How did Illinois's mid-2017 income tax rate increase (P.A. 100-22) affect 2017 tax computations, exemptions, the R&D credit, and estimated tax penalties?

Plain-English summary

This GIL responds to a tax practitioner's questions about Public Act 100-22, which raised Illinois income tax rates mid-way through 2017: the individual, trust, and estate rate went from 3.75% to 4.95%, and the corporate rate went from 5.25% to 7%, both effective July 1, 2017. Because the change happened mid-year, the Department explains how 2017 calendar-year filers compute tax for a year that spans two different rates.

The default method is a blended rate: net income for the year is split between the two rate periods based on the ratio of days in each period (181 days at the old rate, 184 days at the new rate for calendar-year 2017), producing a single blended rate of about 4.3549% for individuals. Taxpayers who want to attribute income and deductions to the actual period in which they were earned or incurred — rather than using the day-count ratio — can instead make an irrevocable election on Schedule SA by the return's due date (including extensions).

The letter also confirms several other P.A. 100-22 changes: the standard exemption allowance and the residential real property tax credit are now completely disallowed (not phased out) once a taxpayer's federal adjusted gross income exceeds $500,000 (joint filers) or $250,000 (all others); the research and development credit was reinstated retroactive to the 2016 tax year, with amended 2016 and 2015 forms available to claim it; and taxpayers who made timely estimated payments based on 100% of their prior year's tax liability will not owe an estimated-tax underpayment penalty, since P.A. 100-22 did not change the underpayment-penalty rules in Section 804.

As a GIL, this letter is general guidance only — it is not binding on the Department and does not carry the force of a taxpayer-specific ruling.

What this means for you

Calendar-year individuals, trusts, and estates filing 2017 returns

Unless you elect specific accounting on Schedule SA, your 2017 Illinois tax is computed using the blended rate described above rather than by applying 3.75% and 4.95% separately to income you actually earned before and after July 1, 2017. If you want to split gains or losses (for example, a partnership redemption or brokerage account activity) between the two rate periods based on when they actually occurred, you must make the Schedule SA election by your return's due date (including extensions), and once made it cannot be revoked.

Corporations

The same mechanics apply at the corporate level: a blended rate combining 5.25% (pre-July 1) and 7% (post-July 1) applies by default, with the same Schedule SA election available to specifically attribute income to each period instead.

Higher-income taxpayers claiming the standard exemption or property tax credit

If your federal AGI exceeds $500,000 (married filing jointly) or $250,000 (all other filers), you lose the entire standard exemption allowance and the residential real property tax credit for 2017 — there is no partial phase-out as AGI approaches the threshold. The test is based on federal AGI, not Illinois base income.

Taxpayers claiming the R&D credit or worried about estimated tax penalties

If you didn't claim the research and development credit on your 2015 or 2016 return because the credit had lapsed, you can now claim it using the prescribed 2016 Schedule 1299-D (or by amending your 2015 return and Schedule 1299-D). And if you paid your 2017 estimated tax installments on time based on 100% of your 2016 tax liability, the rate change itself does not create an underpayment penalty.

Common questions

Q: Do I have to use the blended rate, or can I split my income by the actual date it was earned?
A: The blended rate applies automatically. If you'd rather attribute income and deductions to the specific period in which they occurred, you must affirmatively elect specific accounting on Schedule SA by your return's due date (including extensions); the election is irrevocable once made.

Q: Is the AGI threshold for the exemption and property tax credit based on my Illinois income or my federal AGI?
A: Federal adjusted gross income. And it's a cliff, not a phase-out — once you cross $500,000 (joint) or $250,000 (other), the standard exemption and the property tax credit are both disallowed entirely for that year.

Q: I didn't claim the R&D credit on my 2015 or 2016 return — can I still get it?
A: Yes. P.A. 100-22 reinstated the credit retroactive to 2016. The Department made available a 2016 Schedule 1299-D (and a revised version) for the 2016 tax year, and taxpayers whose 2015 tax year ended after December 31, 2015 can amend their 2015 return and Schedule 1299-D to claim it.

Q: Will I owe an underpayment penalty because the mid-year rate change increased my actual 2017 tax liability?
A: Not if you made timely estimated payments based on 100% of the tax shown on your prior year's return (and that prior year wasn't a short year) — P.A. 100-22 did not change the underpayment penalty rules in Section 804, so the existing safe harbor still applies.

Q: Is this letter binding on the Department?
A: No. It is a General Information Letter, which under 86 Ill. Adm. Code 1200.120(b) and (c) provides general information but is not a statement of Department policy and is not binding on the Department.

Citations and references

• 35 ILCS 5/201(b) (individual, trust, estate, and corporate income tax rates, including the 2017 mid-year rate increase)
• 35 ILCS 5/202.5 (allocation of net income between pre- and post-July 1, 2017 periods; blended rate and specific accounting election)
• 35 ILCS 5/204 (standard exemption allowance, including the new AGI-based disallowance)
• 35 ILCS 5/208 (residential real property tax credit, including the new AGI-based disallowance)
• 35 ILCS 5/102 (definition of adjusted gross income/base income)
• 35 ILCS 5/201(k) (research and development credit)
• 35 ILCS 5/402 (method of accounting)
• 35 ILCS 5/207 (net loss carryforward deduction)
• 35 ILCS 5/804 (penalty for underpayment of estimated tax)
• 86 Ill. Adm. Code 1200.120(b) and (c) (General Information Letters are not binding Department policy)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2017/it-17-0011-gil.pdf

Original ruling text

IT 17-0011-GIL 12/13/2017 TAX CHANGES
P.A. 100-22 Illinois Income Tax Changes (This is a GIL.)

December 13, 2017
Re:

P.A. 100-22
Illinois Income Tax Changes

Dear Xxxxx:
This is in response to your letter dated November 16, 2017 in which you requested information
related to the Illinois income tax. The nature of your letter and the information provided require 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.ILtax.com.
Your letter states as follows:
As we prepare for the upcoming tax filing season for 2017 returns, we are reminded of the
many changes enacted with P.A. 100-0022 which became effective for t ax years beginning on
or after January 1, 2017 or ending on December 31, 2017. Reference is made to the Illinois
Department of Revenue Informational Bulletins FY 2018-01, FY 2018-02 and FY 2018-03.
By way of background, the vast, vast majority of our individual and trust taxpayers use the
calendar year for tax reporting purposes. We note among the various provisions of the tax
legislation that the Illinois individual, trust and estate tax rate increased to 4.95% on July 1,
2017 and the corporate tax rate increased to 7%. We have questions regarding the
computation of 2017 tax and other provisions of P.A. 100-0022:
• Bulletin FY 2018-02 makes specific reference to additional guidance and instructions
to be released in January 2018 – is a draft of the form and/or instructions available
now? Will taxpayers be allowed to specifically bifurcate their transactions into preversus post-tax law rate changes and how will this work? For example, if a taxpayer is
redeemed out of a partnership in March of 2017 at a gain, will he be allowed to apply
the tax rate in effect at that date or must he use the blended rate? Will a taxpayer be
allowed to segregate his portfolio gains and losses from taxable brokerage account
transactions into pre- versus post-tax law rate changes and how will this work? We
believe that releasing information now (and not in January 2018) will help practitioners
understand what options are available and how this information is to be reported to the
Illinois Department of Revenue.
• We note that Schedule SA (IL-1040) Specific Accounting Method of Computing Net
Income for Individuals is on the Department’s website but that it only applies to fiscalyear filers with tax years ending on or after July 1, 2017 and on or before December 30,
2017. What form is to be used for calendar 2017 tax filers? What will it look like and,

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given the impending tax filing season, why is it not yet released for practitioners to get
up to speed?
• We note that the standard exemption allowance and property tax credit will be
disallowed where a taxpayer’s AGI exceeds $500,000 (MFJ status) or $250,000 (all
other returns). Are these thresholds referring to Federal AGI or Illinois base income? Is
the disallowance in the form of a cliff cut-off i.e., if the AGI limit is achieved, then no
phase-out occurs, just total loss of deduction or credit? Please clarify.
• The research and development credit was reinstated retroactive to 2016. FY 2018-01
states that the Department will provide updated forms and instructions in order to claim
a credit not previously allowed. When will this guidance be released?
• As to individuals, trusts, and estates, if such taxpayers have based their 2017
estimated tax payments using the 100% of prior year tax safe harbor, and have paid
these installments on time and as scheduled, no penalties for underpayment of
estimated tax would be applicable under the new law. Please confirm.

RULING
Public Act 100-22 amended the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/101 et seq.), including
Sections 201(b) and 202.5. Subsection (a) of Section 201 imposes the regular income tax, and
subsection (b) establishes the rate of tax.1 As amended, IITA Section 201(b) provides, in relevant
part, as follows:
(5.2) In the case of an individual, trust, or estate, for taxable years beginning on or after
January 1, 2015, and ending prior to July 1, 2017, an amount equal to 3.75% of the taxpayer’s
net income for the taxable year.
(5.3) In the case of an individual, trust, or estate, for taxable years beginning prior to July 1,
2017 and ending after June 30, 2017, an amount equal to the sum of (i) 3.75% of the
taxpayer’s net income for the period prior to July 1, 2017, as calculated under Section 202.5,
and (ii) 4.95% of the taxpayer’s net income for the period after June 30, 2017, as calculated
under Section 202.5.
(5.4) In the case of an individual, trust, or estate, for taxable years beginning on or after July 1,
2017, an amount equal to 4.95% of the taxpayer’s net income for the taxable year.
…
(12) In the case of a corporation, for taxable years beginning on or after January 1, 2015, and
ending prior to July 1, 2017, an amount equal to 5.25% of the taxpayer’s net income for the
taxable year.
(13) In the case of a corporation, for taxable years beginning prior to July 1, 2017, and ending
after June 30, 2017, an amount equal to the sum of (i) 5.25% of the taxpayer’s net income for
the period prior to July 1, 2017, as calculated under Section 202.5, and (ii) 7% of the
taxpayer’s net income for the period after June 30, 2017, as calculated under Section 202.5.
(14) In the case of a corporation, for taxable years beginning on or after July 1, 2017, an
amount equal to 7% of the taxpayer’s net income for the taxable year.
1

IITA Sections 201(c) and (d) impose the personal property tax replacement income tax (replacement tax). The replacement tax is
imposed at the rate of 2.5% of net income in the case of a corporation (other than an S corporation), and 1.5% of net income in the
case of a partnership, trust or Subchapter S corporation. Public Act 100-22 did not amend IITA Sections 201(c) or (d).

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IITA Section 202.5 sets forth the manner by which a taxpayer determines net income for the period
prior to July 1, 2017 and after June 30, 2017. As amended, IITA Section 202.5 states:
(a) In general. With respect to the taxable year of a taxpayer beginning prior to the first day of
a month and ending after the last day of the preceding month, net income for the period after
the last day of the preceding month is that amount that bears the same ratio to the taxpayer’s
net income for the entire taxable year as the number of days in that taxable year after the last
day of the preceding month bears to the total number of days in that taxable year, and the net
income for the period prior to the first day of the month is that amount that bears the same ratio
to the taxpayer’s net income for the entire taxable year as the number of days in that taxable
year prior to the first day of the month bears to the total number of days in that taxable year.
(b) Election to attribute income and deduction items specifically to the respective portions of a
taxable year prior to the first day of a month and ending after the last day of the preceding
month. In the case of a taxpayer with a taxable year beginning prior to the first day of a month
and ending after the last day of the preceding month, the taxpayer may elect, instead of the
procedure established in subsection (a) of this Section, to determine net income on a specific
accounting basis for the 2 portions of the taxable year:
(1) from the beginning of the taxable year through the last day of that apportionment
period; and
(2) from the first day of the next apportionment period through the end of the taxable
year.
The election provided by this subsection must be made in the form and manner that the
Department requires by rule, and must be made no later than the due date (including any
extensions thereof) for the filing of the return for the taxable year, and is irrevocable.
(c) If the taxpayer elects specific accounting under subsection (b):
(1) there shall be taken into account in computing base income for each of the 2
portions of the taxable year only those items earned, received, paid, incurred or accrued
in each such period;
(2) for purposes of apportioning business income of the taxpayer, the provisions in
Article 3 shall be applied on the basis of the taxpayer’s full taxable year, without regard
to this Section;
(3) the exemption provided by Section 204 shall be divided between the respective
periods in amounts which bear the same ratio to the total exemption allowable under
Section 204 (determined without regard to this Section) as the total number of days in
each period bears to the total number of days in the taxable year;
(4) for purposes of this subsection, net income may not be negative for either of the two
portions of the taxable year and positive for the other; if net income for one portion of
the taxable year would be positive and net income for the other portion would otherwise
be negative, the net income for the entire taxable year shall be attributed to the portion

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of the taxable year with positive net income and the net income for the other portion of
the taxable year shall be zero; and
(5) the net loss carryforward deduction for the taxable year under Section 207 may not
exceed combined net income of both portions of the taxable year, and shall be used
against the net income of the portion of the taxable year from the beginning of the
taxable year through the last day of the preceding month before any remaining amount
is used against the net income of the latter portion of the taxable year.
As these provisions indicate, for purposes of applying the tax rates under IITA Sections 201(b)(5.3)
and 201(b)(13), under IITA Section 202.5(a) a taxpayer’s net income for the period prior to July 1,
2017 and for the period after June 30, 2017, is deemed to be received in each period based on the
ratio of the number of days in such period to the total number of days in the taxable year. The
Department implements the general rule of IITA Section 202.5(a) by computing a blended income tax
rate.2 Taxpayers must use the blended income tax rate to determine their tax liability unless a proper
election is made to apply the specific accounting method under IITA Section 202.5(b). Where a
taxpayer properly elects to apply the specific accounting method, net income for the period prior to
July 1, 2017 and for the period after June 30, 2017 is determined by applying the taxpayer’s method
of accounting under IITA Section 402 as if each such period constituted a separate taxable year as
well as the special rules set forth under IITA Section 202.5(c). Taxpayers make the election to apply
specific accounting by properly completing Schedule SA. The election must be made no later than the
due date (including any extensions thereof) for the filing of the return for the taxable year, and once
made is irrevocable. The 2017 Schedule SA for corporate and individual filers will soon be available
on the Department’s website at tax.illinois.gov.
Public Act 100-22 amended IITA Sections 204 and 208. IITA Section 204 allows the standard
exemption and certain additional exemptions. Public Act 100-22 added subsection (g) to Section 204,
which states as follows:
(g) Notwithstanding any other provision of law, for taxable years beginning on or after January
1, 2017, no taxpayer may claim an exemption under this Section if the taxpayer’s adjusted
gross income for the taxable year exceeds (i) $500,000, in the case of spouses filing a joint
federal tax return or (ii) $250,000, in the case of all other taxpayers.
Section 208 of the IITA allows a tax credit for residential real property taxes. As amended, IITA
Section 208 provides:
Beginning with tax years ending on or after December 31, 1991, every individual taxpayer shall
be entitled to a tax credit equal to 5% of real property taxes paid by such taxpayer during the
taxable year on the principal residence of the taxpayer. In the case of multi-unit or multi-use
structures and farm dwellings, the taxes on the taxpayer’s principal residence shall be that
portion of such total taxes which is attributable to such principal residence. Notwithstanding
any other provision of law, for taxable years beginning on or after January 1, 2017, no taxpayer
may claim a credit under this Section if the taxpayer’s adjusted gross income for the taxable
year exceeds (i) $500,000, in the case of spouses filing a joint federal tax return, or (ii)
$250,000, in the case of all other taxpayers.
2

For example, the tax imposed under IITA Sections 201(b)(5.3) and 202.5(a) in the case of a calendar year individual taxpayer for the
2017 taxable year is determined as follows: [(net income × 181/365(.0375)) + (net income × 184/365(.0495))] = net income(.043549).

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As these provisions indicate, the disallowance of exemptions and credit is based on federal adjusted
gross income rather than Illinois base income, and applies in full once the AGI threshold is exceeded
(i.e. there is no phase-out). See IITA Section 102.
Public Act 100-22 amended Section 201(k) of the IITA, which allows the research and development
credit. As amended, Section 201(k) provides, in pertinent part, as follows:
(k) Research and development credit. For tax years ending after July 1, 1990 and prior to
December 31, 2003, and beginning again for tax years ending on or after December 31, 2004,
and ending prior to January 1, 2022, a taxpayer shall be allowed a credit against the tax
imposed by subsections (a) and (b) of this Section for increasing research activities in this
State.
…
It is the intent of the General Assembly that the research and development credit under this
subsection (k) shall apply continuously for all tax years ending on or after December 31, 2004
and ending prior to January 1, 2022, including, but not limited to, the period beginning on
January 1, 2016 and ending on the effective date of this amendatory Act of the 100th General
Assembly. All actions taken in reliance on the continuation of the credit under this subsection
(k) by any taxpayer are hereby validated.
The Department has prescribed 2016 Schedule 1299-D (R&D), and revised the 2016 Schedule 1299D in order to allow taxpayers to claim the research and development credit for the 2016 tax year. In
addition, if a taxpayer did not claim the research and development credit on a 2015 return because its
tax year ended after December 31, 2015, the taxpayer may amend the 2015 return and the 2015
Schedule 1299-D to claim the credit.
Section 804 of the IITA imposes a penalty in the case of any underpayment of estimated tax. Section
804(b) defines an “underpayment” for this purpose as the excess of the amount of the required
installment determined under Section 804(c) over the amount of the installment paid on or before the
last date prescribed for payment. IITA Section 804(c) states that the required installment is equal to
25% of the “required annual payment.” The required annual payment is defined as the lesser of: (i)
90% of the tax shown on the return for the taxable year (or if no return is filed, 90% of the tax for such
year), or (ii) 100% of the tax shown on the return of the taxpayer for the preceding taxable year if a
return showing a liability for tax was filed by the taxpayer for the preceding taxable year and such
preceding taxable year was not a short year. Public Act 100-22 did not amend IITA Section 804.
As these provisions indicate, a taxpayer who makes timely estimated payments by properly
calculating the required annual payment based on 100% of the tax shown on their return filed for the
prior 12 month taxable year will not incur a penalty for underpayment of estimated tax.
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) 782-7055. If you have additional questions regarding Illinois
income tax laws, please visit the Department’s website at www.ILtax.com.

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Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)