Monday, February 21, 2011

Illinois Explains Effects of Income Tax Increases

The Illinois Department of Revenue issued a bulletin that provides information for individuals, trusts, estates, and corporations about: recent income tax rate changes; how estimated payments are affected by the income tax rate change; how fiscal-year filers, short-year filers, and 52/53 week filers will calculate their income tax rate; and changes to Illinois net loss deductions. (Illinois Dept. of Rev. Info. Bulletin FY 2011-09, 02/01/2011.)

Rates increased. For income received on or after January 1, 2011, the income tax rate on individuals, trusts, and estates increased from 3% to 5%. The Illinois income tax rate on corporations (excluding S corporations) increased from 4.8% to 7%.

Estimated payments and the underpayment for estimated tax penalty. If a taxpayer is required to make estimated payments for income received on or after January 1, 2011, the taxpayer will be required to make the payments at the higher tax rate. The worksheets for Forms IL-1040-ES and IL-1120-ES reflect the new rates. Note: If a taxpayer received a preprinted 2011 Form IL-1120-ES from the U.S. Postal Service, the old rate is printed on the worksheets.

For installments of estimated tax due before February 1, 2011, the law requires that taxpayers timely pay the lesser of 100% of the prior year's tax liability or 90% of the current year's tax liability in order to avoid an underpayment of estimated tax late payment penalty. However, for payments due on or after February 1, 2011, and before February 1, 2012, an underpayment of estimated tax late payment penalty can be avoided by timely paying the lesser of 150% of the prior year's tax liability or 90% of the current year's tax liability.

Fiscal-year filers. Fiscal-year filer must divide the total net income between the periods subject to different rates. The amount earned prior to January 1, 2011, is taxed at 3% (individuals, trusts, and estates) and 4.8% (corporations). The amount earned on or after January 1, 2011, is taxed at 5% (individuals, trusts, and estates), and 7% (corporations). The two tax amounts are added together for the total tax liability.

Taxpayers may use the apportionment method or the specific accounting method to figure the total tax due.

Apportionment method (blended rate): The apportionment method is figured by dividing net income earned based on the total number of days in one accounting period in equal ratio to the total number of days in the second accounting period. A convenient way to use this method is to calculate a blended rate and apply it to total income. The Department provided a Blended Income Tax Rate Schedule in the bulletin to assist taxpayers in finding the blended tax rate.

If the taxpayer's tax year is less than 12 months (short-year) or the taxpayer is a business filing on a 52/53 week basis, the taxpayer cannot use the Blended Income Tax Rate Schedule. Instead, taxpayers must figure the blended tax rate using the Apportioned Income Tax Rate Formula that is included in the bulletin.

The Department encourages taxpayers to use the blended rate, if possible. A taxpayer that uses the blended rate does not need to complete Schedule SA (Specific Accounting).

Specific accounting method: The specific accounting method allows taxpayers to treat net income or loss and modifications as though they were earned in two different taxable years (prior to January 1, 2011, and on or after January 1, 2011) and calculates the tax due at the appropriate rate for each period.

Schedule SA: Schedule SA will be made available on the Department website.

Method chosen: Taxpayers must choose which method to use to divide their income on or before the extended due date of their tax return. Once this decision is made, it is irrevocable.

Illinois net loss deductions. If a taxpayer is a corporation (other than an S corporation), the new law suspends the use of the Illinois net loss deduction (NLD) for tax years ending on or after January 1, 2011, and prior to December 31, 2014.

If a taxpayer is a calendar year filer ending on December 31, 2010, the taxpayer may use the Illinois NLD against net income. Fiscal year filers, with tax years ending on or after January 1, 2011, cannot use their Illinois NLD. The carryforward provision will be extended four years for suspended losses.

If a taxpayer is a 52/53 week filer whose tax year ends on or immediately after January 1, 2011, Illinois considers the tax year to end on December 31, 2010, for purposes of the suspension of Illinois NLD. The taxpayer will be eligible to use any available NLD as if all of your income were received as a 2010 calendar year filer. However, the taxpayer must still apply the new tax rate to any income earned after January 1, 2011, that is not offset by NLD.

Illinois replacement tax. The replacement tax rates of 2.5% (corporations) and 1.5% (trusts, S corporations, and partnerships) remain the same.

S corporations and partnerships. S corporations and partnerships are not affected by the tax increase. S corporations and partnerships pay only replacement tax on their income. If the income is distributed to a taxpayer who is responsible for paying income tax, that partner, shareholder, or beneficiary will pay income tax at the higher rate.

If the S corporation or partnership files Form IL-1000 (Pass-through Entity Payment Income Tax Return), on behalf of its nonresident partners and shareholders, the income tax rate increase must be accounted for in the payment amount. Trusts filing Form IL-1000 on behalf of nonresident beneficiaries are also responsible for making pass-through entity payments at the increased rate.

If the S corporation or partnership files Form IL-1023-C (Composite Income and Replacement Tax Return), on behalf of its nonresident partners and shareholders, the income tax rate increase must be accounted for when figuring the tax for the partners and shareholders.

No comments: