Illinois — Corporate Income / Franchise Tax

Illinois imposes income tax on corporations (other than S corporations) for the privilege of earning or receiving income in or as a resident of Illinois. The tax applies to C corporations doing business in Illinois or earning Illinois-source income. S corporations are exempt from Illinois corporate income tax but remain subject to the replacement tax at a different rate.

In addition to the 7 percent corporate income tax, corporations must pay a 2.5 percent Personal Property Replacement Tax on net income, resulting in a combined effective rate of 9.5 percent. The replacement tax was enacted to compensate local governments for the elimination of personal property taxes on business assets.

Corporations must file Form IL-1120 if they are either liable for tax under the Illinois Income Tax Act or qualified to do business in Illinois, regardless of tax liability.

Source: 35 ILCS 5/201 and Illinois Department of Revenue - Corporation Tax Information

Illinois imposes corporate income tax on nonresident corporations when they earn or receive income in Illinois and have sufficient nexus under the U.S. Constitution. Activity conducted in interstate commerce may establish nexus with Illinois when the nonresident earns or receives income in the state. Unlike its sales tax regime, Illinois has not adopted a specific dollar threshold for corporate income tax nexus; instead, the state asserts jurisdiction to tax business income to the full extent allowed under the Due Process Clause and Commerce Clause of the U.S. Constitution.

For sellers of tangible personal property, Public Law 86-272 may provide protection from Illinois income tax if the corporation's activities are limited to solicitation of orders for tangible personal property that are approved and shipped from outside Illinois. However, PL 86-272 does not protect sales of services, intangibles, SaaS, or the leasing or licensing of property.

A corporation must file Form IL-1120 if it is either (1) liable for Illinois income tax, or (2) qualified to do business in Illinois and required to file a federal income tax return, regardless of whether it has Illinois tax liability.

Source: 86 Ill. Adm. Code § 100.9720; Illinois Department of Revenue Letter Ruling IT 22-0009-GIL; 35 ILCS 5/502(a)

Illinois imposes a 7 percent corporate income tax on net income for taxable years beginning on or after July 1, 2017. In addition, corporations (other than S corporations) are subject to a 2.5 percent Personal Property Replacement Tax on the same net income base, resulting in a combined effective rate of 9.5 percent.

Source: 35 ILCS 5/201(b)(14); 35 ILCS 5/201(d); Illinois Department of Revenue - Income Tax Rates

Illinois apportions the business income of multistate corporations using a single sales factor formula. The apportionment percentage equals Illinois sales divided by total sales everywhere. Sales of tangible personal property are sourced to Illinois if delivered or shipped to a purchaser within Illinois. For sales other than tangible personal property, Illinois applies market-based sourcing rules under Section 304(h), which generally assign receipts to Illinois based on where the service is received or the intangible is utilized.

Different apportionment formulas apply to insurance companies (Section 304(b)), financial organizations (Section 304(c)), federally regulated exchanges (Section 304(c-1)), and transportation companies (Section 304(d)).

Source: 35 ILCS 5/304(a); 35 ILCS 5/304(h)

Corporate returns are due on or before the 15th day of the third month following the close of the taxable year. Illinois applies the same due date as federal returns when a taxpayer's income or loss is reported for federal purposes on a return with a later due date. For calendar-year C corporations, Form IL-1120 is due April 15. Illinois provides an automatic six-month extension to file without requiring a separate extension form, though any tax owed must be paid by the original due date to avoid interest and penalties.

Source: 35 ILCS 5/505(a)(1); Illinois Department of Revenue - Corporation Tax Information

Illinois corporate income tax starts with federal taxable income and then applies statutory addition and subtraction modifications to arrive at base income, which is the starting point for computing Illinois tax liability. Section 203(b) of the Illinois Income Tax Act governs these modifications for corporations (other than S corporations). Understanding which items must be added back and which may be subtracted is essential for accurate Illinois return preparation, because the modifications reconcile differences between federal and Illinois tax policy.

Starting point: federal taxable income

For C corporations, the base income computation begins with federal taxable income as reported on federal Form 1120. For certain special entities, the starting point is the entity-specific federal taxable income: life insurance companies use life insurance company taxable income (plus pre-1984 policyholder surplus account distributions); non-life insurance companies use taxable income under IRC Section 831; regulated investment companies use investment company taxable income under IRC Section 852; and real estate investment trusts use REIT taxable income under IRC Section 857.

Addition modifications

Illinois requires corporations to add back to federal taxable income certain items that were excluded or deducted at the federal level but are taxable for Illinois purposes. Common addition modifications under Section 203(b)(2) include:

• State and municipal bond interest — Interest income from obligations of states other than Illinois, their political subdivisions, and the District of Columbia that was excluded from federal gross income must be added back. This includes interest on bonds issued by other states, cities, counties, and municipal authorities outside Illinois.

• IRC Section 250 deduction (FDII/GILTI) — The deduction allowed under IRC Section 250(a)(1)(A) for foreign-derived intangible income (FDII) must be added back. Corporations report this on federal Form 8993, Line 28, and add it back on Illinois Schedule M.

• Federal bonus depreciation and excess Section 179 expense — Illinois decouples from federal accelerated depreciation. Corporations must add back the amount of federal bonus depreciation taken under IRC Section 168(k) and any Section 179 expense deduction that exceeds Illinois limits. These additions are computed on Illinois Form IL-4562, Special Depreciation.

• Related-party expenses (80/20 companies) — Intangible expenses and interest paid to related foreign persons (80/20 companies—entities that would be part of the unitary group but for conducting 80% or more of their business activity outside the United States) must be added back. These are computed on Illinois Schedule 80/20.

• Tax credits included in income — Certain tax credits that generate federal deductions (such as the Student-Assistance Contribution Credit under Section 203(b)(2)(U)) must be added back when the associated federal deduction was claimed.

Subtraction modifications

Illinois allows corporations to subtract from federal taxable income certain items that were included federally but are not taxable for Illinois purposes, as well as items that represent timing adjustments. Common subtraction modifications under Section 203(b)(2) include:

• U.S. government obligation interest — Interest income from U.S. Treasury obligations, U.S. savings bonds, and other direct federal government obligations that was included in federal taxable income may be subtracted.

• Interest from certain U.S. territories — Interest, dividends, and other income from obligations issued by the governments of American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands may be subtracted to the extent included in federal taxable income.

• Depreciation timing adjustments — In the taxable year in which federal bonus depreciation is taken and for each subsequent year, corporations may subtract an amount that effectively allows them to claim the regular (non-bonus) depreciation they would have been entitled to under pre-bonus-depreciation law. This subtraction, computed on Form IL-4562, phases in over the asset's depreciable life. Important limitation: Unused depreciation subtractions in a given year may not be carried forward as a standalone item, although they may be embedded in a net operating loss carryforward under Section 207.

• Related-party income from 80/20 companies — If a U.S. corporation received interest or intangible income from an affiliated 80/20 company (which had to add back related expenses), the receiving corporation may subtract the income to the extent of the corresponding addition. This subtraction is computed on Schedule 80/20.

• Subtractions passed through from partnerships, S corporations, trusts, or estates — A corporation's distributive share of subtractions from pass-through entities, as reported on Illinois Schedule K-1-P or K-1-T.

Legislative policy: Section 203(h)

Section 203(h) of the Illinois Income Tax Act states the general rule: "Except as expressly provided by this Section there shall be no modifications or limitations on the amounts of income, gain, loss or deduction taken into account in determining gross income, adjusted gross income or taxable income for federal income tax purposes for the taxable year." This provision clarifies that Illinois follows the federal definition of taxable income except where the statute expressly requires an addition or allows a subtraction. Taxpayers may not create their own modifications; only those enumerated in Section 203 apply.

Reporting mechanics

Corporations report most addition and subtraction modifications on Illinois Schedule M, Other Additions and Subtractions (for businesses). Special depreciation adjustments are reported on Form IL-4562, and related-party expense adjustments on Schedule 80/20. The sum of all modifications flows to Form IL-1120, where it is combined with federal taxable income to arrive at base income (Step 4, Line 13 on Form IL-1120). That base income is then subject to apportionment (for multistate corporations) or allocation (for nonbusiness income) under Article 3 of the Illinois Income Tax Act, and reduced by any net operating loss deduction under Section 207, to determine net income subject to the 7% corporate income tax and 2.5% replacement tax.

Form IL-1120 instructions confirm: "Your base income or loss is your federal taxable income or loss, plus any additions on Lines 2 through 8, less any subtractions on Line 22."

Source: 35 ILCS 5/203; Illinois Department of Revenue - Corporation Tax Information; Illinois Form IL-1120 Instructions

Illinois allows corporations to deduct net operating losses (NOLs) under Section 207 of the Illinois Income Tax Act, but the carryback and carryforward periods, and the ability to use those losses, differ significantly from federal rules and have changed multiple times over the past two decades. Practitioners must identify when the loss was incurred and when it is being used to determine the applicable carryforward period and any annual deduction cap.

How Illinois net losses are computed

An Illinois net loss arises when, after applying all Section 203(b)(2) addition and subtraction modifications and the Article 3 allocation and apportionment rules, the taxpayer's net income results in a loss. This means the taxpayer starts with federal taxable income, applies the Illinois-specific modifications (such as adding back bonus depreciation and the Section 250 FDII deduction, and subtracting U.S. government interest), and then apportions or allocates the resulting base income—if that number is negative, it is an Illinois net loss available for carryover under Section 207.

Illinois net losses are distinct from federal NOLs. A corporation may have a federal NOL but not an Illinois net loss (or vice versa) because Illinois applies different modifications and a different apportionment formula. The Illinois net loss is computed on Illinois Schedule NLD.

Carryforward and carryback periods: depends on when the loss was incurred

The Illinois Income Tax Act has changed the carryback and carryforward periods multiple times. The applicable rules depend on the taxable year in which the loss was incurred:

• Losses incurred in taxable years ending before December 31, 1999: Carryback and carryforward allowed in the manner permitted under IRC Section 172 as it existed at that time.

• Losses incurred in taxable years ending on or after December 31, 1999 and before December 31, 2003: Two-year carryback and 20-year carryforward. A taxpayer could elect to relinquish the entire carryback period and carry the loss forward only; the election had to be made by the due date (including extensions) of the return for the loss year and was irrevocable once made.

• Losses incurred in taxable years ending on or after December 31, 2003 and before December 31, 2021: No carryback; 12-year carryforward. (An optional carryback election was available for losses incurred in taxable years ending on or after December 31, 2003 and before December 31, 2019, allowing taxpayers to elect to relinquish the carryforward period, but this is rarely relevant because the default rule for this period was no carryback.)

• Losses incurred in taxable years ending on or after December 31, 2021: No carryback; 20-year carryforward.

Critical 2021 legislative change: retroactive extension to 20 years

Public Act 102-0658, effective November 16, 2021, amended Section 207(a)(3) to extend the carryforward period from 12 years to 20 years for losses incurred in taxable years ending on or after December 31, 2003. Importantly, the extension applies retroactively to any net loss that had not expired as of November 16, 2021. A loss that would have expired under the prior 12-year rule but had at least one carryforward year remaining on November 16, 2021 was automatically extended to 20 years from the loss year.

For example, a loss incurred in a taxable year ending December 31, 2009 would have expired after the taxable year ending December 31, 2021 under the prior 12-year rule. Because it had not yet expired as of November 16, 2021, it is now carried forward for 20 years and may be used through taxable years ending December 31, 2029.

The Illinois Department of Revenue confirmed this extension in its official guidance, stating: "For any net loss that has not expired as of November 16, 2021, the carryover period shall be extended from 12 years to 20 years."

Order of application: carrybacks first, then carryforwards in order of expiration

When a carryback is permitted (for losses incurred in taxable years ending 1999–2002), the loss must be carried back to the earliest of the two preceding taxable years before it may be carried forward. For example, a loss incurred in a taxable year ending December 31, 2001 must first be carried back to the taxable year ending December 31, 1999; any remaining loss is then carried back to the taxable year ending December 31, 2000; and only then may any excess be carried forward.

When multiple losses are available in a single taxable year, Illinois net losses are applied in order of expiration, beginning with the oldest loss first (the loss that will expire soonest). This rule is found in Section 207(a-5)(B) and is consistent with federal ordering rules.

Corporate limitation: $100,000 annual cap for specific periods

For C corporations (other than S corporations), Illinois has twice imposed temporary annual caps on the amount of net loss deduction that may be claimed in a given year, regardless of the total loss available:

• Taxable years ending on or after December 31, 2010 and before December 31, 2012: NOL deduction completely suspended (zero allowable deduction).

• Taxable years ending on or after December 31, 2012 and before December 31, 2014: NOL deduction capped at $100,000 per year.

• Taxable years ending on or after December 31, 2021 and before December 31, 2024: NOL deduction capped at $100,000 per year (reinstated by Public Act 102-0016, effective June 17, 2021).

These limitations apply only to the deduction year (the year in which the taxpayer is using the loss to offset income), not the loss year. A loss incurred in 2008 would have been subject to the suspension in 2011 and 2012, the $100,000 cap in 2013, full use in 2014–2020, and again the $100,000 cap in 2022 and 2023.

Critical rule: suspension and cap years do not count against the carryforward period. Section 207(d) provides that "for purposes of determining the taxable years to which a net loss may be carried under subsection (a) of this Section, no taxable year for which a deduction is disallowed under this subsection, or for which the deduction would exceed $100,000 if not for this subsection, shall be counted." This means a loss that could not be fully used because of the suspension or cap does not "age" during those years—the carryforward clock effectively pauses.

For example, assume a corporation incurred an Illinois net loss in the taxable year ending December 31, 2009. Under the 20-year carryforward rule (as extended by PA 102-0658), that loss may be carried forward through the taxable year ending December 31, 2029. If the corporation had income in the taxable years ending December 31, 2011 and December 31, 2012, it could not use the loss in those years (suspension period). Those two years do not count against the 20-year carryforward period, so the loss may instead be carried forward through the taxable year ending December 31, 2031 (20 years of actual availability, not counting the two suspension years). The same principle applies to years in which the $100,000 cap prevented full utilization.

S corporations are exempt from the corporate limitation

The suspension and $100,000 cap apply only to C corporations. Section 207(d) expressly excludes S corporations from the limitation. S corporations may use their Illinois net loss deductions without annual caps or suspension, subject only to the general carryforward period rules.

Federal NOL deduction must be added back on the Illinois return

Because Illinois computes net losses under its own rules, any federal NOL deduction taken on the federal return must be added back to federal taxable income when computing Illinois base income. This addition modification is required under Section 203(b)(2)(D) for corporations. The taxpayer then separately computes and deducts the Illinois net loss deduction under Section 207, using Illinois Schedule NLD.

Filing mechanics

Corporations compute and claim the Illinois net loss deduction on Illinois Schedule NLD (Net Loss Deduction). The schedule identifies each loss year, the amount of loss incurred, the amount previously used in earlier carryback or carryforward years, any reduction due to discharge of indebtedness income (Section 207(c)), and the amount available to offset base income in the current year. The net loss deduction from Schedule NLD flows to Form IL-1120, where it reduces net income subject to tax.

The return that generates the loss must be filed before the loss may be claimed in a carryback or carryforward year. Illinois law does not require the loss-year return to be filed by any particular deadline to establish the loss, but no refund or credit will be issued on a return filed three or more years past the extended due date of that return. This means a corporation may file a late return to establish a loss for carryforward purposes, but if the return is filed more than three years late, the corporation will not receive a refund of any overpayment shown on that loss-year return (though it may still carry the loss forward to offset income in future years, subject to the carryforward period).

When a corporation ceases Illinois operations

If a corporation incurs an Illinois net loss and then ceases carrying on business in Illinois for one or more years, the loss does not expire solely because the corporation had no Illinois activity. The Illinois Department of Revenue has stated in a general information letter (IT 13-0007-GIL) that "assuming that a loss is otherwise carried under the provisions of IITA Section 207 to a taxable year when the taxpayer resumes carrying on business in Illinois, the taxpayer is allowed any Illinois net loss deduction as specified in that section." The carryforward period continues to run based on the loss year, but the loss remains available if the corporation later has Illinois-source income within the carryforward window.

Reduction for discharge of indebtedness income

Section 207(c) requires a reduction to an Illinois net loss (and any NOL carryover) when a taxpayer excludes discharge of indebtedness income under IRC Section 108(a) and that income would have been allocated and apportioned to Illinois. The reduction is computed by multiplying the federal IRC Section 108(b)(2)(A) reduction by a fraction: the numerator is the amount of discharge of indebtedness income excluded from gross income that would have been allocated and apportioned to Illinois, and the denominator is the total amount excluded. This rule applies to taxable years ending on or after December 31, 2008.

Source: 35 ILCS 5/207; Illinois Department of Revenue – What are the limitations for using an Illinois Net Operating Loss?; Illinois Department of Revenue Letter Ruling IT 13-0007-GIL