Bill
SB 3799
Allows electing partnerships and S corps in Illinois to pay an entity-level tax starting 2026, with two bases: full distributive share or Illinois-sourced income.
SB3799 Summary – 104th Illinois General Assembly (Inc TX-Entity Base)
Overview
- Purpose: Introduces an optional entity-level income tax for partnerships and Subchapter S corporations (S-corporations) under the Illinois Income Tax Act. The bill adds a choice starting in 2026 to determine the entity-level tax base using either a full distributive share method or an Illinois-sourced income method. The broader context of the bill also includes various existing tax credits and surcharges, but the primary new feature is the passthrough entity tax election with two possible bases.
Main purpose and intent
- Create an elective entity-level tax for partnerships and S corporations that pay tax at the entity level instead of (or in addition to) passing net income to partners.
- Provide two alternative bases for calculating the tax base:
- Full distributive share method: tax on the total distributive share of net income allocable to Illinois resident partners, regardless of the apportionment for nonresident partners.
- Illinois-sourced income method: tax only on the portion of each partner’s distributive share that is attributable to Illinois sources, determined under Illinois Section 304 rules and related guidance.
- Allow annual irrevocable elections for each taxable year and specify treatment of credits and cross-credit mechanics.
Key provisions and changes
- New election (P.A. 104- bill) allowing entity-level tax on:
- 4.95% of net income for the electing partnership or S corporation (tax at the entity level).
- An annual, irrevocable election to choose the tax base method:
- Full distributive share method (Section 2.1(A))
- Illinois-sourced income method (Section 2.1(B))
- Eligibility and scope:
- Applies to partnerships (excluding publicly traded partnerships under Section 7704) and to Subchapter S corporations.
- The election applies for the taxable year and, if the entity elects, impacts how partners’ and shareholders’ tax liabilities are determined.
- Credit mechanics (existing framework retained):
- The bill preserves credit structures linked to entity-level tax and credits for partners/shares under the new framework, with credits allocated to partners in proportion to income/distributive share, and subject to caps and ordering rules (i.e., credits cannot reduce liability below zero; carryforwards apply per existing law).
- Nonresidents may have different filing implications depending on whether they have Illinois-source income via the electing entity.
- Interaction with existing provisions:
- The bill is harmonized with the current Illinois framework for pass-through credits, net income definitions, and entities’ liability for tax where applicable.
- It aligns with current pass-through and entity-level tax concepts, but introduces a choice-based approach to determine the tax base for the entity-level tax.
- Effective date:
- Immediate effectiveness for the entity-level tax election (as introduced). The key new election specifically references an effective date relating to the new election framework; the bill text indicates the new entity-level election provisions become operative at law upon enactment.
Who is affected
- Affected entities:
- Partnerships (non-publicly traded) and Subchapter S corporations operating in Illinois.
- Affected individuals:
- Partners and shareholders in electing entities may face changes in how their Illinois tax is computed, depending on whether the entity uses the full distributive share method or Illinois-sourced income method.
- Administrative/filing impact:
- The Department of Revenue would oversee the election process, ensure proper computation, and administer credits/offsets consistent with the new framework.
Procedural and timeline considerations
- Election timing:
- The new framework requires an annual election for each taxable year, with the chosen method applying to that year.
- The election is irrevocable for the tax year.
- Filing and compliance:
- Taxpayers must follow Department-prescribed forms and procedures to elect and report the entity-level tax and any corresponding credits.
- Interaction with existing credits:
- The framework preserves existing credits (e.g., investment, training, research and development, environmental remediation, River Edge/River Zone credits) and their carry-forward mechanics, with applicability to the entity-level tax and pro rata credits to partners as applicable.
Notes
- The bill’s text provided is extensive and contains many existing provisions related to other credits (e.g., Enterprise Zone, High Impact Business, Blue Collar Jobs Act) that are retained and applied in the context of the new passthrough entity tax framework.
- As introduced, SB3799 emphasizes the new election mechanism and its two possible bases, with the remainder of the bill preserving Illinois’ established tax credit ecosystem and surcharge rules.
Effective date
- The act takes effect upon becoming law.
Compiled from official sources — confirm details with the bill’s official record.
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