Subchapter S (Small Business) Corporation

The Illinois Income Tax is imposed on every taxpayer earning or receiving income in Illinois. The tax is calculated by multiplying net income by a flat rate. The Illinois Income Tax is based, to a large extent, on the federal income tax code.

Replacement Tax, also known as Personal Property Replacement Tax, is a tax on the net income of corporations, subchapter S corporations, partnerships, and trusts. This tax replaces money lost by local governments when their power to impose personal property taxes was taken away. Replacement tax is collected from corporations, subchapter S corporations, partnerships, and trusts by the State of Illinois and paid to local governments.

Pass-through entity (PTE) tax is an elective tax on partnerships (other than a publicly traded partnership under Internal Revenue Code (IRC) Section 7704) and Subchapter S corporations effective for tax years ending on or after December 31, 2021, and beginning before January 1, 2026.

Tax rate

S corporations are subject replacement tax, but do not pay Illinois income tax. The income tax is paid at the shareholder's level. Generally, income from an S corporation is passed on to the shareholders. The shareholders must include this income in their federal adjusted gross income (for individuals) or taxable income (for other taxpayers). This is the starting point for Illinois income tax purposes and where income tax is paid.

Use the Tax Rate Database to determine the replacement tax rate for S corporations.

S corporations who elect to pay PTE tax are subject to this tax for the privilege of earning or receiving income in Illinois in an amount equal to 4.95 percent (.0495) of the taxpayer's net income for the taxable year. Each shareholder of an electing pass-through entity is allowed a credit against their own tax in an amount equal to 4.95 percent (.0495) times the shareholder's distributive share of the net income of the electing S corporation.

Tax base

The starting point for the Illinois Small Business Corporation Replacement Tax Return is federal taxable income, which is income minus deductions. Next, the federal taxable income is changed by adding back certain items ( e.g. , state, municipal, and other interest income excluded from federal taxable income) and subtracting others ( e.g ., interest income from U.S. Treasury obligations). The result is “base income.”

Pass-through entity net income has the same meaning as defined in Section 202 of the Illinois Income Tax Act, except that the following provisions shall not apply:

1. the standard exemption allowed under Section 204;
2. the deduction for net losses allowed under Section 207; and
3. the modification for income distributable to a shareholder subject to replacement tax.
   

If a taxpayer making the PTE tax election is a partner of another taxpayer who made the PTE tax election, net income shall be computed as above, except that the taxpayer shall subtract its distributive share of the net income of the electing partnership (including its distributive share of the net income of the electing partnership derived as a distributive share from electing partnerships in which it is a partner).

See the Illinois Department of Revenue Income Tax Credits and Expirations spreadsheet for information about income tax credits.

Filing requirements

You must file Form IL-1120-ST, Small Business Corporation Replacement Tax Return, if you are a small business corporation, as defined in Internal Revenue Code (IRC), Section 1361(a), that

• has net income or loss as defined under the Illinois Income Tax Act (IITA); or
• is qualified to do business in the state of Illinois and is required to file U.S. Form 1120S (regardless of net income or loss).

If you own a qualified subchapter S subsidiary (QSSS) defined in IRC, Section 1361(b)(3), as well as any other entity that is disregarded as an entity separate from you for purposes of the IRC, it is likewise disregarded as a separate entity for purposes of the IITA. You must include all items of income, deduction, loss, credit, etc. from such entities on your return as if they were earned or incurred by you directly.

Original return

S corporations may file as members of a unitary group but may not file a combined return. Y ou may be required to file a separate unitary return and file a schedule UB to apportion your business income. You should see Illinois Schedule UB, Combined Apportionment for Unitary Business Group , Illinois Schedule UB Instructions , and Form IL-1120-ST Instructions f or information about filing requirements.

Automatic filing extension

You are not required to file a form to obtain this automatic extension. However, if you expect tax to be due, you must pay any tentative tax due by the original due date of the return to avoid interest and penalty on tax not paid . An extension of time to file your Form IL-1120-ST does not extend the amount of time to pay your Illinois tax liability. See Make a Payment for payment options.

Amended return

For amended returns claiming a credit or refund filed on or after June 25, 2021, IDOR has an automatic six month extension of time to issue an assessment of additional tax due if the amended return is filed within six months of the original expiration of the statute of limitations.

• ​If yo ur change creates or increases the Illinois net loss for the year, you must file Form IL-1120-ST-X showing the increase in order to carry the increased loss amount to another year.
• If your change increases the tax due to Illinois, you should file Form IL-1120-ST-X and pay the tax, penalty, and interest promptly.
• If your change decreases the tax due to Illinois and you are entitled to a refund or credit carryforward, you must file Form IL-1120-ST-X within
  • three years after the due date of the return (including extensions),
  • three years after the date your original return was filed, or
  • one year after the date your Illinois tax was paid, whichever is latest.
    
  • ​If your federal change decreases the tax due to Illinois and you are entitled to a refund or credit carryforward, you must file Form IL-1120-ST-X within two years plus 120 days of federal finalization.
  • If your federal change increases the tax due to Illinois, you must file Form IL-1120-ST-X and pay any additional tax within 120 days of IRS partial agreement or finalization. T o avoid late payment penalties, you must attach proof of the federal finalization date, showing the change was reported to Illinois within 120 days of IRS acceptance, or you may be assessed a late-payment penalty.

  Pass-through withholding payments and pass-through entity (PTE) tax
  

  S corporations, partnerships, and trusts are required to make Illinois Income Tax payments on behalf of nonresident shareholders, partners, and beneficiaries. Although this is referred to as "pass-through entity withholding", deductions are not actually taken from payments the pass-through entities make to their owners. Instead, the pass-through entities are required to make an income tax payment, a "pass-through withholding payment," on behalf of the nonresident owner for each taxable year.

  Partnerships and S corporations may elect to pay PTE tax for the privilege of earning or receiving income in Illinois in an amount equal to 4.95 percent (.0495) of the taxpayer's net income for the taxable year. Each partner or shareholder of an electing pass-through entity is allowed a credit against their own tax in an amount equal to 4.95 percent (.0495) times the partner or shareholder's distributive share of the net income of the electing partnership or subchapter S corporation.

  Nonresident partners, shareholders, and beneficiaries must be notified by the partnership, S corporation, or trust of the amount of pass-through withholding payments. When a partnership or S corporation elects to pay PTE tax, all partners or shareholders must be notified of the amount of PTE tax credit passed-through to them by the pass-through entity. If the pass-through withholding payment or PTE tax credit is sufficient to satisfy the nonresident partner's, shareholder's, or beneficiary's Illinois Income Tax liability, no return is required. Any taxpayer that files an Illinois tax return for any reason must include any income passed through from the pass-through entity and will be allowed a credit for the pass-through withholding or the PTE tax credit .
  

  E stimated payments
  

  Subchapter S corporations who elect to pay PTE tax and who can reasonably expect their replacement tax and PTE tax liability to be more than $500 must make quarterly estimated payments. Estimated payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. Subchapter S corporations are encouraged to use an electronic method to make estimated payments .
  

  What if I need to correct or change my return?
  

  If you need to correct or change your return after it has been filed, you must file Form IL-1120-ST-X, Amended Small Business Corporation Replacement Tax Return . Returns filed before the extended due date of the return are treated as your original return for all purposes. You should file Form IL-1120-ST-X only after you have filed a processable Illinois Income Tax return. You must file a separate Form IL-1120-ST-X for each tax year you wish to change. For more information see Form IL-1120-ST-X Instructions.
  

  Do not file another Form IL-1120-ST with “amended” figures to change your originally filed Form IL-1120-ST.