- Governor J.B. Pritzker signed Illinois’ budget package on June 16th.
- The bill makes some significant changes to the income and sales tax statutes.
- The legislation also authorizes an amnesty program for taxpayers to settle unpaid tax liabilities.
Background
On June 16, 2025, Governor J.B. Pritzker of Illinois signed a series of bills, including HB 2755, implementing Illinois’ budget for the 2026 fiscal year. The legislation contained several important tax provisions.
Sales Factor and Finnigan
Illinois changed how it calculates the apportionment factor for unitary business, switching from the “Joyce” method to the “Finnigan” method. The previous “Joyce” method requires a corporation filing a combined unitary return with one or more companies to include individual entity Illinois sales in the combined apportionment factor only to the extent that single corporation on its own had established nexus in Illinois. The revised “Finnigan” method requires all corporate members of a unitary filing group to include its Illinois sales in the combined apportionment factor, even if one or more individual members of the group do not have nexus in Illinois. This is effective for tax years ending on or after December 31, 2025.
Forvis Mazars Insight: The change from Joyce to Finnigan in computing the Illinois sales factor has two implications for Illinois taxpayers filing as part of a unitary group. The first is that if any member of the group has Illinois nexus, all members must include Illinois sales in the numerator of the Illinois sales factor. A corollary of this first consequence is the impact on Illinois’ throwback rules. Under Joyce, if an individual member of a group shipped products from Illinois to another state where that member was not taxable, those sales would have to be “thrown back” to Illinois for sales factor purposes, even if another member of the group was taxable in that state. The Finnigan rule means that sales originating from Illinois to states where any member of the unitary group is taxable no longer must be thrown back to Illinois.
Sourcing Gains and Losses On Sales of Interests in Pass-Through Entities
The bill clarified sourcing rules for gains and losses resulting from sales and exchanges of partnership interest and S corporation shares. The traditional approach in state tax was to treat these gains and losses as the sale of an intangible (the interest in the pass-through entity), and tax was generally imposed at the domicile of the owner of these intangibles. However, the legislation provides that Illinois will allocate such gains and losses to the state if the pass-through entity is taxable in the state. The gains and losses will be allocated to Illinois using the average of the pass-through entity’s Illinois apportionment factor in the year of exchange and the two preceding tax years. Only the years in which the entity was in existence will be considered in the average if the pass-through entity was not in existence during the preceding two years.
Forvis Mazars Insight: Illinois is part of a continuing trend whereby states will seek to tax non-residents on the gain from the sale of their interests in pass-through entities based upon the attributes of the entity. This concept, referred to as “investee apportionment,” has been the subject of litigation or proposed legislation in California, Massachusetts, and New York City recently as well.
Interest & Intangible Expense Addback Changes and 163(j)
For tax years ending on or after December 31, 2025, Illinois modified its addback rules for interest and intangible expenses paid to related foreign entities. The legislation removes the following two exceptions from the addback requirement:
- Interest or intangible expenses paid to a related entity that is subject to a tax in a foreign country or state will now have to be added back in computing taxable income.
- Interest or intangible expenses paid to a related entity under an arm’s length agreement, when the principal purpose of the payment was not tax avoidance, will also now have to be added back.
Illinois also changes its rules with respect to the state treatment of interest expense under Section 163(j) of the Internal Revenue Code of 1986, as amended (the “Code”). For taxable years ending on or after December 31, 2025, the reduction in interest allowed under Section 163(j) of the Code is treated as allocable first to persons who are not foreign persons, then to foreign persons. This applies to individuals, trusts, estates, corporations, and partnerships.
GILTI
For taxable years ending on or after December 31, 2025, only 50 percent of global intangible low-taxed income, or GILTI, received or deemed received or paid pursuant to Code Section 951A is subtracted from income. Previously Illinois provided for a full subtraction of GILTI. The GILTI deduction under Code Section 250(a)(1)(B)(i) remains unchanged.
Sales Tax – Illinois’ Wayfair Threshold
As of January 1, 2026, a retailer making sales of tangible personal property in excess of $100,000 to Illinois purchasers will be deemed to have nexus and required to collect and remit sales tax, regardless of the number of transactions. Illinois removed its 200-transaction requirement to determine whether a retailer has economic nexus and is therefore required to collect and remit sales taxes on sales to Illinois customers.
Forvis Mazars Insight: This change alleviates the burden on small businesses that had a significant number of customer transactions in Illinois at small dollar values per transaction, leading to sales tax compliance burdens that were high relative to total sales volume.
Tax Amnesty
Illinois extended its general tax amnesty program, from October 1st, 2025, to November 15th, 2025, that covers tax periods ending after June 30th, 2018, and before July 1st, 2024. Benefits include full waiver of penalties and interest.
Additionally, as part of HB 2755, Illinois established a sales tax remote-seller specific amnesty program running from August 1st, 2026, to October 31st, 2026. The amnesty program offers a simplified tax rate at a flat 9% (6.25% state plus 2.75% uniform local rate). This assists taxpayers in avoiding the complexity of sourcing sales to Illinois’ many local jurisdictions. While calculating tax at a flat 9% rate offers compliance benefits, it may cause some taxpayers to remit more tax than they otherwise would have had they collected the retailer’s occupation tax under destination-based sourcing rules. The remote seller amnesty program covers periods from January 1st, 2021, through June 30th, 2026, and offers a waiver of penalties and interest. Prior to January 1st, 2021, Illinois required remote sellers to collect Illinois use tax from Illinois customers at a rate of 6.25%.
In contrasting the amnesty program to the state’s voluntary disclosure program, the biggest benefit for the amnesty program is the full waiver of penalties and interest. The voluntary disclosure program typically only provides penalty waivers; however, the voluntary disclosure program offers a limited look-back period of only four years, while the amnesty program goes back to January 1st, 2021.
Advancing Innovative Manufacturing Tax Credit
The legislation creates a new tax credit, referred to as the advancing innovative manufacturing tax credit. The credit is on a sliding scale of three to seven percent depending on the amount of capital improvements made by a taxpayer “…to a new or existing facility for the purpose of modernizing, upgrading, automating, or streamlining a manufacturing or production process.”
Applicants must either be currently located in Illinois as a manufacturer of critically needed goods, be engaged in research and development that will result in the manufacture of these goods or planning to perform these services in Illinois.
The credit, to be taken against either corporate or individual tax, requires a minimum capital investment of $10 million dollars. The credit is nonrefundable but can be carried forward for ten years. The statute contemplates credits being granted starting on January 1, 2027, and ending on December 31, 2030.
How Forvis Mazars Can Help
Forvis Mazars can assist you in understanding the impact of these law changes on your income and sales tax filing responsibilities and your potential tax liability. We can also discuss whether the tax amnesty programs may be applicable given your fact pattern.