LEGISLATIVE ALERT!
The Illinois State Income Tax Act passed last July includes a 50% tax increase on Partnership, LLC and LLP Income! A Member accountant reported that just for his clients alone, it would mean a $2,000,000 increase in tax dollars. Most of us believed an income tax increase was rejected by the Illinois legislature. Many service businesses are discovering that simply isn't true. This tax increase applies to all partnerships and to LLCs and LLPs that file as partnerships, including accountants, doctors, dentists, consultants, realtors, and all similar service businesses.
What’s odd is
that not a penny of the increased replacement tax will benefit the state:
100% of replacement tax dollars are distributed to municipalities
statewide. The Illinois Chamber reports that IL-SB 1912, a
hidden amendment to this Act, Deep in SB 1912 (now PA 96-0045) was amended to
subject most personal service income of partnerships, LLCs and LLPs
to a brand new tax – a 1.5% Illinois replacement income tax.
The 1.5% replacement tax is in addition to the personal income tax of 3%
paid by each partner receiving his or her distributive share of partnership
income, resulting in a 50% increase in tax.
§ Previously, partnerships were allowed a replacement tax subtraction for "reasonable compensation for personal services" paid to partners. This was to be comparable to the deduction S Corps take for shareholder salaries. SB 1912 now limits partnership deductions to "guaranteed payments" to partners and disallows a deduction for all other income distributions of partnerships.
§ Example: many firms distinguish between "equity" and "income" partners. Income partners receive a guaranteed payment (salary) each month whether the partnership makes a profit or not. Equity partners receive a distributive share of the partnership profits according to their individual share of ownership. The distributable income to equity partners is considered employment income by the federal IRS and subject to FICA and Medicare tax as well as federal individual income tax. For Illinois purposes, the net effect of SB 1912 will be taxing the personal service income of equity partners twice: once at the partnership level (the 1.5% replacement tax) and also under the 3% individual Illinois income tax, resulting in a 50% increase in tax on personal service income!
§ SB 1912 appeared as a floor amendment on July 15, the last day of the extended legislative session. The change was buried more than halfway (page 156) into the huge budget implementation bill and was represented as a technical correction. It passed both houses of the legislature and was signed by Governor Quinn on July 15.
§ Not a penny of the increased replacement tax will benefit the state: 100% of replacement tax dollars are distributed to municipalities statewide. In fact, state income tax revenues may actually decrease as a result of SB 1912 since increasing a partnership’s tax liability will reduce profits distributed to partners and taxed under the individual income tax.
What can you do about this?
The IL Chamber is leading an effort to overturn this onerous 50% tax boost on employers. The Downers Grove Chamber wants to engage you to impact change. We are communicating directly with legislators and growing grassroots opposition to deliver the message, “this tax increase must not stand.” For a list of State legislators, please click here. Please join the Illinois Chamber and the Downers Grove Chamber and help us push for reforms against damaging tax increases.