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Legal Update

Illinois Governor Approves Corporate, Individual Income Tax Increases

25 January 2011
Mayer Brown Legal Update

Illinois Governor Pat Quinn signed legislation (SB 2505) on January 13, 2011, to increase the state's corporate income tax rate and personal income tax rate. Facing a looming financial crisis and one of the largest budget shortfalls of any state, the Illinois Legislature voted to pass the controversial legislation during a lame-duck session with razor thin majorities in both the House and Senate.

Corporate income tax rate. Under the new law, the corporate income tax rate rises from 4.8 percent to 7 percent for 2011-2014, then declines to 5.25 percent until 2025 when the rate returns to 4.8 percent.

Personal income tax rate. The new law increases the personal income tax rate from 3 percent to 5 percent for calendar years 2011-2014 and then decreases it to 3.75 percent from 2015-2024 and 3.25 percent starting in 2025.

Spending limit provision. The new law includes a provision tying the revenue increases to a state spending cap. It requires that the income tax rates revert to the current levels (3 percent of net income for individuals, trusts and estates and 4.8 percent of net income for corporations) if lawmakers approve spending increases for fiscal years 2012-2015 that exceed 2 percent of the prior year's total. Any spending beyond the prescribed limits would require approval by the Comptroller and Treasurer, as well as strong bipartisan support in the General Assembly.

Net loss carryover. The new law suspends the "net operating loss" provisions, stating that in the case of a corporation (other than an S corporation), no carryover deduction will be allowed under ILCS § 5/207 (Net Losses) for any taxable year ending after December 31, 2010 and prior to December 31, 2014. For purposes of determining the taxable years to which a net loss may be carried under ILCS § 5/207(a), no taxable year for which a deduction is disallowed under this provision would be counted.

Estimated tax safe harbor provision. For purposes of estimated tax payments, the new law amends the definition of the term "required annual payment" to mean the lesser of: (i) 90 percent of the tax shown on the return for the taxable year or, if no return is filed, 90 percent of the tax for such year; (ii) for installments due prior to February 1, 2011, and after January 31, 2012, 100 percent of the tax shown on the return for the preceding taxable year if a return showing a liability for tax was filed by the taxpayer for the preceding taxable year and such preceding year was a taxable year of 12 months; or (iii) for installments due after January 31, 2011, and prior to February 1, 2012, 150 percent of the tax shown on the return for the preceding taxable year if a return showing a liability for tax was filed by the taxpayer for the preceding taxable year and such preceding year was a taxable year of 12 months.

Estate tax provision amended. The new law also amends the definition of "state tax credit" for estate tax purposes. For persons dying after December 31, 2010, "state tax credit" means the full amount calculable under the Internal Revenue Code as the credit would have been computed and allowed on December 31, 2001, with an exclusion amount of $2 million, and with a reduction to the adjusted taxable estate for any qualified terminable interest property election.

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