Current through Register Vol. 48, No. 38, September 20, 2024
a) Taxpayers are entitled to subtract from
taxable income (adjusted gross income, in the case of an individual) an amount
equal to dividends paid by a corporation that:
1) conducts business operations in a
federally designated Foreign Trade Zone or Sub-Zone, and
2) is designated by the Department of
Commerce and Community Affairs as a High Impact Business located in Illinois.
However, only dividends not eligible for the subtraction
provided in Section
100.2480
of this Part may be subtracted under this Section.
b) A corporation conducts business operations
in a federally designated Foreign Trade Zone or Sub-Zone when any portion of
its total business activity during a taxable year is operated within a
federally designated Foreign Trade Zone or Sub-Zone. For the purpose of this
Section, business activity within a federally designated Foreign Trade Zone or
Sub-Zone shall be measured by means of the factors ordinarily applicable to the
corporation under IITA Section 304(a), (b), (c) or (d); except that, in the
case of a corporation ordinarily required to apportion business income under
Section 304(a), such corporation shall not use the sales factor in the
computation. Thus, for example, for taxable years ending on or after December
31, 2000, for purposes of determining whether dividends may be subtracted under
this Section, a corporation that apportions its business income under Section
304(a) using only the sales factor in accordance with Section 304(h) must still
compute its property and payroll factors. In measuring the business activity of
a corporation within a federally designated Foreign Trade Zone or Sub-Zone, the
apportionment factors of that corporation shall be determined without regard to
the factors or business activity of any other corporation and, in the case of a
corporation engaged in a unitary business with any other person, the
apportionment factors of that corporation shall be determined as if it were not
engaged in a unitary business with such other person.
1) 304(a) Corporations. A corporation using
Section 304(a) to apportion business income to Illinois shall determine the
ratio of the corporation's property and payroll within a federally designated
Foreign Trade Zone or Sub-Zone to the corporation's property and payroll
everywhere. If the ratio so computed is greater than 0%, and the other
requirements of this Section are met, the dividends paid by the corporation
shall qualify for this subtraction. In the case where a corporation does not
have any property or payroll within a federally designated Foreign Trade Zone
or Sub-Zone, the corporation is not conducting any portion of its business
operations within a federally designated Foreign Trade Zone or Sub-Zone for the
purpose of this Section.
A) Example 1: In the
tax year ending December 31, 1995, Taxpayer received dividends from X
corporation (hereafter referred to as "X"). X, a calendar year taxpayer,
manufactures and sells widgets at wholesale in Illinois and various other
states. The widgets are manufactured at X's plant in Illinois, which is not
located in a federally designated Foreign Trade Zone or Sub-Zone. X does not
have employees who perform any services in a federally designated Foreign Trade
Zone or Sub-Zone. X owns 100% of the stock of A corporation (hereafter referred
to as "A"), whose sole business activity consists of the distribution of X's
widgets. A's trucks take delivery of the widgets at X's plant, and then deliver
the widgets to customers of X, including customers located in a federally
designated Foreign Trade Zone. In determining its business income apportionable
to Illinois in 1995, X used the 3-factor formula of property, payroll, and
sales under IITA Section 304(a). Thus, in order to determine whether it
conducts business operations in a federally designated Foreign Trade Zone or
Sub-Zone, X must compute the ratio of its property and payroll in a federally
designated Foreign Trade Zone or Sub-Zone to its property and payroll
everywhere. In making such computation, it may not use its sales factor, nor
may it consider the factors or business activity of A. As a result, regardless
of whether X is designated a High Impact Business located in Illinois, Taxpayer
may not subtract dividends paid by X. Because X does not have any property or
payroll within a federally designated Foreign Trade Zone or Sub-Zone, it is not
conducting any portion of its business operations within a federally designated
Foreign Trade Zone or Sub-Zone as required by this Section.
B) Example 2: The facts are the same as in
Example 1, except that X rents a warehouse in which it maintains an inventory
of widgets pending shipment to customers. The warehouse is located in a
federally designated Foreign Trade Zone. Since the ratio of X's property and
payroll within a federally designated Foreign Trade Zone or Sub-Zone to its
property and payroll everywhere is greater than 0%, X conducts a portion of its
business operations within a federally designated Foreign Trade Zone. Thus,
Taxpayer has met the requirement under this Section that it receive dividends
from a corporation that conducts business operations within a federally
designated Foreign Trade Zone or Sub-Zone.
2) All Other Corporations. A corporation
using a 1-factor apportionment formula under IITA Section 304(b), (c) or (d)
shall determine business activity conducted within a federally designated
Foreign Trade Zone or Sub-Zone by comparing business income from sources within
a federally designated Foreign Trade Zone or Sub-Zone and everywhere else
pursuant to its ordinarily applicable factor under Section 304(b), (c) or (d).
A corporation using an alternative method of apportionment under Section 304(f)
shall petition the Department for approval of an appropriate method of
determining its qualification under this Section, and only upon the
Department's approval shall the corporation be allowed to use a method not
provided in this Section.
A) Example 3: In
the tax year ending December 31, 1996, Taxpayer received dividends from Z
Airlines, Inc (hereafter referred to as "Z"). Z provides interstate
transportation of passengers and freight. Z's corporate headquarters is located
in a federally designated Foreign Trade Zone in Illinois. Its hub is also
located in Illinois, but not in a federally designated Foreign Trade Zone or
Sub-Zone. Z's planes regularly arrive and depart from its hub, and regularly
fly over a federally designated Foreign Trade Zone in route to various
locations. Z owns 100% of the stock of B corporation (hereafter referred to as
"B"). B's sole business activity consists of transporting freight from Z's
planes to local destinations in Illinois. B's trucks take delivery of the
freight at Z's hub, and deliver the freight to Z's customers, including
customers located in a federally designated Foreign Trade Sub-Zone. In 1996, B
delivered within the federally designated Foreign Trade Sub-Zone at least 1 ton
of freight the distance of one mile for a consideration. In determining its
business income apportionable to Illinois in 1996, Z and B used the
apportionment formula under IITA Section 304(d) on a combined basis. In order
to determine whether it conducts business operations within a federally
designated Foreign Trade Zone or Sub-Zone, Z is required to use the same
apportionment formula under IITA Section 304(d) as if it were not engaged in a
unitary business with B. As a result, regardless of whether Z is a High Impact
Business located in Illinois, Taxpayer may not subtract dividends paid by Z.
Because Z has no business income from sources within a federally designated
Foreign Trade Zone or Sub-Zone applying IITA Section 304(d), no portion of Z's
business operations are conducted in a federally designated Foreign Trade Zone
or Sub-Zone as required by this Section.
B) Example 4: The facts are the same as in
Example 1, except that Z conducts the activities of B as a division. In
determining its business income apportionable to Illinois in 1997, Z used the
apportionment formula under IITA Section 304(d). In order to determine whether
it conducts business operations within a federally designated Foreign Trade
Zone or Sub-Zone, Z must use the same formula. Since Z has business income from
sources within a federally designated Foreign Trade Sub-Zone, it conducts a
portion of its business operations within a federally designated Foreign Trade
Zone or Sub-Zone. Thus, Taxpayer has met the requirement under this Section
that it receive dividends from a corporation that conducts business operations
within a federally designated Foreign Trade Zone or Sub-Zone.
c) Taxpayers are
entitled to this subtraction in the taxable year in which qualifying dividends
are paid by corporations. Dividends are qualifying dividends if paid by the
corporation during a taxable year of the corporation with respect to which the
requirements of this Section are met. Corporations paying dividends shall be
deemed to have started business operations within a federally designated
Foreign Trade Zone or Sub-Zone from the later of:
1) The date the Foreign Trade Zone or
Sub-Zone in which the corporation paying the dividends is located was
officially federally designated;
2)
The date the corporation paying dividends commenced operations in the federally
designated Foreign Trade Zone or Sub-Zone as a designated High Impact Business
located in Illinois; or
3) The
effective date of the Public Act enacting this subtraction (January 1,
1986).
d) See
20 ILCS
655/5.5 regarding designation by the Department of
Commerce and Community Affairs as a High Impact Business.
e) Limitations.
1) This Section allows taxpayers to subtract
distributions from a corporation only to the extent:
A) The distributions are characterized as
dividends;
B) The dividends are
included in federal taxable income (in the case of an individual, adjusted
gross income) of the taxpayer;
C)
The dividends are not eligible for the subtraction provided in IITA Section
203(a)(2)(J), IITA Section 203(b)(2)(K), IITA Section 203(c)(2)(M), or IITA
Section 203(d)(2)(K) (regarding dividends paid by a corporation that conducts
all or substantially all of its operations in an Illinois Enterprise Zone or
Zones); and
D) The taxpayer has not
subtracted the dividends from federal taxable income (in the case of an
individual, adjusted gross income) under any other provision of Section 203 of
the IITA.
2) Example 5:
Taxpayer, an S corporation shareholder, receives a distribution from an S
corporation designated a High Impact Business and that conducts business
operations in a federally designated Foreign Trade Zone. The Taxpayer is not
entitled to the subtraction modification provided under this Section since a
distribution by an S corporation is generally not characterized as a dividend.
See Section 1368 of the Internal Revenue Code.
3) Example 6: Taxpayer, a corporation,
receives a dividend from another corporation that qualifies for the 70%
dividends received deduction under Section 243(a)(1) of the Internal Revenue
Code. Because only 30% of the dividend is included in Taxpayer's federal
taxable income, this Section allows Taxpayer to subtract only 30% of the
dividend from its federal taxable income.
