The Illinois Income Tax is imposed on every taxpayer earning or receiving income in Illinois. The tax is calculated by multiplying net income by a flat rate. The Illinois Income Tax is based, to a large extent, on the federal income tax code.
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Replacement Tax, also known as Personal Property Replacement Tax, is a tax on the net income of corporations, subchapter S corporations, partnerships, and trusts. This tax replaces money lost by local governments when their power to impose personal property taxes was taken away. Replacement tax is collected from corporations, subchapter S corporations, partnerships, and trusts by the State of Illinois and paid to local governments.
Pass-through entity (PTE) tax is an elective tax on partnerships (other than a publicly traded partnership under Internal Revenue Code (IRC) Section 7704) and Subchapter S corporations effective for tax years ending on or after December 31, 2021, and beginning before January 1, 2026.
Partnerships are subject to replacement tax but do not pay the Illinois income tax. The income tax is paid at the partner's level. Generally, income from a partnership is passed on to the partners. The partners must include this income in their federal adjusted gross income (for individuals) or federal taxable income (for other taxpayers). This is the starting point for Illinois income tax purposes and where the income tax is paid.
Use the Tax Rate Database to determine the replacement tax rate.
Partnerships who elect to pay PTE tax are subject to this tax for the privilege of earning or receiving income in Illinois in an amount equal to 4.95 percent (.0495) of the taxpayer's net income for the taxable year. Each partner of an electing pass-through entity is allowed a credit against their own tax in an amount equal to 4.95 percent (.0495) times the partner's distributive share of the net income of the electing partnership.
The starting point for the Illinois Partnership Replacement Tax Return is federal taxable income, which is income minus deductions. Next, the federal taxable income is changed by adding back certain items (e.g., state, municipal, and other interest income excluded from federal taxable income) and subtracting others (e.g., interest income from U.S. Treasury obligations). The result is “base income.”
Pass-through entity net income has the same meaning as defined in Section 202 of the Illinois Income Tax Act, except that the following provisions shall not apply:
- the standard exemption allowed under Section 204;
- the deduction for net losses allowed under Section 207; and
- the modifications for personal service income or reasonable allowance for compensation paid to partners and income distributable to a partner subject to replacement tax.
If a taxpayer making the PTE tax election is a partner of another taxpayer who made the PTE tax election, net income shall be computed as above, except that the taxpayer shall subtract its distributive share of the net income of the electing partnership (including its distributive share of the net income of the electing partnership derived as a distributive share from electing partnerships in which it is a partner).
See the Illinois Department of Revenue Income Tax Credits and Expirations spreadsheet for information about income tax credits.
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 partnership who 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.
Partnerships may file as members of a unitary group but may not file a combined return. You may be required to file a separate unitary return and file a schedule UB to apportion your business income. You should see Illinois Schedule UB, Combined Apportionment for Unitary Business Group, Illinois Schedule UB Instructions, and Form IL-1065 Instructions for information about filing requirements.
- Form IL-1065 is due on or before the 15th day of the 4th month following the close of the tax year.
If you are operating as a business organized under a Lloyd's plan of operation
- Form IL-1065 is due the same date as your federal return due date.
- Automatic filing extension
You are not required to file a form to obtain this automatic extension. However, if you expect tax to be due, you must pay any tentative tax due by the original due date of the return to avoid interest and penalty on tax not paid. An extension of time to file your Form IL-1065 does not extend the amount of time to pay your Illinois tax liability. See Make a Payment for payment options.
- we grant you an automatic six-month extension of time to file your tax return.
If you are operating as a business organized under a Lloyd's plan of operation
- the length of your Illinois automatic extension of time to file is the same as your federal extension.
- Amended return
For amended returns claiming a credit or refund filed on or after June 25, 2021, IDOR has an automatic six month extension of time to issue an assessment of additional tax due if the amended return is filed within six months of the original expiration of the statute of limitations.
- If your change creates or increases the Illinois net loss for the year, you must file Form IL-1065-X showing the increase in order to carry the increased loss amount to another year.
- If your change increases the tax due to Illinois, you should file Form IL-1065-X and pay the tax, penalty, and interest promptly.
- If your change decreases the tax due to Illinois and you are entitled to a refund or credit carryforward, you must file Form IL-1065-X within
- three years after the due date of the return (including extensions),
- three years after the date your original return was filed, or
- one year after the date your Illinois tax was paid, whichever is latest.
- If your federal change decreases the tax due to Illinois and you are entitled to a refund or credit carryforward, you must file Form IL-1065-X within two years plus 120 days of federal finalization.
- If your federal change increases the tax due to Illinois, you must file Form IL-1065-X and pay any additional tax within 120 days of IRS partial agreement or finalization. To avoid late payment penalties, you must attach proof of the federal finalization date, showing the change was reported to Illinois within 120 days of IRS acceptance, or you may be assessed a late-payment penalty.
Note: You should not file Form IL-1065-X until you receive a federal finalization notification from the IRS stating that they have accepted your change, either by paying a refund, or by final assessment, agreement, or judgment. Acknowledgment that the IRS received your amended return is not acceptable proof of federal finalization.
Pass-through withholding payments and pass-through entity (PTE) tax
S corporations, partnerships, and trusts are required to make Illinois Income Tax payments on behalf of nonresident shareholders, partners, and beneficiaries. Although this is referred to as “pass-through entity withholding”, deductions are not actually taken from payments the pass-through entities make to their owners. Instead, the pass-through entities are required to make an income tax payment, a “pass-through withholding payment,” on behalf of the nonresident owner for each taxable year.
Partnerships and S corporations may elect to pay PTE tax for the privilege of earning or receiving income in Illinois in an amount equal to 4.95 percent (.0495) of the taxpayer's net income for the taxable year. Each partner or shareholder of an electing pass-through entity is allowed a credit against their own tax in an amount equal to 4.95 percent (.0495) times the partner or shareholder's distributive share of the net income of the electing partnership or subchapter S corporation.
Nonresident partners, shareholders, and beneficiaries must be notified by the partnership, S corporation, or trust of the amount of pass-through withholding payments. When a partnership or S corporation elects to pay PTE tax, all partners or shareholders must be notified of the amount of PTE tax credit passed-through to them by the pass-through entity. If the pass-through withholding payment or PTE tax credit is sufficient to satisfy the nonresident partner’s, shareholder’s, or beneficiary’s Illinois Income Tax liability, no return is required. Any taxpayer that files an Illinois tax return for any reason must include any income passed through from the pass-through entity and will be allowed a credit for the pass-through withholding or the PTE tax credit.
See the Pass-through Entity Information (Publication 129) web page for more information.
Partnerships who elect to pay PTE tax and who can reasonably expect their replacement tax and PTE tax liability to be more than $500 must make quarterly estimated payments. Estimated Payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. Partnerships are encouraged to use an electronic method to make estimated payments.
What if I need to correct or change my return?
If you need to correct or change your return after it has been filed, you must file Form IL-1065-X, Amended Partnership Replacement Tax Return. Returns filed before the extended due date of the return are treated as your original return for all purposes. You should file Form IL-1065-X only after you have filed a processable Illinois Income Tax return. You must file a separate Form IL-1065-X for each tax year you wish to change. For more information see Form IL-1065-X Instructions.
Do not file another Form IL-1065 with “amended” figures to change your originally filed Form IL-1065.