Due to the budget crisis caused by the ongoing COVID-19 pandemic, Gov. JB Pritzker is freezing the implementation of a new set of state business tax credits and calling for a “decoupling” of Illinois tax law from recently enacted federal business tax changes.
State officials are calling the business tax changes “loopholes” that would cost Illinois in excess of $500 million in tax revenue.
The expanded state tax credits were authorized in 2019 as part of a series of tax changes contained in PA 101-9 and were scheduled to take effect Jan. 1, 2021. The new, expanded credits are estimated to cost the state an additional $20 million annually.
The proposed decoupling would keep the Illinois income tax framework the same as it was before Congress amended the federal income tax law in March 2020 as part of the Coronavirus Aid, Relief and Economic Security Act.
The amendments substantially changed federal tax treatment of net operating losses and excess business losses, automatically causing the same change in Illinois tax treatment.
Without decoupling, state officials say, federal tax changes could reduce Illinois income tax revenue by more than $500 million.
“Right now, we cannot afford to expand tax breaks to businesses that already receive tax breaks,” Pritzker said in a state of Illinois news release. “As we recover from the pandemic, we must focus on job creation and balancing our state budget. I am confident in our ability to grow our economy and put our state on firmer fiscal footing.”
The state business incentives in PA 101-9 allow companies that already receive tax credits for relocating or expanding in Illinois through the state’s Enterprise Zone, River’s Edge Redevelopment Zone, Economic Development for a Growing Economy, or High Impact Business tax credit programs, to qualify for even more credits based on wages paid to workers for construction associated with that relocation or expansion.
Companies would be eligible for up to $20 million in credits across these four programs. These new credits will not be implemented while the state is working to overcome its current fiscal challenges.
The CARES Act repealed the federal tax law provision that limited net operating losses to 80% of taxable income and added another provision allowing a five-year carryback of losses incurred after Dec. 31, 2017, and before Jan. 1, 2021.
As a result, instead of the previous practice of limiting immediate deductibility and permitting deduction of such business losses gradually over a period of years using loss carryforwards, taxpayers are permitted to deduct such business losses immediately in tax year 2020.
The decoupling will affect the tax treatment of such losses for owners of pass-through entities such as partnerships and limited liability companies.
The CARES Act also deferred until 2021 the federal tax law provision limiting the immediate deductibility of excess business losses for noncorporate taxpayers. Decoupling will reinstitute the previous limits.
In December, state officials announced $700 million in spending reductions for fiscal year 2021 that included a hiring freeze, grant reductions and operational savings. Today’s announcement will get the state another step closer to balancing the budget.
“The recently announced budget cuts along with these new roll backs of corporate tax breaks are just the first steps in this budget process. More will be necessary,” Pritzker said. “We will need to scrutinize and potentially roll back other corporate tax breaks — including those that have been on the books for many years.”
SOURCE: state of Illinois news release