Authors
Key takeaways
- Combined Reporting Shift: Illinois will move from Joyce to Finnigan for purposes of apportioning sales of a combined reporting group.
- GILTI Deduction Limited: Illinois will now tax Global Intangible Low-Taxed Income (GILTI), reducing its dividends received deduction from 100% to 50% of the GILTI included under IRC § 951A.
- Interest and Intangible Expense Addback Tightened: Key exceptions to the addback requirement for related-party interest and intangible expenses are eliminated, narrowing the ability to avoid addbacks.
- Sales Tax Nexus Simplified: The 200-transaction threshold for remote retailers and marketplace facilitators is eliminated.
- Amnesty Programs Introduced: Illinois will offer limited-time amnesty programs for general, franchise, and remote retailer taxes, waiving penalties and interest for eligible taxpayers.
- Other Notable Changes: There will be increases to tobacco, sports betting, and telecommunications taxes, and expanded definitions for certain taxable products and services.
Illinois has enacted significant changes to its income, sales and use, and excise tax laws as part of the state's fiscal year 2026 budget bill (H.B. 2755), signed into law by Governor J.B. Pritzker on June 16, 2025. The changes impact apportionment, GILTI inclusion, sourcing rules, nexus thresholds, and compliance requirements and establish tax amnesty programs beginning later this year. Most income tax changes are effective for tax years ending on or after December 31, 2025, while most sales and use tax changes take effect January 1, 2026.
Combined Reporting and Apportionment
For tax years on or after December 31, 2025, Illinois will adopt the Finnigan method for unitary combined reporting. Under this approach, all sales by members of a unitary group—regardless of whether those members have nexus with Illinois—must be included in the Illinois sales factor numerator. This is a significant shift from the previous Joyce method, which only included sales from group members with Illinois nexus. The Finnigan rule is likely to increase the Illinois apportionment percentage and, consequently, the Illinois tax liability for many multi-state businesses. This is a good time to reevaluate the members to be included in your unitary business group.
GILTI Deduction Limitation
For tax years ending on or after December 31, 2025, only 50% of GILTI under IRC § 951A will be deductible for Illinois corporate income tax purposes. This change aligns Illinois more closely with federal treatment and will increase the state tax base for companies with foreign subsidiaries. Taxpayers affected by this change may wish to evaluate whether requesting an alternative apportionment method—such as factor representation for the activities generating GILTI—could yield a more equitable and fair representation in Illinois. However, states that already include a portion of GILTI in the corporate income tax base, like Minnesota, have consistently denied such positions.
Interest and Intangible Expense Addback
Also effective for tax years on or after December 31, 2025, Illinois will eliminate two major exceptions to the required addback of interest and intangible expenses paid to related foreign parties: the "subject to tax" exception and the "not for tax avoidance" exception. The remaining exceptions—the conduit exception and the ability to demonstrate the addback is unreasonable—will continue to apply. The new legislation also specifies how the addback interacts with the interest expense limitation under IRC § 163(j), requiring that any reduction in the interest expense deduction required under IRC § 163(j) be allocated first to the interest paid to non-foreign persons and then to foreign persons. This effectively ensures that the interest expense addback applies to the full amount of interest paid to foreign related parties, unless one of the narrow remaining exceptions applies. This ordering rule maximizes the amount of interest expense deduction disallowed and results in an effective graduated tax rate for certain taxpayers, which is arguably contrary to the Illinois Constitution.
Sales Tax Nexus and Sourcing
Effective January 1, 2026, remote retailers and marketplace facilitators will be required to collect and remit Illinois sales tax if their Illinois sales exceed $100,000 annually, regardless of transaction count. Additionally, the definition of "marketplace facilitator" is expanded to include those facilitating sales of services subject to Illinois’ service occupation and use taxes.
Sourcing of Pass-Through Entity Sales
Gains and losses from the sale or exchange of S corporation shares or partnership interests (other than investment partnerships) will be allocated to Illinois based on the average of the entity's Illinois apportionment factor for the year of sale and the two preceding years. This "look-through" approach increases the importance of accurate historical apportionment tracking and could be vulnerable to a constitutional challenge.
Amnesty Programs
- General Tax Amnesty: Runs from October 1, 2025 through November 15, 2025, covering most taxes for periods ending after June 30, 2018 and before July 1, 2024. Non-filers should consider the Department’s voluntary disclosure program as an alternative to amnesty.
- Franchise Tax Amnesty: Runs for the same period as the general tax amnesty program and covers franchise tax or license fee liabilities for periods after June 30, 2019 and on or before June 30, 2025.
- Remote Retailer Amnesty: Runs from August 1, 2026 through October 31, 2026, for remote retailers with unreported sales from January 1, 2021 through June 30, 2026. This program allows for both payment at simplified rates and abatement of penalties and interest. Consideration should be given as to whether the state’s general tax amnesty program provides a better or worse result for the remote retailer.
Other Tax Changes & Looking Forward
Additional changes include increased excise taxes on tobacco, sports betting, and telecommunications, as well as expanded definitions for taxable products and services, including short-term rentals now subject to the hotel operators' occupation tax. Looking forward, we expect further discussion of a digital advertising tax and the broadening of the types of services subject to sales tax, which may result in additional legislation.
Along with monitoring future legislation, taxpayers should model the impact the corporate income tax changes will have on their estimated tax liability and review their compliance procedures for sales and use tax, specifically remote retailers and marketplace facilitators. If you report GILTI, review your international tax structure and consider strategies to mitigate increased exposure, such as alternative apportionment. To the extent you have identified outstanding liability, evaluate your eligibility for upcoming amnesty programs and consider whether voluntary disclosure may be an alternative method of relief for non-filers.
Client Alert 2025-183