On August 27, 2021 Governor Pritzker has signed into law the Optional Pass-Through Entity Tax. This legislation provides owners of partnerships and S-corporations the ability to in effect deduct individual income taxes at the partnership or S-corporation level. The deduction of these individual income taxes can be taken at their full amount without limitation. This tax planning approach bypasses the state and local income tax cap of $10,000 many taxpayers face when they prepare their individual income tax returns.
This election is available for tax years ending on or after December 31, 2021, and beginning prior to January 1, 2026. The election must be made by the entity on an annual basis. The S-corporation or partnership must make quarterly payments of estimated tax for any year the election is in effect. Under the legislation, the manner and timing of making the annual election will be determined by the Illinois Department of Revenue, and is yet to be announced at this time. This opportunity will be revoked if the Federal government passes legislation removing the $10,000 state and local tax deduction cap at the individual level.
Each owner of the pass thru entity may claim a credit on their respective Illinois individual income tax returns equal to their share of the income taxes paid by the entity.
This pass thru entity tax is equal to 4.95% of the partner/member or S-corporation shareholder’s respective flow thru income. This tax rate being paid at the business entity level is exactly the same as the rate at the individual level. It would appear that therefore, there is no reason not to make the election.
If you have questions about this tax law, or any other tax legislation, contact KRD at 847-240-1040 or contact us online.
