Current through Register Vol. 48, No. 38, September 20, 2024
a) General
Definitions. For the purposes of IITA Sections 203 and 803(e), and subject to
the exceptions discussed in this Section, a taxpayer's gross income,
adjusted gross income or taxable income for the taxable year mean the amount of
gross income, adjusted gross income or taxable income properly reportable for
federal income tax purposes for the taxable year under the provisions of the
Internal Revenue Code. (IITA Section 203(e)(1))
b) Taxable Income Less than Zero.
Taxable income may be less than zero. (IITA Section 203(e)(1))
Accordingly, when the computation of a taxpayer's base income begins with its
taxable income and its taxable income is negative, it may offset that negative
amount against any addition modifications required to be made under IITA
Section 203, consistent with the provisions of this subsection (b).
1) Taxable Years Ending On or After December
31, 1986. For taxable years ending on or after December 31, 1986,
net
operating loss carry-forwards from taxable years ending prior to December 31,
1986 may not exceed the sum of federal taxable income for the taxable year
before net operating loss deduction, plus the excess of addition modifications
for the taxable year. (IITA Section 203(e)(1))
EXAMPLE: In its taxable year ending December 31, 1986,
Corporation A properly reports a federal net operating loss (FNOL) of $100,000,
all of which is available to carry forward to its taxable years ending on or
after December 31, 1987 for federal income tax purposes. Corporation A has
addition modifications for its taxable year ending December 31, 1986 that
exceed its subtraction modifications for that year by $5,000. For Illinois
income tax purposes, the federal net operating loss available to carry forward
is $95,000 (the $100,000 federal net operating loss minus the $5,000 in excess
addition modifications). In its taxable year ending December 31, 1987,
Corporation A deducts $97,000 of the federal net operating loss. The remainder
is deducted in its taxable year ending December 31, 1988. For purposes of IITA
Section 203, Corporation A's taxable income for the taxable year ending
December 31, 1987 is computed without allowing $2,000 of the federal net
operating loss deduction taken in that year and its taxable income for December
31, 1988 is computed without allowing any of the $3,000 federal net operating
deduction. In order to avoid a double benefit, Corporation A adds back the
ineligible $2,000 and $3,000 of FNOL for Illinois purposes on its Illinois
return for 1987 and 1988, respectively.
2) Taxable Years Ending Before December 31,
1986
A) For taxable years ending prior to
December 31, 1986, taxable income may never be an amount in excess of
the net operating loss for the taxable year as defined in Internal Revenue Code
section 172(c) and (d), provided that when taxable income of a corporation
(other than a subchapter S corporation), trust, or estate is less than zero and
addition modifications, other than those provided by IITA Section 203(b)(2)(E)
or (c)(2)(E) for trusts and estates, exceed subtraction modifications, an
addition modification is made under those subsections for any
other taxable year to which taxable income less than zero (net operating loss)
is applied under IRC section 172 or IITA Section 203(e)(2)(E) in conjunction
with IRC section 172. (IITA Section 203(e)(1))
B) For application of this provision, see
Sections
100.2230
and
100.2410.
3) Pre- and post-1986 net losses are
discussed in detail in Sections
100.2200
through
100.2250
and individual net losses are specifically discussed at Section
100.2410.
c) Special
Rules Regarding Certain Taxpayers. Many taxpaying entities do not calculate
federal taxable income on a federal taxable return or use a special variation
of federal taxable income. For these taxpayers, IITA Section 203(e)(2) defines
federal taxable income. Thus, for purposes of IITA Section 203, the taxable
income properly reportable by the following taxpayers for federal income tax
purposes means:
1) Certain Life Insurance
Companies - for life insurance companies taxable under IRC section 801,
life insurance company taxable income, plus the amount of distribution from
pre-1984 policyholder surplus accounts as calculated under IRC section
815a. (IITA Section 203(e)(2)(A));
2) Mutual Insurance Companies - for
mutual insurance companies taxable under IRC section 831, insurance company
taxable income. (IITA Section 203(e)(2)(B));
3) Regulated Investment Companies (RICs) -
for RICs taxable under IRC section 852, investment company taxable
income. (IITA Section 203(e)(2)(C));
4) Real Estate Investment Trusts (REITs) -
for REITs taxable under IRC section 857, REIT taxable income.
(IITA Section 203(e)(2)(D));
5)
Consolidated Corporations - for a corporation that is
a member of an affiliated group of corporations filing a federal consolidated
income tax return for the taxable year, taxable income determined as if that
corporation had filed a separate return federally for the taxable year and for
each preceding taxable year for which it was a member of an affiliated group
and also determined as if the election provided under IRC section 243(b)(2) had
been in effect for all years. (IITA Section 203(e)(2)(E)). However,
for purposes of computing the combined taxable income and combined base income
of a unitary business group for purposes of IITA Sections 304(e) and 502(e),
Section
100.5270
provides that the unitary business group generally applies the federal
consolidated return regulations;
6)
Cooperatives - for cooperative corporations or associations, taxable
income of such organization determined in accordance with IRC sections 1381
through 1388, inclusive, but without regard to the prohibition
against offsetting losses from patronage activities against income from
nonpatronage activities; except that a cooperative corporation or association
may make an election to follow its federal income tax treatment of patronage
losses and nonpatronage losses. In the event the election is made, patronage
losses and nonpatronage losses are computed and carried over in a manner
consistent with IITA Section 207(a) and apportioned by the apportionment factor
reported by the cooperative on its Illinois income tax return filed for the
taxable year in which the losses are incurred. (IITA Section
203(e)(2)(F)) (see PA 96-932). (See Section 100.2360 for more
guidance.);
7) Subchapter S
Corporations - Subchapter S corporations are not generally subject to federal
income tax but instead act as conduits through which items of gain, loss,
income and deduction flow to their owners. Accordingly, a special rule for
computing "taxable income" is necessary to enable them to compute their
Illinois base income for purposes of determining their Illinois Personal
Property Tax Replacement Income Tax liability under IITA Section 201(c) and
(d).
A) Election in Effect. For
subchapter S corporations for which there is in effect an election for
the taxable year under IRC section 1362, "taxable income" means
taxable income determined in accordance with IRC section 1363(b),
except that taxable income takes into account those items that are separately
stated under IRC section 1363(b)(1). (IITA Section
203(e)(2)(G)(i))
B) Items that are
separately stated under IRC section 1363(b)(1), as listed in
26 CFR
1.1366-1(a)(2), include:
i) The corporation's combined net amount of
gains and losses from sales or exchanges of capital assets;
ii) The corporation's combined net amount of
gains and losses from sales or exchanges of property used in the trade or
business and involuntary conversions;
iii) Charitable contributions paid by the
corporation within the taxable year of the corporation;
iv) The taxes described in IRC section 901
that have been paid (or accrued) by the corporation to foreign countries or to
possessions of the United States;
v) Each of the corporation's separate items
involved in the determination of credits against tax allowable under IRC part
IV, subchapter A (section 21 et seq.), except for any credit allowed under IRC
section 34 (relating to certain uses of gasoline and special fuels);
vi) Each of the corporation's separate items
of gains and losses from wagering transactions (IRC section 165(d)); soil and
water conservation expenditures (IRC section 175); deduction under an election
to expense certain depreciable business expenses (IRC section 179); medical,
dental, etc., expenses (IRC section 213); the additional itemized deductions
for individuals provided in part VII of subchapter B of the Internal Revenue
Code (IRC section 212 et seq.); and any other itemized deductions for which the
limitations on itemized deductions under IRC section 67 or IRC section 68
applies;
vii) Any of the
corporation's items of portfolio income or loss, and related expenses, as
defined in
26 CFR 1.469-0
through 11 (2007) under IRC section 469;
viii) The corporation's tax-exempt income.
For purposes of subchapter S, tax-exempt income is income that is permanently
excludible from gross income in all circumstances in which the applicable
provision of the Internal Revenue Code applies. For example, income that is
excludible from gross income under IRC section 101 (certain death benefits) or
IRC section 103 (interest on state and local bonds) is tax-exempt income, while
income that is excludible from gross income under IRC section 108 (income from
discharge of indebtedness) or IRC section 109 (improvements by lessee on
lessor's property) is not tax-exempt income; and
ix) Any other item identified in guidance
(including forms and instructions) issued by the Commissioner of Internal
Revenue as an item required to be separately stated.
C) Treatment of Items That Are Separately
Stated Under IRC Section 1363(b)(1). Many items are separately stated because
their deduction is limited by the taxable income or adjusted gross income of
the taxpayer, and this limitation is determined by each shareholder rather than
by the subchapter S corporation. IITA Section 203(e)(2)(G) permits the
deduction of these items without imposing the limitations that could apply to
the shareholder. For example, charitable deductions that are separately stated
are deductible by a subchapter S corporation without regard to the limitations
under IRC section 170(b).
D) Items
that are not separately stated under IRC section 1363(b), and that are not
taken into account in computing "taxable income" for purposes of IITA Section
203, include:
i) IRC section 199(d)(1)(A)
provides that the deduction under IRC section 199 for the domestic production
activities income of a subchapter S corporation are taken at the shareholder
level, rather than by the corporation. Because these deductions are separately
stated under this provision and not under IRC section 1363(b)(1), a subchapter
S corporation shall not take these deductions in computing its taxable income
for purposes of IITA Section 203.
ii) IRC section 613A(c)(11) provides that
percentage depletion deductions for oil and gas property of a subchapter S
corporation are computed separately for each shareholder. Because these
deductions are separately stated under this provision and not under IRC section
1363(b)(1), a subchapter S corporation shall not take these deductions in
computing its taxable income for purposes of IITA Section 203. However, in the
case of any subchapter S corporation that deducted percentage depletion on oil
and gas properties on any return filed prior to March 31, 2008 in reliance on
the return instructions for the Form IL-1120-ST, any increase in Illinois
income tax liability that would result from disallowing the percentage
depletion deduction for oil and gas property for that year is abated under
Section 4(c) of the Taxpayers' Bill of Rights Act [
20 ILCS
2520/4(c)] .
E) Election Not in Effect. For
subchapter S corporations for which there is in effect an election to
opt out of the provisions of the Subchapter S Revision Act of
1982 and that have applied instead the prior federal
subchapter S rules as in effect on July 1, 1982, "taxable income"
means the taxable income of such corporation determined in accordance
with the federal subchapter S rules as in effect on July 1, 1982.
(IITA Section 203(e)(2)(G)(ii));
8) Partnerships - Partnerships are not
generally subject to federal income tax, but instead act as conduits through
which items of gain, loss, income and deduction flow to their owners.
Accordingly, a special rule for computing "taxable income" is necessary to
enable partnerships to compute their Illinois base income for purposes of
determining their Illinois Personal Property Tax Replacement Income Tax
liability under IITA Section 201(c) and (d). For partnerships, "taxable income"
is
taxable income determined in accordance with IRC section 703, except
that taxable income shall take into account those items that are separately
stated under IRC section 703(a)(1), but would be taken into account by an
individual in calculating his or her
taxable income.
(IITA Section 203(e)(2)(H))
A) Items That Are
Separately Stated Under IRC Section 703(a)(1). IRC section 703(a)(1) provides
that items listed in IRC section 702(a) are separately stated. These items are:
i) gains and losses from sales or exchanges
of capital assets held for not more than 1 year;
ii) gains and losses from sales or exchanges
of capital assets held for more than 1 year;
iii) gains and losses from sales or exchanges
of property described in IRC section 1231 (relating to certain property used in
a trade or business and involuntary conversions);
iv) charitable contributions (as defined in
IRC section 170(c));
v) dividends
entitled to capital gains treatment under IRC section 1(h)(11) or to the
corporate dividends-received deduction under part VIII of subchapter B of the
Internal Revenue Code;
vi) taxes
for which the foreign tax credit may be allowed under IRC section 901, paid or
accrued to foreign countries and to possessions of the United States;
and
vii) other items of income,
gain, loss, deduction or credit to the extent provided by regulations
prescribed by the Secretary of the Treasury (see
26 CFR
1.702-1) .
B) Treatment of Items That Are Separately
Stated Under IRC Section 703(a)(1). Many items are separately stated because
their deduction is limited by the taxable income or adjusted gross income of
the taxpayer, and this limitation is determined by each partner rather than by
the partnership. IITA Section 203(e)(2)(H) permits the deduction of these items
without imposing the limitations that could apply to the partner. For example,
charitable deductions that are separately stated are deductible by a
partnership without regard to the limitations under IRC section
170(b).
C) Items not separately
stated under IRC section 703(a)(1), and that are not taken into account in
computing "taxable income" for purposes of IITA Section 203, include:
i) IRC section 199(d)(1)(A) provides that the
deduction under IRC section 199 for the domestic production activities income
of a partnership is taken at the partner level, rather than by the partnership.
Because these deductions are separately stated under this provision and not
under IRC section 703(a)(1), a partnership does not take these deductions in
computing its taxable income for purposes of IITA Section 203;
ii) IRC section 613A(c)(11) provides that
percentage depletion deductions for oil and gas property of a partnership is
computed separately for each partner. Because these deductions are separately
stated under this provision and not under IRC section 703(a)(1), a partnership
does not take these deductions in computing its taxable income for purposes of
IITA Section 203. However, in the case of any partnership that deducted
percentage depletion on oil and gas properties on any return filed prior to
March 31, 2008 in reliance on the return instructions for the Form IL-1065, any
increase in Illinois income tax liability that would result from disallowing
the percentage depletion deduction for oil and gas property for that year is
abated under Section 4(c) of the Taxpayers' Bill of Rights Act [
20 ILCS
2520/4(c)] ; and
iii) IRC section 108(a) provides that a
taxpayer in bankruptcy or that is insolvent does not recognize income from
discharge of indebtedness. IRC section 108(d)(6) provides that, when
indebtedness of a partnership is discharged, this exemption applies only at the
partner level. Accordingly, the exemption in IRC section 108(a) does not apply
in determining the taxable income of a
partnership;
9)
Electing Small Business Trust (ESBT). An ESBT that owns both stock in one or
more subchapter S corporations and other property is treated as two separate
trusts under IRC section 641. However, the IRS practice is to require the ESBT
to file a single return and pay tax on the income from both sources. In these
cases, the income of the ESBT derived by the ESBT from investments in
subchapter S corporations is not reported, but rather the tax liability
attributable to that income is computed separately and added to the tax
liability computed for the other property of the ESBT. In order to allow the
ESBT to file a single Illinois income tax return, an ESBT that owns both stock
in subchapter S corporations and other property shall include income from both
sources in its taxable income for purposes of IITA Section
203.
d) Special Rule
Regarding Recapture of Business Expenses on Disposition of Asset or Business.
Notwithstanding any other law to the contrary, if in prior years income
from an asset or business has been classified as business income and in a later
year is demonstrated to be non-business income, then all expenses, without
limitation, deducted in such later year and in the two immediately preceding
taxable years related to that asset or business that generated the non-business
income, are added back and recaptured as business income in the year of the
disposition of the asset or business. The amount of the add-back is apportioned
to Illinois using the greater of the apportionment fraction computed for the
business under IITA Section 304 for the taxable year or the average of the
apportionment fractions computed for the business under IITA Section 304 for
the taxable year and for the two immediately preceding taxable years.
(IITA Section 203(e)(3)) This provision is effective for tax years ending on or
after July 30, 2004 (the effective date of PA 93-840).
1) IITA Section 203(e)(3) requires recapture
of expenses treated as business expenses in a taxable year for which the
taxpayer has made an election under IITA Section 1501(a)(1) to treat all of its
income (other than employee compensation) as business income whenever, in a
subsequent year, the taxpayer fails to make that election, so that income from
an asset is treated as business income in the earlier year and as nonbusiness
income in the subsequent year.
2)
IITA Section 203(e)(3) does not require recapture of business expenses passed
through to a partner in any taxable year by a partnership that qualifies as an
investment partnership under IITA Section 1501(a)(11.5) in a subsequent
taxable year, causing all income of the partnership to be characterized as
nonbusiness income under IITA Section 305(c-5).
3) IITA Section 203(e)(3) does not require
recapture of business expenses passed through to a partner, a shareholder in a
subchapter S corporation, or a beneficiary of a trust or estate by the
partnership, subchapter S corporation, trust or estate for a taxable year
merely because nonbusiness income is passed through the partnership, subchapter
S corporation, trust or estate in a subsequent year. However, recapture of
those business expenses passed through in a taxable year shall be required by
the partner, shareholder or beneficiary if the partnership, subchapter S
corporation, trust or estate is required to recapture business expenses for
that taxable year or if the business expenses were passed through in the same
year that the partnership, subchapter S corporation, trust or estate also
passed through nonbusiness income that the partner, shareholder or beneficiary
elected to treat as business income under IITA Section 1501(a)(1) and the
partner, shareholder or beneficiary fails to make that election with respect to
nonbusiness income passed through by the partnership, subchapter S corporation,
trust or estate in a subsequent year.
e) Illinois Base Income Defined. "Illinois
base income" is the amount determined by applying addition and subtraction
modifications specifically authorized under the IITA to either federal adjusted
gross income (in the case of individuals) or federal taxable income (in the
case of all other taxpayers). An item taken into account on the federal income
tax return after the computation of federal taxable income or federal adjusted
gross income is not taken into account on the corresponding Illinois income or
replacement income tax return unless specifically authorized in the IITA. For
example, itemized deductions, which are taken on Schedule A to the U.S. 1040
after federal adjusted gross income has already been calculated, are not
reflected in Illinois base income.
f) Double Deductions Prohibited. No item of
deduction may be taken into account twice in the calculation of Illinois base
income unless specifically authorized under the IITA. If a subtraction
modification applies to an item that is already excluded or deducted in
computing adjusted gross income or federal taxable income, or to which another
subtraction applies, it will be disallowed. (See IITA Section
203(g).)
g) Legislative Intention.
IITA Section 203(h) provides that, unless specifically authorized under the
IITA Section 203, no modifications or limitations on the amounts of
income, gain, loss or deduction are taken into account in determining gross
income, adjusted gross income or taxable income for federal income tax purposes
for the taxable year, or in the amount of such items entering into the
computation of Illinois base income and net income (defined at Section
100.2050
) for the taxable year, whether in respect of property values as of
August 1, 1969 or otherwise.
