What is replacement tax

For an S corporation, the modification for income distributable to an entity subject to the Replacement Tax would be excluded; 1 for a partnership, the modifications for personal service income or a reasonable allowance for compensation paid and for income distributable to an entity subject to the Replacement Tax would be excluded. The PTE tax applies to electing partnerships and S corporations at a rate of 4.

A PTE is not required to remit nonresident withholding on the Illinois distributable share of income to a nonresident owner for those years. Each partner or shareholder of a PTE may claim a credit against its Illinois income tax liability equal to 4. This tax credit is also allowed for partners and shareholders in tiered partnerships and is determined for their distributive share of net income.

The PTE owner's share of the PTE tax credit that exceeds its respective Illinois income tax liability will be treated as an overpayment in line with Illinois's general rules. Nonresident partners or shareholders of an electing PTE are not required to file Illinois individual income tax returns for any year in which a PTE election is in effect.

This applies if the PTE owner's only source of income from Illinois is from the electing PTE and the owner's share of the PTE tax credit equals or exceeds its respective nonresident Illinois income tax liability. If the PTE fails to pay the tax, the partners or shareholders are directly liable to pay the PTE tax, including penalties and interest.

Liability of each partner or shareholder for any unpaid PTE assessment will be based on the ratio of that partner's or shareholder's share of the PTE's net income.

The Act does not specify whether an electing PTE partner's or shareholder's liability is affected based on when it first held an interest in the partnership or S corporation.

In Illinois, along with individual partners paying state tax on their respective distributions, partnerships themselves are required to pay the personal property replacement tax at a rate of 1. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.

Our primary focus here is on businesses operating solely in Illinois. However, if you're doing business in several states, you should be aware that your business may be considered to have nexus with those states, and therefore may be obligated to pay taxes in those states.

Also, if your business was formed or is located in another state, but generates income in Illinois, it may be subject to Illinois taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional. For further guidance on Illinois's corporate income tax and personal property replacement tax, check the Illinois Department of Revenue website ; for further guidance on the corporation franchise tax, check the Office of the Illinois Secretary of State.

And, if you're looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business , by Frederick Daily Nolo.

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Grow Your Legal Practice. Meet the Editors. Illinois State Business Income Tax. What kind of tax will you owe on Illinois business income? Corporations Illinois corporations are subject to Illinois's corporate income tax, personal property replacement tax, and corporation franchise tax. S Corporations An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect S status.

Partnerships Income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns. Sole Proprietorships Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.

Note on Multistate Businesses and Nexus Our primary focus here is on businesses operating solely in Illinois. Additional Information For further guidance on Illinois's corporate income tax and personal property replacement tax, check the Illinois Department of Revenue website ; for further guidance on the corporation franchise tax, check the Office of the Illinois Secretary of State. Updated: June 11, Talk to a Tax Attorney Need a lawyer?

Start here. Practice Area Please select Under current law, taxpayers are required to remit a franchise tax, also known as the personal property replacement tax, in addition to the Illinois income tax. For tax years beginning on or after January 1, , the Illinois replacement tax will begin phasing out and will be fully phased out by tax years beginning in The current replacement tax rates are 2. Below is the breakdown of the phase out for tax years beginning on:. The November of ballot will propose the following income tax rates P.

In the wake of the Wayfair decision, multiple states have implemented rules surrounding marketplace facilitators aimed at online sellers, such as Amazon, Ebay, etc.

Under the recently enacted Illinois law, if the marketplace facilitator has certified they will collect and remit sales tax on behalf of the seller, the seller does not include these sales in their gross receipts for Illinois sales tax purposes. Thus, the seller would decrease their taxable sales when filing Illinois sales tax returns.

Effective July 1, , Illinois will change from origin-based sourcing to destination-based sourcing for remote sellers that exceed the economic nexus threshold SB Many remote sellers were only required to collect the state sales tax under the local origin-based sourcing rules.