Article

Illinois budget legislation includes multiple tax changes

July 24, 2025 · Authored by Shannon Bonner, Mark Hawkins

On June 16, 2025, the Illinois Governor signed HB 2755, the state’s budget legislation (the Legislation), that includes significant tax changes. Specifically, the Legislation enacted and/or changed various income and sales tax provisions.

Income tax

The Legislation made many changes to the Illinois income tax provisions including:

Change to Finnigan Rule:

For combined reporting purposes, the Legislation enacted the Finnigan method of apportionment when computing the sales factor numerator for tax years ending on or after Dec. 31, 2025. Specifically, each taxpayer member of the unitary business group must include in its sales factor numerator a portion of the aggregate Illinois sales of non-taxpayer members based on a ratio. The ratio is calculated by the Illinois sales of the members (numerator) divided by the total combined sales of all the taxpayer members of the unitary group (denominator).

Additionally, if inclusion of sales in the sales factor or numerator of the sales factor depends on whether a taxpayer is considered taxable in another state, that taxpayer shall be considered taxable in any state in which any member of its unitary business group is considered taxable. As acknowledged by the Illinois Department of Revenue (the Department) in its guidance regarding this legislation, shifting to the Finnigan method of apportionment will also have implications in how taxpayers compute Illinois throwback sales of tangible personal property and throw-out receipts for services.

GILTI deduction

For taxable years ending on or after Dec. 31, 2025, the Legislation limits the global intangible low-taxed income (GILTI) deduction to 50% of the amount received or deemed received. Previously, Illinois allowed for a full deduction.

IRC section 163(j) deduction changes:

For taxable years ending on and after Dec. 31, 2025, for taxpayers subject to the IRC section 163(j) deduction limit, the reduction in the amount of interest for which a deduction is allowed by reason of Section 163(j) shall be treated as allocable first to persons who are not foreign persons and then to such foreign persons. Illinois considers this change to align the state with IRC section 59A(c)(3) and the federal consolidated return treatment.

Addback provisions for interest and intangible expenses:

Illinois no longer allows certain exceptions to the related-party addback provisions for unitary filers. Specifically, for taxable years ending on or after Dec. 31, 2025, the only exceptions permitted when calculating related-party expenses additions on Schedule 80/20 are:

(i) an item of interest paid, accrued, or incurred, directly or indirectly, to a person if the taxpayer can establish, based on a preponderance of the evidence, both of the following:

(a) the person, during the same taxable year, paid, accrued, or incurred, the interest to a person that is not a related member, and

(b) the transaction giving rise to the interest expense between the taxpayer and the person did not have as a principal purpose the avoidance of Illinois income tax, and is paid pursuant to a contract or agreement that reflects an arm's-length interest rate and terms; or

(ii) an item of interest paid, accrued, or incurred, directly or indirectly, to a person if the taxpayer establishes by clear and convincing evidence that the adjustments are unreasonable; or if the taxpayer and the Director agree in writing to the application or use of an alternative method of apportionment.

Under prior law, Illinois permitted exceptions to the related party interest expense addback if the taxpayer could document either: 1) the expense was paid to an 80/20 company that is subject to a tax in the foreign country or state (except other combined/unitary states) measured by net income with respect to the interest received; or 2) the expense relates to a contract entered into at arm’s length rates and terms and the principal purpose for the payment was unrelated to federal or Illinois tax avoidance.

Pass-through entity (PTE) capital gains and losses allocation changes

The Legislation provides that gains and losses from sales or exchanges of shares in an S corporation or from an interest in a partnership, other than an investment partnership, are allocated to Illinois if the PTE is taxable in Illinois. The gain and losses are allocated in proportion to the average of the PTE’s Illinois apportionment factor in the year of the sale or exchange and the two years immediately preceding the year of the sale or exchange. Importantly, this change was effective on June 16, 2025, the effective date of the Legislation.

The Department issued an informational bulletin summarizing the legislative income tax changes as a result of the Legislation.

Sales and use tax changes

The Legislation includes many sales and use tax changes including, but not limited to, the following:

Economic nexus changes

Effective Jan. 1, 2026, the Legislation eliminates the 200-transaction count threshold when evaluating economic nexus for marketplace facilitators and remote sellers. As such, economic nexus for sales tax purposes will be determined solely based on whether receipts are equal to or greater than $100,000 in a 12-month period. For marketplace facilitators, the $100,000 relates to cumulative gross receipts from sales of tangible personal property to purchasers in Illinois by the marketplace facilitator and by marketplace sellers selling through the marketplace. The Legislation requires taxpayers to make such determination on a quarterly basis.

Marketplace facilitator defined

The definition of “marketplace facilitator” is amended to mean “a person who, pursuant to an agreement with an unrelated third-party marketplace serviceman, directly or indirectly through one or more affiliates facilitates sales of service by that unrelated third-party marketplace serviceman through: (1) listing or advertising for sale by the marketplace serviceman in a marketplace, sales of service that are subject to tax under this Act; and (2) either directly or indirectly, through agreements or arrangements with third parties, collecting payment from the customer and transmitting that payment to the marketplace serviceman regardless of whether the marketplace facilitator receives compensation or other consideration in exchange for its services.

Sales of services out of state

Beginning Jan. 1, 2026, a serviceman maintaining a place of business in Illinois that makes sales of service to Illinois customers from a location outside of Illinois is required to collect and remit state and local service occupation tax as well as the service use tax. The term “serviceman” is defined as any person who is engaged in the occupation of making sales of service.

New penalties for taxpayers with insufficient documentation

The Legislation creates a new tax/penalty regime for taxpayers that file sales and use tax returns that are incomplete or otherwise without supporting documentation. Effective Jan. 1, 2026, if a taxpayer fails to provide the information, schedules or other documentation needed to determine the location of the sale, the Department will impose a 15% tax on the gross receipts associated with such sales in lieu of penalties for filing returns the agency cannot process.

Amnesty programs

The Legislation includes multiple amnesty programs as follows:

General amnesty program

The Legislation creates a six-week general amnesty program beginning on Oct. 1, 2025, through Nov. 17, 2025, for tax liabilities for any period ending after June 30, 2018, and before July 1, 2024. The amnesty program benefits taxpayers as the Department will abate and not seek to collect any interest or penalties that may be applicable, if all conditions of the amnesty are met.

Franchise tax and license fee amnesty

The Legislation includes a franchise tax and license fee amnesty established by the Illinois Secretary of State for a period between Oct. 1, 2025, and Nov. 15, 2025, and will apply to franchise tax or license fee liabilities for any tax period ending after June 30, 2019, and on or before June 30, 2025. Upon payment of all franchise taxes and license fees due, the Secretary of State will abate and not seek to collect any interest or penalties that may be applicable.

Remote retailer amnesty program

The Legislation enacts a remote seller amnesty program from Aug. 1, 2026, through Oct. 31, 2026. During this period the Department will accept returns and payment of state and local retailers' occupation taxes at a simplified retailers' occupation rate for eligible transactions that occur during the eligibility period. The eligibility period runs from Jan. 1, 2021, through June 30, 2026, and eligible transactions include “the sale of tangible personal property by a remote retailer to an Illinois customer that occurs during the eligibility period and that requires the remote retailer to ship or otherwise deliver the tangible personal property to an address in the State.”

If a taxpayer meets all of the remote retailer amnesty requirements, the Department will abate and not seek to collect any interest or penalties that may be applicable with respect to the eligible transactions. In addition, remote retailers will use a simplified sales tax rate intended to reflect both an average locality tax rate and the state sales tax rate.

What’s next?

The Legislation’s significant tax changes should be reviewed by taxpayers to understand the potential impact, if any, on its Illinois filings. Taxpayers should reach out to their state tax advisor with any questions about the Legislation including whether participation in one of the above amnesty programs would be beneficial based on its specific facts and circumstances. For more questions, contact our authors Shannon Bonner and Mark Hawkins.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.