Table of Contents
When operating a business, understanding the business tax in Illinois tied to your entity type is critical. Each business structure—LLC, S Corporation, C Corporation, and Partnership—has its unique tax treatment under Illinois law. Here’s a breakdown to help you navigate the state’s tax requirements.
Single-Member Limited Liability Company (LLC)
An LLC in Illinois can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on its election with the IRS. By default, single-member LLCs are treated as disregarded entities. Since we address partnerships down below, here are the key taxes applicable for single-member LLCs:
Personal Income Tax: For pass-through taxation, profits are reported on the owners’ individual tax returns. Illinois imposes a flat personal income tax rate of 4.95% on the owner’s personal 1040 tax return.
Replacement Tax: Single-member LLCs are not subject to an Illinois replacement tax.
S Corporation
S Corporations are popular for their pass-through tax benefits, but they’re not entirely exempt from taxes in Illinois:
Personal Income Tax: Shareholders report their share of the corporation’s income on their individual tax returns, subject to the 4.95% rate.
Replacement Tax: Illinois imposes a 1.5% replacement tax on the S corporation’s net income.
PTE Tax: S corporations can elect to pay the optional PTE tax at the rate of 4.95%. This can reduce the federal taxable income of shareholders. This is not an additional tax but rather replaces the personal income tax above.
C Corporation
C Corporations face a more traditional tax structure where income is taxed at both the corporate and individual levels (double taxation):
Corporate Income Tax: Illinois levies a 7% corporate income tax on net income.
Replacement Tax: In addition, C corporations are subject to a 2.5% replacement tax on net income. This is a total of 9.5% between the corporate income tax and replacement tax.
Double Taxation: Profits distributed as dividends to shareholders are taxed again on the shareholders’ individual tax returns.
Startup Accounting, Tax Filings, and CFO Services
Helping You Master Your Finances and Impress Investors!
Schedule a Complimentary Meeting Today!
Partnership
Partnerships in Illinois are generally treated as pass-through entities, meaning the income flows through to the partners who report it on their individual returns.
Personal Income Tax: Partners pay a flat 4.95% tax on their share of the partnership income.
Replacement Tax: Partnerships themselves are subject to a 1.5% replacement tax on net income.
PTE Tax: Partnerships can elect to pay the 4.95% PTE tax at the entity level, providing a potential federal tax deduction for partners. Similar to S Corporations, this is not an additional tax but rather replaces the personal income tax above.
Understanding the Pass-Through Entity (PTE) Tax
The PTE tax in Illinois is an elective tax available to partnerships and S corporations taxed as pass-through entities. Here’s why it’s significant:
Rate: The tax is set at 4.95%, matching the state’s personal income tax rate.
Federal Deduction: Paying the PTE tax allows the business to deduct state taxes paid at the entity level, potentially reducing the owners’ federal tax liability. Without the PTE election, state taxes paid would not be deductible for a business.
Election: Businesses must elect this tax annually when filing their returns.
Illinois business taxes vary significantly depending on your legal entity type. Understanding these differences—especially the implications of the pass-through entity tax—can help you optimize your tax strategy and compliance. Consulting with a tax professional is recommended to ensure you meet all requirements and take advantage of available tax benefits.
About the Author
Brett Rosenstein
Founder of Build Accounting
Certified Public Accountant
Brett is the founder and president of Build Accounting where he provides accounting, tax filing, and CFO services for startups and small businesses. His goal is to make the accounting and tax process as simple, streamlined, and headache-free for business founders as possible.
Brett received a Bachelor of Science in Business Administration from The Ohio State University. He is also a Certified Public Accountant.
When Brett is not working, he is running, biking, spending time with his wife and daughter, or trying new pizza places.
How Can We Help Your Business?
Get started today by scheduling a call to see how we can help your startup. We’ll respond as soon as possible.
By submitting this contact form, you consent to receive email communications from Build Accounting, including our newsletter with quick time and tax saving tips. You may opt-out at any time.
Midwest Startup CPA
Serving Columbus, Cincinnati, Cleveland, Chicago, and beyond
Contact
brett@buildaccounting.com
7775 Walton Pkwy, 3rd Floor
New Albany, OH 43054
Copyright: © 2024 Build Accounting LLC All Rights Reserved 2024 | Privacy Policy | Terms of Use | Fulfillment Policy
