Introduction to the Illinois Corporate Tax Rate
Illinois, ranked 17th best state in the country by CNBC, is making strides as a great state for businesses. The state boasts excellent infrastructure and education systems, coming in 2nd place nationally for both. It’s also a hub for technological innovation, securing the 14th spot. When it comes to quality of life, health, and inclusion, Illinois takes 17th place. With top-notch transportation, a highly educated workforce, and a diverse economy spanning agriculture, manufacturing, finance, and more, it’s a promising place for businesses to thrive.
While the state hosts major corporations like Walgreens and State Farm, it faces business costs and tax-friendliness challenges, ranking 32nd and 39th in these categories, respectively. Sales taxes can also vary by region, so navigating the local landscape with caution is critical. Despite some challenges, Illinois remains an economic powerhouse with opportunities for growth and prosperity. The Illinois corporate tax rate is well-know for being favorable by businesses.
- Illinois has a flat 4.95% individual income tax rate.
- The Illinois corporate tax rate is 7% of federal taxable income.
- Corporations pay a 2.5% replacement tax on their net Illinois income, while partnerships, trusts, and S-corporations pay a 1.5% replacement tax.
- The deadline for filing state tax returns for the corporation is the fifteenth day of the fourth month following the end of the tax year. The state grants an automatic 6-month extension to file state tax returns.
- Illinois has a 6.25% state sales tax rate and local sales tax rate of 0% to 4.75%, depending on the jurisdiction.
How Do I Start a Business in Illinois?
The process for forming a business in Illinois depends on the type of business you’re creating, but every business will generally have the same steps to get started. After you have a business idea that you believe in, here are the steps to forming a business in Illinois:
- Choose the business entity that works best for your goals. LLC, C-corporation, sole proprietorship, or partnership.
- Register your business. You must register your business entity types before you can legally conduct any business activity.
- Obtain your business EIN.
- An Employer Identification Number (EIN) is the number that the federal government will use to identify your business, and it’s required to hire employees.
- You will also need an EIN if you file taxes as a separate entity and do not allow those tax liabilities to fall on your personal tax returns.
- Use this IRS link to apply for an EIN.
4. Apply for the required permits or licenses. The State of Illinois requires specific business licenses or permits based on the nature of your business and location. The types of licenses are as follows:
- Local business licenses.
- Sales tax and revenue permits: All business entity types must register with the state Department of Revenue.
- Additional local or state permits.
- Federal licenses: Many businesses will be required to get a federal license to participate in or sell things in their industry (i.e., the sale of alcohol).
What is the Illinois Corporate Tax Rate?
The Illinois corporate tax rate is equal to 7% of federal taxable income, subject to adjustments. The corporation has until the fifteenth day of the fourth month after the end of the tax year to file its returns. This means corporations with tax years following the calendar year must file by April 15. On the other hand, the deadline for filing returns for a corporation whose tax year ends on June 30 is the fifteenth day of the third month following the end of that tax year.
In addition to income tax, corporations pay a 2.5% replacement tax on their net Illinois income. On the other hand, partnerships, trusts, and S-corporations pay a 1.5 percent replacement tax on net Illinois income.
Does Illinois Have a Franchise Tax?
Yes. An annual franchise tax, which is a tax on the privilege of conducting business in Illinois, is imposed on corporations. All corporations must pay the Illinois corporate tax rate at the start of their first year of operation in the state, then on an annual basis, and following specific events like share issuance, mergers, or consolidations.
The Illinois corporate tax rate is primarily based on the corporation’s net worth or paid-in capital. It is due annually by the last day of the month preceding the first day of the company’s anniversary of formation. The minimum franchise tax is $25, and the maximum is $2,000,000. The franchise tax can be calculated using either of the two methods: the allocation factor or paid-in-capital.
The allocation factor is based on four (4) criteria:
- Value of all property owned by the corporation
- Value of property located in Illinois
- The gross amount of business transacted over the last 12 months everywhere
- The gross amount of business transacted over the last 12 months in Illinois
The computation shall be as follows:
- Compute for Allocation Factor = (b+d) / (a+c)
- Multiply the allocation factor by the paid-in capital and then by 0.0015.
- Round to the nearest cent; $25 is the minimum tax liability.
Companies are exempt from paying this tax for the first $1,000 of their liability, meaning they only have to pay it if and to the extent that they owe more than $1,000. For the first year, the tax is 0.15% of paid-in capital ($1.50 for each $1,000) for the preceding twelve-month period. In the following years, the tax is equal to 0.1% ($1 for every $1,000) of the previous year’s revenue, up to a $2 million maximum, plus 0.1% of the basis. Any increase in paid-in capital will result in an additional franchise tax due each month for a year.
Lastly, Illinois passed an optional pass-through entity (PTE) tax for the years 2022 through 2025. During these years, S-corporations, partnerships, and LLCs taxed as partnerships have the option of paying an Illinois corporate tax rate of 4.95 percent on their net income. The pass-through entity’s partners, LLC members, or shareholders are eligible for a credit against their state income taxes equal to the PTE tax. The PTE tax is designed to allow Illinois residents to avoid the $10,000 federal limit on deducting state taxes on individual tax returns.
Does Having a Mailing Address in Illinois Trigger Corporate Income Tax and/or Registration Requirements?
Having a mailing address in Illinois does not, by itself, trigger corporate income tax or registration requirements for a corporation. However, whether or not a corporation is subject to the Illinois corporate tax rate and registration requirements depends on several factors, including its business activities and nexus with the state. Here are some key points to consider:
- Nexus: Nexus is the connection between a corporation and a state that can subject the corporation to state taxation and registration requirements. Common activities that can create a nexus in Illinois include having a physical presence (such as an office or employees), generating significant sales in the state, or owning property in Illinois. The mere use of a mailing address in the state typically does not create a nexus.
- Business Activities: If a corporation conducts business activities in Illinois, such as selling products or services to customers in the state, it may be subject to the Illinois corporate income tax rate and registration requirements, regardless of where its mailing address is located.
- Registration Requirements: In Illinois, corporations are generally required to register with the Illinois Secretary of State’s office. Registration may be necessary to obtain the legal authority to conduct business in the state, such as opening bank accounts or entering into contracts. The mailing address may be a factor in determining where to send official notices and communications, but it is not the sole determinant of registration requirements.
- Corporate Income Tax: Whether a corporation is subject to Illinois corporate income tax depends on its income from Illinois sources. If a corporation earns income in Illinois, it may be required to file an Illinois corporate income tax return and pay taxes on that income, regardless of its mailing address.
- Legal and Tax Advice: Determining a corporation’s specific tax and registration requirements can be complex and may depend on the corporation’s unique circumstances. It is advisable to consult with legal and tax professionals knowledgeable about Illinois tax laws and regulations to ensure compliance.
I Own a Business in Illinois But Reside in Another State. Will I Be Required to Pay the Illinois Corporate Tax Rate?
Yes, nonresidents must pay the Illinois corporate tax rate on income and Schedule NR if:
- Nonresidents earned enough taxable income from state sources to have tax liability or
- Nonresidents are claiming a refund of Illinois income tax that was withheld in error. (Refer to the Instructions, Form IL-1040, Illinois Individual Income Return, and Instructions, Schedule NR, Nonresident and Part-Year Resident Computation of Illinois Tax for guidance.)
All My Activities are Outside the U.S., and I live in a Different Country, But I Have a Company in Illinois. Do I Have to Pay the Illinois Corporate Tax Rate?
Yes, you need to pay the Illinois corporate tax rate if you have a company in Illinois based on the state nexus, regardless of whether you are not residing in or do not have activities in the said state.
Does Having an Employee in Illinois Trigger the Requirement to Pay the Illinois Corporate Tax Rate on Income?
Yes, one of the common activities that can create a nexus in Illinois includes having a physical presence (such as an office or employees), generating significant sales in the state, or owning property in Illinois that triggers the requirement to pay the Illinois corporate tax rate on income.
Does Having an Independent Contractor in Illinois Trigger Corporate Income Tax?
Yes, having an independent contractor is the same as having an employee in Illinois, which triggers the requirement to pay the Illinois corporate tax rate on income.
Does Having a Founder Living in Illinois Trigger Corporate Income Tax?
Yes, having a founder in Illinois equates to being a resident, which triggers the requirement to pay the Illinois corporate tax rate on income.
If You Hold Board Meetings in Illinois, Will It Trigger Corporate Income Tax?
No. Even if you hold board meetings in Illinois, it will not trigger the requirement to pay the Illinois corporate tax rate as long as it is not the company’s office or founder’s residency.
Does Illinois Collect Sales Tax?
Yes. Illinois has an origin-based sales tax system that makes things easier for you. If you are a local business, you must charge the tax rate applicable to your location in Illinois. Currently, the statewide sales tax is 6.25% for general merchandise, a 1% preferential rate for qualifying food, drugs, and medical appliances, and any local taxes (ranging from 0% to 4.75%) that some jurisdictions may impose.
Does Illinois Tax SaaS Income?
It depends. Illinois taxes various types of software, and SaaS-delivered via a cloud-based system is exempt from sales tax as long as no tangible personal property is transferred as part of the transaction. The same Illinois corporate tax rate applies to tangible personal property sold at retail online as they do to any other retail transaction.
Does Illinois Tax Online Marketplaces?
Yes, if the company meets a tax remittance threshold and is a marketplace facilitator through the marketplace. The following taxes apply to sales made by a marketplace facilitator:
- For sales for which selling activities occur in Illinois, state and local retailers’ occupation taxes are incurred at the tax rate that is in effect at the location of the selling activities.
- Sales made from Illinois inventory that are not otherwise sold in Illinois are subject to state and local retailers’ occupation taxes at the tax rate in effect at the Illinois inventory location.
- Sales that are not fulfilled from Illinois inventory and do not otherwise take place in Illinois are subject to state and local retailers’ occupation taxes at the rate in effect at the purchaser’s location.
Does Illinois Tax Remote Software Sales?
Yes, you must pay taxes from remote software sales if the company is registered in Illinois or if the sales are collected in the said state based on a threshold.
What Will I Have to Do If I Want to Close My Business in Illinois?
- File the required dissolution documents.
- Sell any remaining inventory, property, and other assets.
- Cancel any remaining insurance policies, licenses, or permits.
- File your final tax returns and have your EIN canceled. Cleer Tax has a final tax return package that includes IRS Form 966 and the EIN cancellation letter.
When is My Illinois State Tax Return Due?
Tax filings for C-Corps for both the state of Illinois and the federal government are due at the same time, which is usually four months and 15 days after the end of the fiscal year, or April 15. S-Corps and partnerships are due three months and 15 days after the end of the fiscal year, or March 15. The filing is due the following business day if either of the due dates falls on a weekend or holiday.
What Happens If I File My Illinois Tax Return Late?
You will be required to pay a penalty of $100 or 5% of the tax due, whichever is greater, for each month or portion of a month that you fail to file your return if it is received after the 30-day deadline. The penalty cannot exceed $2,500 or 30% of the tax due, whichever is greater.
Can Cleer Tax Help With Filing a Illinois State Income Tax Return?
Yes, Cleer Tax offers services to help you avoid the stress and inconvenience of preparing and filing taxes. We can also help you to determine whether the Illinois corporate tax rate is right for you. Please feel free to book a business tax consultation to discuss the best structure for your startup business, no matter what state you register in. Our tailored new company package includes a tax consultation, bookkeeping software, and a chart of accounts set up to help you do it right from the start.
Cleer’s flat-rate federal income tax preparation also includes your state income tax return. We also offer all-in-one monthly accounting packages that include monthly statements plus your federal and state tax returns.
If you have questions about the Illinois corporate tax rate or need additional help finding the right package, email customer success at email@example.com.