If a nonresident partner's only Illinois income is pass-through income from a partnership that already withholds and remits tax on its behalf, does the partner still have to file its own annual Illinois corporate return?

Plain-English summary

The taxpayer wrote to the Illinois Department of Revenue asking about the Illinois filing requirement for a corporation that is a nonresident member of an Illinois limited liability company (referred to in the letter as COMPANY). That member, COMPANY 1, is itself a limited liability company residing in another state, and its sole source of revenue is the pass-through income it receives from COMPANY — it has no other Illinois-source income. COMPANY remits pass-through withholding payments to Illinois on COMPANY 1's behalf. The taxpayer asked: since 100% of COMPANY 1's Illinois revenue is generated at the partnership level and COMPANY makes timely quarterly tax estimates (withholding), is COMPANY 1 still required to file its own annual Form IL-1120, Corporation Income and Replacement Tax Return?

The Department responded with a General Information Letter (GIL), which is non-binding and merely points the taxpayer to the relevant law. It explained that Section 502(a) of the Illinois Income Tax Act (IITA) generally requires a return from every person liable for tax under the Act, but that a nonresident whose Illinois income tax liability is paid in full — after taking into account credits allowed under Section 502(f) or Section 709.5 — is not required to file a return under that subsection. IITA Section 709.5(a) imposes a pass-through withholding requirement on partnerships (and S corporations and trusts) with respect to the Illinois-source income of nonresident partners, shareholders, or beneficiaries, and Section 709.5(b) treats amounts so withheld and paid to the Department as a payment of that partner's own estimated tax or withholding liability.

Applying these provisions to the facts described, the Department concluded that COMPANY 1 is not required to file an Illinois income tax return, unless it is separately qualified to do business in Illinois and is required to make a federal income tax return (which would trigger a filing requirement under IITA Section 502(a)(2) regardless of tax liability).

What this means for you

For nonresident partners and members of Illinois pass-through entities

If your only connection to Illinois is a pass-through interest in a partnership or LLC that already withholds and remits Illinois tax on your share of the income under IITA Section 709.5, this GIL indicates you generally do not need to separately file an annual Illinois corporate or income tax return, as long as that withholding fully satisfies your Illinois tax liability. This can simplify compliance for out-of-state investors and members whose only Illinois nexus runs through the entity itself.

For accountants and tax professionals advising multistate businesses

Before relying on this relief, confirm two things mirrored in the ruling's facts: (1) the withholding entity is actually remitting pass-through withholding timely under Section 709.5, and (2) the nonresident partner has no other Illinois-source income and is not otherwise "qualified to do business" in Illinois. The Department was explicit that the filing exception does not apply if the partner is qualified to do business in Illinois and required to file a federal return — in that case, a return is still due under IITA Section 502(a)(2), regardless of whether any additional tax is owed.

For partnerships and LLCs remitting withholding on behalf of members

The ruling underscores that timely, complete withholding under Section 709.5(a) is what allows a nonresident partner to avoid its own separate filing obligation, since amounts withheld are credited as a payment of that partner's estimated tax or withholding liability under Section 709.5(b). Entities administering withholding for nonresident members should keep this connection in mind when advising members about their own filing obligations.

Common questions

Does a nonresident partner ever have to file an Illinois return even if withholding covers the full tax liability?
Yes — if the nonresident partner is qualified to do business in Illinois and is required to file a federal income tax return, IITA Section 502(a)(2) requires an Illinois return regardless of whether the partner owes any additional Illinois tax.

What counts as "paid in full" for purposes of the filing exception?
The ruling describes it as the nonresident's Illinois income tax liability under subsections (a) through (d) of IITA Section 201 being paid in full after taking into account credits allowed under Section 502(f) or Section 709.5 (i.e., pass-through withholding credits).

Is this letter binding on the Department?
No. It is a General Information Letter (GIL) under 86 Ill. Adm. Code 1200.120(b) and (c), which is designed to provide general information and is expressly not a statement of Department policy and not binding on the Department.

Who is responsible for withholding in this scenario?
The partnership (COMPANY) is responsible for withholding under IITA Section 709.5(a) on the business income and certain nonbusiness income distributable to its nonresident partner, shareholder, or beneficiary (here, COMPANY 1).

Citations and references

• 35 ILCS 5/502(a) (Illinois Income Tax Act) — sets the general requirement to file an Illinois return, and the exception for nonresidents whose tax liability is fully paid via withholding/credits.
• 35 ILCS 5/709.5(a) (Illinois Income Tax Act) — imposes pass-through withholding on partnerships, S corporations, and trusts for the Illinois-source income of nonresident partners, shareholders, or beneficiaries.
• 35 ILCS 5/709.5(b) (Illinois Income Tax Act) — treats amounts withheld and remitted under Section 709.5 as a payment of the nonresident partner's own estimated tax or withholding liability.
• 35 ILCS 5/201 (Illinois Income Tax Act) — referenced for the subsections (a)-(d) tax liability computation used in the Section 502(a) filing exception.
• 86 Ill. Adm. Code 1200.120(b) and (c) — establishes that General Information Letters are general, non-binding, and not a statement of Department policy.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2016/it-16-0007-gil.pdf

Original ruling text

IT 16-0007-GIL 12/05/2016

RETURNS

A nonresident partner whose liability for income and replacement tax is fully satisfied by
amounts withheld on its behalf under IITA Section 502(a)(1). (This is a GIL.)
December 5, 2016

Re:

Illinois income tax

Dear Xxxxx:
This is in response to your letter dated October 31, 2016. The nature of your request and the
information you have provided requires that we respond with a General Information Letter (GIL).
A GIL is designed to provide general information, is not a statement of Department policy and is
not binding on the Department. See 86 Ill. Adm. Code 1200.120(b) and (c), which may be
accessed from the Department’s web site at www.tax.illinois.gov.
In your letter you have stated the following:
We are writing to the Illinois Department of Revenue to obtain a legal opinion as to the
Illinois filing requirement for the above mentioned corporation.
The taxpayer is a member in COMPANY (COMPANY). COMPANY is a STATE limited
liability company residing in the state of STATE 1. COMPANY 1 (COMPANY 1) is a
member in COMPANY and also resides in the state of STATE 1; therefore, COMPANY 1
is a non-resident member for Illinois purposes. COMPANY remits the pass-through
withholding payments on behalf of COMPANY 1. COMPANY 1’s sole revenue source is
the pass-through income from COMPANY and, otherwise, has no other Illinois sources
of revenue.
The question we would like for the Legal Department to address is the following:
Since 100% of Illinois revenue is generated at the partnership level and COMPANY
makes timely quarterly tax estimates, is COMPANY 1 required to file annually Form IL1120, Corporation Income and Replacement Tax Return?
RULING
Section 502(a) of the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/101 et seq.) sets forth the
requirements for filing Illinois income tax returns. That section states in pertinent part as follows:
(a)

In general. A return with respect to the taxes imposed by this Act shall be made by
every person for any taxable year:

(1)

For which such person is liable for a tax imposed by this Act, or

(2)

In the case of a resident or in the case of a corporation which is qualified to do
business in this State, for which such person is required to make a federal income
tax return, regardless of whether such person is liable for a tax imposed by this
Act.

Notwithstanding the provisions of paragraph (1), a nonresident (other than, for taxable
years ending on or after December 31, 2011, a nonresident required to withhold tax under
Section 709.5) whose Illinois income tax liability under subsections (a), (b), (c), and (d) of
Section 201 of this Act is paid in full after taking into account the credits allowed under
subsection (f) of this Section or allowed under Section 709.5 of this Act shall not be
required to file a return under this subsection (a).
IITA Section 709.5(a) imposes an income tax withholding requirement on partnerships, S
corporations, and trusts, with respect to the shares of business income, and certain nonbusiness
income, of nonresident partners, shareholders, or beneficiaries. IITA Section 709.5(b) provides
for the treatment of amounts so withheld with respect to the partner, shareholder, or beneficiary:
Credit for taxes withheld. Any amount withheld under subsection (a) of this Section and
paid to
the Department shall be treated as a payment of the estimated tax liability or of the
liability for
withholding under this Section of the partner, shareholder, or beneficiary to whom
the income is
distributable for the taxable year in which that person incurred a liability
under this Act with respect to that income.
Applying these provisions to the facts represented in your letter, COMPANY 1. is not required to
file an Illinois income tax return unless it is qualified to do business in Illinois and required to
make a federal income tax return.
As stated above, this is a GIL. A GIL does not constitute a statement of policy that applies,
interprets or prescribes the tax laws, and it is not binding on the Department. If you have further
questions regarding this GIL, please call (217) 782-2844 If you have additional questions
regarding Illinois income tax laws, please visit the Department’s web site at www.tax.llinois.gov.

Sincerely,

Brian L. Stocker
(Associate Counsel – Income tax)