as the starting point for calculating Illinois income tax liabilities. So,
when sweeping federal tax changes come along, the first question is the extent to which
Illinois will conform.
Unlike many other states, Illinois law provides for automatic conformity. In states that don’t
automatically conform, maintaining conformity becomes a timing and legislative variable.
In other words, conforming to or decoupling from federal tax law, and determining the
state’s tax impact of doing so, is a daunting task. Fortunately, along with Illinois’
automatic conformity, most of the federal tax changes are effective for 2018 and beyond,
which gives us some time to work through the implications for Illinois. Let’s get started.
First off, many of the headline-grabbing federal tax changes have little to no impact on
Illinois’ tax base. For instance, the reductions and changes in corporate and individual
income tax rates don’t have an impact on the Illinois tax base. Even the 20 percent
deduction for pass-through entities pursuant to IRC Section 199A doesn’t affect the
computation of the personal property replacement tax Illinois imposes on partnerships
and S corporations.
In the case of individual taxpayers, net income subject to Illinois income tax is determined
by federal adjusted gross income calculated before itemized federal deductions. In
addition, the federal tax reform change reducing personal exemptions to zero doesn’t
affect Illinois personal exemptions either because the federal personal exemptions weren’t
repealed — just reduced.
As for corporate taxpayers, an impact could be felt by taxpayers and the state since the
calculation of net income subject to Illinois income tax begins with federal taxable
income, including federally authorized deductions, and is subject to certain state
modifications. Corporations also use this same net income amount for calculating their
personal property replacement tax liability in Illinois.
All that said, there are several federal tax law changes that will affect corporate income
taxation in Illinois. Some will reduce the Illinois tax base, while some will increase the tax
base. Here are some highlights:
• IRC Section 163(j) is amended to limit the interest expense deduction to 30 percent of
adjusted taxable income plus the taxpayer’s interest income.
• IRC Section 199, the domestic production activity deduction,
was repealed. However, Illinois “decoupled” from this federal
deduction in 2017.
• IRC Section 243(a) is amended to reduce the dividends received
deduction, which can reduce the foreign dividends subtraction
allowed under IITA Section 203(b)(2)(O).
• IRC Section 965 is amended to require deemed repatriation of
certain income for federal income tax purposes. Much of this
income will be excluded from Illinois income taxation by the
foreign dividend subtraction under IITA Section 203(b)(2)(O).
We’re awaiting further guidance from the Illinois Department of
Revenue on this.
• IRC Section 951A provides for federal taxation of a U.S.
shareholder’s share of global intangible low-taxed income
of a controlled foreign corporation. However, a portion of
this income will also be excluded by the foreign dividend
subtraction (awaiting guidance).
• The 100 percent bonus depreciation enacted at the federal level
pursuant to IRC Section 168(k) will flow through to Illinois tax
returns, reducing Illinois income tax liability. The IITA was
amended a few years ago to decouple from federal bonus
depreciation; however, because of the mechanics of Illinois’
law, 100 percent depreciation federally is not subject to an
add-back at the Illinois level. This deduction is likely to cause
the biggest reduction in Illinois’ tax base in 2018 — allowing
immediate expensing in the year the item is acquired and
placed in service shifts the deduction to that first year rather than
spreading the deduction over the useful life of the item.
• IRC Section 179, a small business deduction, is amended
to double the maximum depreciation deduction from $500,000
to $1 million and to increase phase out of the deduction to
Among the federal changes, the one spurring Illinois legislators
into action is the state and local tax (SALT) deduction at the federal
level being limited to $10,000. This limitation doesn’t affect an
individual’s Illinois income tax liability. However, the limitation
will increase federal income taxes for many individuals, especially
those who live in areas with high property taxes.
This has triggered Illinois legislation to “work around” the federal
limit by recharacterizing SALT payments as “charitable deductions”
for which there is no comparable federal limitation. Recently
introduced in the Illinois General Assembly, HB 4237 would
authorize the establishment of charitable funds at the state and
county level. Taxpayers could make payments to the charitable
funds in amounts equal to their local property tax and Illinois
income tax liabilities and then receive charitable deductions for
federal income tax purposes. Further, HB 4563 would allow
taxpayers to receive a credit against their property taxes for
donations made to a local school district foundation. Both
proposals depend on the IRS agreeing that the “donations” would
qualify as charitable donations for federal income tax purposes.
Without going into detailed analysis of federal law, I believe
it’s unclear the IRS will agree to qualify these donations for
At this point, it’s too soon to tell if Illinois will see a net gain or loss
in income tax revenues because of federal tax reform, but there’s
plenty going on as the federal legislation is implemented and the
effects flow down to the state level.