Illinois General Assembly Passes Legislation Imposing Substantial Tax Changes

On June 1, the Illinois General Assembly passed the fiscal 2026 budget (H.B. 2755). The plan includes significant changes to the taxation of businesses and retailers and outlines the rules for three tax amnesty programs. Gov. JB Pritzker has indicated that he intends to sign the budget before July 1, the start of the state’s fiscal year.

Switching Apportionment From Joyce to Finnegan    

Illinois is a Joyce state for combined apportionment reporting but will switch to the Finnegan method for tax years ending on or after December 31, 2025. Under Finnegan, the numerator of the apportionment factor for combined groups must include all the group’s receipts, regardless of nexus. 

GILTI Taxation

Illinois does not impose tax on the global intangible low-taxed income (GILTI) of controlled foreign corporations that are a part of a corporation’s consolidated group. That will change for tax years ending on or after December 31, 2025, when the budget will impose a 50% tax on GILTI. 

Interest and Intangible Expense Addback Changes

H.B. 2755 amends the rules requiring an addition modification for interest and intangible expenses paid, accrued, or incurred to a foreign person with at least 80% of its total business activity outside the U.S.   Specifically, for tax years ending on and after December 31, 2025, the legislation removes addback exceptions for interest or intangible expenses paid, accrued, or incurred:

• to a foreign related entity if that entity is subject to tax in a foreign country or state; or
• under an agreement entered into at arm’s-length rates and terms and the principal purpose for the payment is not federal or Illinois tax avoidance.

Illinois retains the addback exceptions for interest or intangible expenses paid to a related party that pays the interest or intangible expenses to an unrelated party or the taxpayer establishes by clear and convincing evidence that the adjustments are unreasonable.

Section 163(j) Changes

H.B. 2755 adjusts the application of the business interest limitation. Any federal reduction in a combined group’s deductible interest expenses stemming from the IRC Section 163(j) limitation must be applied first to expense deductions claimed by group members included in the Illinois combined report and then to members excluded from the report. 

Attributing Gain/Loss From Sales of Interests in Pass-Through Entities 

The General Assembly has approved provisions to use a look-through approach to attribute to Illinois the owners’ income from the sale of pass-through entities (S corporations and partnerships other than Illinois investment partnerships). The revised approach averages the pass-through entity’s current tax year with the two immediately preceding tax years to allocate nonbusiness income and source business income from the pass-through entity’s sale.

Indirect Tax Nexus

Effective January 1, 2026, Illinois will remove the 200-transaction prong of the nexus threshold for sales tax collected by remote retailers and marketplace. The state will retain the nexus threshold of at least $100,000 in cumulative gross receipts from sales of services and tangible personal property to Illinois purchasers. For marketplace facilitators, the threshold would apply to the combined gross receipts from direct and facilitated sales made through the marketplace.

Tax Amnesty Programs

H.B. 2755 reinstates two tax amnesty programs: one for all taxpayers owing any Illinois taxes and another for taxpayers owing any franchise taxes or license fees. It also creates an amnesty program for remote retailers.

General Program

The legislation reinstates a general tax amnesty program, which runs from October 1 to November 15, 2025, for tax periods ending after June 30, 2018, and before July 1, 2024. Under the program, once a taxpayer pays all taxes due, the Illinois Department of Revenue will abate any applicable interest and penalties. The Department also will not pursue civil or criminal action for the taxpayer’s amnesty period. 

The program specifies that taxpayers are ineligible if they are party to ongoing litigation for nonpayment, delinquency, or fraud.

Franchise Tax Program

The legislation also restores a franchise tax amnesty program that will run from October 1, 2025, to November 15, 2025. It applies to any franchise tax or license fee liabilities for any tax periods ending after June 30, 2019, and on or before June 30, 2025. The state will abate all penalties and interest upon payment of all franchise tax and license fees due.

Like the general tax amnesty program, the reinstated franchise program will run from October 1 to November 15, 2025. It also states that taxpayers party to ongoing litigation for nonpayment, delinquency, or fraud are ineligible.

Remote Retailer Program

The budget establishes an amnesty program for remote retailers as defined in Section 1 of the state’s Retailer’s Occupation Tax Act. The program will run from August 1, 2026, to October 31, 2026. During that period, remote retailers can report and remit at simplified rates state or local retailers’ occupation taxes on eligible transactions occurring between January 1, 2021, and June 30, 2026. The simplified rates, which include estimated local rates, are 9% for items normally subject to the state’s 6.25% rate and 1.75% for items that normally would be subject to the state’s 1% rate.  

The payment at the simplified rate relieves the remote retailer of all state and local retail occupation taxes due. The state will abate penalties and interest only for retailers satisfying their full tax liabilities unless the taxpayer has entered an approved repayment plan. As with the other amnesty programs, taxpayers are ineligible if they are party to ongoing litigation for nonpayment, delinquency, or fraud.