Multi-state Income Taxes | Companies expanding into Illinois

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If you have recently expanded your business into this state, or if you’re considering doing so, understanding the cost of apportionment is important to help you accurately report earnings to the IRS and local governments. 

• S Corporations
  • Filing Requirements
    • You must file Form IL-1120-ST, Small Business Corporation Replacement Tax Return, if you are a small business corporation, as defined in Internal Revenue Code (IRC), Section 1361(a), that:
    • has net income or loss as defined under the Illinois Income Tax Act (IITA); or
    • is qualified to do business in the state of Illinois and is required to file U.S. Form 1120S (regardless of net income or loss).
    • If you own a qualified subchapter S subsidiary (QSSS) defined in IRC, Section 1361(b)(3), as well as any other entity that is disregarded as an entity separate from you for purposes of the IRC, it is likewise disregarded as a separate entity for purposes of the IITA. You must include all items of income, deduction, loss, credit, etc. from such entities on your return as if they were earned or incurred by you directly.
  • Allocation & apportionment
    • One Factor Formula: Sales
    • Market-based apportionment
      • Illinois follows the market-based rule in sourcing receipts from performance of services to the state. Gross receipts from the performance of services are sourced to Illinois if the services are received in Illinois.

• Partnerships
  • Filing Requirements
    • You must file Form IL-1065, Partnership Replacement Tax Return, if you are a partnership, as defined in Internal Revenue Code (IRC), Section 761(a), that has base income or loss as defined under the Illinois Income Tax Act (IITA). A partnership that has elects an IRC, Section 761, exclusion from the federal partnership provisions is also excluded for purposes of the IITA.
    • Lloyd’s plan of operation: A person transacting an insurance business organized under a Lloyd’s plan of operation may file a Form IL-1065 on behalf of all its underwriters, including corporations and residents. You must refer to Illinois Income Tax Regulations, Section 100.5130, for specific instructions on how to properly complete Form IL-1065 and determine what you need to attach to your return.
    • All underwriters who are members of an insurance business organized under a Lloyd’s plan of operation may be included on Form IL-1065. No credit is allowed to any underwriter for its share of tax paid on Form IL-1065.
    • Investment or Illinois Lottery: If you qualify as an investment partnership, you are not required to file Form IL-1065, even if you are required to file a federal tax return (federal Form 1065, U.S. Return of Partnership Income). See Illinois Income Tax Act (IITA) Section 1501(a)(11.5) for more information.
    • If you are a partnership organized for the sole purpose of playing the Illinois State Lottery you are not required to file a Form IL-1065.
    • If you are an investment partner that elects to pay PTE tax, then you must file Form IL-1065 and check the box making the PTE tax election. An investment partnership making the PTE tax election should complete the PTE Income worksheet in the Form IL-1065 instructions as if it did not qualify as an investment partnership.
  • Allocation & apportionment
    • One factor formula: Sales
    • Market-based apportionment
      • Revenues received from customers within the state

• Employees & individual filers
  • The following individuals are required to file a 2021 Illinois individual income tax return:
  • If you were an Illinois resident, you must file Form IL-1040 if:
    • you were required to file a federal income tax return, or
    • you were not required to file a federal income tax return, but your Illinois base income from Line 9 is greater than your Illinois exemption allowance.
  • If you were an Illinois resident who worked in Iowa, Kentucky, Michigan, or Wisconsin, you must file Form IL-1040 and include as Illinois income any compensation you received from an employer in these states. Compensation paid to Illinois residents working in these states is taxed by Illinois. Based on reciprocal agreements between Illinois and these states, these states do not tax the compensation of Illinois residents.
    If your employer in any of these states withheld that state’s tax from your compensation, you may file the correct form with that state to claim a refund. You may not use tax withheld by an employer for these states as a credit on your Illinois return. 
  • If you were a retired Illinois resident who filed a federal return, you must file Form IL-1040. However, certain types of retirement income ( e.g., pension, Social Security, railroad retirement, governmental deferred compensation) may be subtracted from your Illinois income. For more information, see the instructions for Line 5 and Publication 120, Retirement Income.
  • If you were a part-year resident , you must file Form IL-1040 and Schedule NR, Nonresident and Part-Year Resident Computation of Illinois Tax, if:
    • you earned income from any source while you were a resident,
    • you earned income from Illinois sources while you were not a resident, or
    • you want a refund of any Illinois Income Tax withheld.
  • If you were a nonresident, you must file Form IL-1040 and Schedule NR if 
    • you earned enough taxable income from Illinois sources to have a tax liability ( i.e., your Illinois base income from Schedule NR, Step 5, Line 46, is greater than your Illinois exemption allowance on Schedule NR, Step 5, Line 50), or
    • you want a refund of any Illinois Income Tax withheld in error. You must attach a letter of explanation from your employer.
  • NOTE: If you are a nonresident and your only income in Illinois is from one or more partnerships, S corporations, or trusts that withheld enough Illinois Income Tax to pay your liability, you are not required to file a Form IL-1040.
  • If you were an Iowa, Kentucky, Michigan, or Wisconsin resident who worked in Illinois, you must file Form IL-1040 and Schedule NR if 
    • you received income in Illinois from sources other than wages, salaries, tips, and commissions, or
    • you want a refund of any Illinois Income Tax withheld.
    • If you received wages, salaries, tips, and commissions from Illinois employers, you are not required to pay Illinois Income Tax on this income. This is based on reciprocal agreements between Illinois and these states.  The reciprocal agreements do not apply to any other income you might have received, such as Illinois lottery winnings.
  • If you were an Illinois resident who was claimed as a dependent on your parents’ or another person’s return, you must file Form IL-1040 if 
    • your Illinois base income from Line 9 is greater than your Illinois exemption allowance, or
    • you want a refund of Illinois Income Tax withheld from your pay.
  • NOTE: If your parent reported your interest and dividend income through federal Form 8814, Parent’s Election to Report Child’s Interest and Dividends, do not count that income in determining if you must file your own Form IL-1040.
  • the surviving spouse or representative of a deceased taxpayer who was required to file in Illinois, you must file any return required of that taxpayer. Please refer to the special instructions on how to file for a deceased taxpayer.
  • a student, you are not exempt from tax nor are there special residency provisions for you. However, income, such as certain scholarships or fellowships, that is not taxable under federal income tax law, is also not taxed by Illinois.
  • nonresident alien, you must file Form IL-1040 if your income is taxed under federal income tax law. You must attach a copy of your federal Form 1040NR, U.S. Nonresident Alien Income Tax Return, or federal Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents.
  • Even if you are not required to file Form IL-1040, you must file to get a refund of
    • Illinois Income Tax withheld from your pay,
    • estimated tax payments you made, or
    • withholding on income passed through to you by a partnership, S Corporation, or trust.

Keeping a handle on these different laws and tax implications might be difficult for your staff members but can be accomplished by outsourcing a CPA. Allow an expert who deals with business structuring, accounting, and taxation regularly set up accounting software to factor in applicable tax laws for each US state.

Fusion CPA recently expanded into new states bringing us firsthand experience and knowledge. We have a team of certified public accountants who are highly skilled in handling multistate taxes. Our team of professionals understands the federal and state laws in various states and jurisdictions.