Legislative Income Tax Changes that May Increase Current Tax Year Liabilities

35 ILCS 5/303(b)(4)

For tax years ending on or after June 16, 2025, taxpayers with gains and losses from sales or exchanges of shares in Subchapter S corporations or from interest in partnerships, other than investment partnerships, are allocable to Illinois if the PTE is taxable in Illinois. Those gains and losses shall be allocated in proportion to the average of the PTE’s Illinois apportionment factor in the year of the sale or exchange and the 2 tax years immediately preceding the year of the sale or exchange.

Capital gains or losses from sales or exchanges of shares in pass-through entities are reported on Illinois Schedule NB, Nonbusiness Income. See the Schedule NB instructions for more information.

35 ILCS 5/304(e)

Effective for tax years ending on or after December 31, 2025, Illinois unitary taxpayers must follow the Finnigan method of apportionment when calculating their apportionment factor on Illinois Schedule UB, Combined Apportionment for Unitary Business Group.

Because of the complex nature of unitary businesses, additional rules were created to address throwback and throw-out sales when calculating unitary apportionment. For tax years ending prior to December 31, 2025, Illinois unitary taxpayers were required to follow the Joyce method of apportionment. For tax years ending on or after December 31, 2025, Illinois unitary taxpayers are required to follow the Finnigan method of apportionment.

 35 ILCS 5/203

Illinois no longer allows certain exceptions to the related-party addback provisions for unitary filers. For tax years ending on or after December 31, 2025, the only Safe Harbor exceptions allowed when calculating related-party expenses additions on Schedule 80/20, Related-Party Expenses, are:

• An amount of interest and intangible expenses paid, accrued, or incurred, directly or indirectly, to a person if
  • the person paid, accrued, or incurred the interest and intangible expenses to another person that is not a related member, and
  • the transaction did not have the principal purpose of avoiding taxes and is paid pursuant to a contract or agreement that reflects rates and terms between unrelated parties.
• An amount of interest and intangible expenses paid, accrued, or incurred, directly or indirectly, to a person if the taxpayer establishes by clear and convincing evidence that the adjustments are unreasonable.
• An amount of interest and intangible expenses paid, accrued, or incurred, directly or indirectly, to a person that would not be included due to an agreement in writing between the taxpayer and the Director of the Illinois Department of Revenue allowing the taxpayer to use an alternative method of apportionment.

35 ILCS 5/203

Taxpayers subject to the IRC Sec. 163(j) deduction limit are required to allocate the reduced interest expenses they paid to certain foreign affiliates first to non-foreign affiliates and then to foreign affiliates. This change aligns Illinois with IRC Sec. 59A(c)(3) and the treatment of consolidated returns at the federal level.

The changes highlighted in this bulletin may affect your required estimated payment amounts or require you to start making estimated payments.

If you are already making estimated payments, you should recalculate your estimated payments based on the changes highlighted in this bulletin. The first estimated payment after June 16th, should include the additional amounts that would have been due with your previous quarterly payments, as well as the full current quarterly payment. This quarterly payment makes up the difference in your estimated payments.

If you are not currently making estimated payments, you should determine if the changes highlighted in this bulletin cause your tax liability to increase to more than the estimated payment requirement. Your first payment should be made on or before your next quarterly estimated payment due date. The payment should include the current estimated payment due and the amount of all the previous quarterly payments due based on the changes. This quarterly payment makes up the difference in your estimated payments.

You may reduce or eliminate your late payment penalty for the underpayment of estimated tax by using the annualized income installment method when filing your tax return. This method allows you to compute your income and liability for each period according to the Illinois Income Tax Act in effect as of the end of that period. The annualized income installment method is found in Step 6 of Form IL-2220, Computation of Penalties for Businesses and Form IL-2210, Computation of Penalties for Individuals.

This relief is appropriate when the first quarterly estimated payment due after June 16, 2025, is paid timely and makes up the difference in your previous estimated payments for the year and all subsequent payments are timely and equal the required payment due amount.

Any penalty assessment is based on the timely estimated installment payments equaling at least 90 percent of this year’s tax liability or 100 percent of the prior year’s tax liability. See 86 Ill. Adm. Code Section 100.8010(h) for more information.