Recent data from the Internal Revenue Service reveal that limited partnerships provide much of the economic horsepower for the nation. Nearly 4 million partnerships filed taxes in 2019.
As a rule, general partnerships function as pass-through entities. Partners report income on distributions on their respective tax returns. Beginning this tax year, those who form a partnership in Illinois will encounter a more complex tax structure. Three different taxes will operate in Illinois to determine the total state tax owed to or refund received by not only just the partners, but also the entity itself.
Entity and partner combined may pay three taxes
Effective from now through January 1, 2026, Illinois has altered the general rule to replace money lost by local governments. The three applicable laws and their scope include:
- Replacement tax: A tax on the net income of partnerships and other entities paid to local governments by the state. The specific amount subject to this tax is federal taxable income, or income minus deductions.
- Pass-through entity (PTE) tax: An elective tax on almost all partnerships that provides a credit of 4.95 percent against income from the partners’ distributive shares, i.e. their net income. State law requires all nonresident partners receive notification of PTE payment.
- Illinois income tax: Partnerships do not pay this tax; partners pay the tax as described above. Nonresident partners may have to pay if the PTE tax credit does not satisfy the partners’ state tax liability.
Taxes tied to business formation
Business formation requires both a broad vision and an eye for detail. Tax-related matters for partnerships in Illinois demand the latter. Attorneys with knowledge of how tax changes can affect your business can offer guidance.