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.