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New Illinois Budget Bill Imposes Major Tax Increases and Unclaimed Property Burdens on Businesses

July 14, 2017

New Illinois Budget Bill Imposes Major Tax Increases and Unclaimed Property Burdens on Businesses

July 14, 2017

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This will be an extensive change for all Illinois businesses and potentially cost some businesses millions of dollars. 

Overriding Governor Bruce Rauner’s veto, the new Illinois budget bill passed on July 6, 2017, imposes some major income tax increases for both corporate and non-corporate businesses, as well as major retroactive changes to the Illinois Uniform Unclaimed Property Act, which will affect businesses with substantial cash outlays and administrative costs starting this year.

Tax Increases: Effective July 1, 2017, the individual (i.e., non-corporate) tax rate will increase to 4.95 percent from 3.75 percent, and the corporate rate (except for S corporations) will increase to 7 percent from 5.25 percent. However, C corporations in Illinois also pay a 2.5 percent personal property replacement income tax for a current total tax rate of 9.5 percent in Illinois and S corporations and other pass-through entities (such as partnerships and LLCs) pay a 1.5 percent replacement tax for a new total tax rate on taxable income of up to 6.45 percent, including tax paid by individual beneficiaries, partners or members. In addition, the number of companies that can be included in a unitary business group for taxation purposes was expanded. While some deductions were extended, the overall impact of these changes will create a major tax increase in Illinois that will affect most enterprises doing business in Illinois.

Unclaimed Property (Hidden Tax): The new Illinois Unclaimed Property Act makes retroactive changes to the Illinois Unclaimed Property Act that will require businesses to send millions of additional dollars to the state every year, as well as provides for an unlimited statute of limitations against businesses that fail to report any money potentially due, even when they dispute that the money is actually reportable to the state. The Illinois Unclaimed Property Act, like all state unclaimed property laws, generally requires that property owed to others and not returned should be turned over to the state for safekeeping after an abandonment period. It is heralded as a consumer protection law, but in reality much of the money is never claimed and it is often a source of significant revenue to the state. It is essentially a transfer of wealth from businesses to the state, similar to a tax. Under the old Illinois Unclaimed Property Act, the Act did not apply to money potentially owed by one business to another, based on the logical assumption that businesses could protect themselves. However, the revised Unclaimed Property Act reverses this decades-old exemption for business-to-business debts and now states that this money must be turned over to the state.

More importantly, the new Unclaimed Property Act is retroactive and reclassifies all such business-to-business property in the last five years now as being unclaimed. This will require all businesses that have taken this money into income and paid income taxes (because the business to which they potentially owed the money did not claim it) to turn over that money to the state of Illinois or determine whether the money is actually owed, incurring substantial administrative costs. This will be an extensive change for all Illinois businesses and potentially cost some businesses millions of dollars. As a result, businesses should be aware of the implications of this new budget bill. It should be pointed out that a number of other states seeking similar revenue streams require business-to-business debt to be turned over to the state, but the retroactive nature of this change in Illinois law will make it an economic shock to the unsuspecting business.

For Further Information

If you would like more information on how this may affect your company, please contact Stanley R. Kaminski, any other member of the State and Local Tax Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.