Legislative Alert cont'd.. 

§  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.” Our early efforts have been encouraging and we have a real chance to repeal this tax increase before it takes effect. However, much more work lies ahead in order to ensure success.

Join the Illinois Chamber and the Downers Grove Chamber and help us push for reforms to government programs and against damaging tax increases.