United States: Illinois Department Of Revenue Provides Guidance On Elimination Of Composite Income Tax Returns

Pursuant to legislation enacted last year,¹ the Illinois Department of Revenue is eliminating Form IL-1023-C, Composite Income and Replacement Tax Return, and Form IL-1000, Pass-Through Entity Payment Income Tax Return, for tax years ending on or after December 31, 2014.² Also, corresponding estimated tax payment and prepayment voucher forms are similarly eliminated. New forms that allow for prepayment are being issued that reflect the new pass-through withholding requirements on some nonbusiness income, as well as credits that are passed through to partners, shareholders or beneficiaries. The Department has issued guidance explaining how S corporations, partnerships, limited liability companies (LLCs) and trusts should proceed in light of these changes.

2013 Legislation Eliminating Composite Returns, Amending Withholding

Prior to legislation enacted in 2013,³ the Department was authorized to allow nonresident individual partners, S corporation shareholders, certain individuals transacting an insurance business, and individual members of an LLC taxed as a partnership, to file composite individual income tax returns to reflect the composite income of these individuals allocable to Illinois and to make composite individual income tax payments.⁴ Also, the Department was authorized to allow these composite returns to include the income tax owed by Illinois residents attributable to their income from partnerships, S corporations, certain insurance businesses, or LLCs taxed as a partnership. These residents were permitted to claim credits on their individual returns for their shares of the composite tax payments.⁵ Under this authorization, the Department released composite tax returns that could be filed by these entities. However, the legislature amended the statute in 2013 to limit the Department's authority to issue composite tax returns to tax years ending prior to December 31, 2014. The 2013 legislation also amended the statute providing for withholding by partnerships, S corporations and trusts.⁶ Prior to amendment, Illinois law required partnerships, S corporations and trusts to withhold from each nonresident, partner, shareholder or beneficiary, an amount equal to the distributable share of business income of that partner, shareholder or beneficiary, whether or not distributed, multiplied by the applicable tax rates for that partner, shareholder or beneficiary. As amended, for taxable years ending on or after December 31, 2014, the withholding requirement is expanded to include the share of nonbusiness income of the partnership, S corporation or trust allocated to Illinois that is distributable to the partner, shareholder or beneficiary. Also, the withholding requirement applies to the net share of any credit that is distributable by the partnership, S corporation or trust and allowable against the tax liability of that partner, shareholder or beneficiary for a taxable year ending on or after December 31, 2014.⁷

New Filing and Payment Procedures

For tax years ending on or after December 31, 2014, the amounts that would have been reported on Form IL-1023-C or Form IL-1000 will be reported on 2014 Form IL-1065, Partnership Replacement Tax Return; Form IL-1120-ST, Small Business Corporation Replacement Tax Return; or Form IL-1041, Fiduciary Income and Replacement Tax Return.⁸ In addition, these amounts will either be paid with those returns or Form IL-505-B, Automatic Extension Payment, or voluntarily prepaid with Form IL-516-I or Form IL516-B, Pass-Through Prepayment Vouchers.⁹

Taxpayers that elect to credit an overpayment on their 2013 Form IL-1023-C to a tax year ending on or after December 31, 2014 must include the credit as an overpayment credit on their Form IL-1065 or Form IL-1120-ST for that year.

The Department also explains that Form IL-1023-CES, Composite Estimated Tax Payments for Partners and Shareholders, and Form IL-1000-P, Prepayment Voucher for Pass-Through Entity Payments, have been eliminated and cannot be used for making voluntary prepayments for tax years ending on or after December 31, 2014. These forms are being replaced by Form IL-516-I and Form IL-516-B, which allow taxpayers to voluntarily prepay their own tax liability from Form IL-1120-ST, Form IL-1065 or Form IL-1041 as well as make voluntary pass-through entity prepayments on behalf of their partners, shareholders or beneficiaries for tax years ending on or after December 31, 2014. The new forms will take into account new pass-through withholding requirements on some nonbusiness income, and credits that are passed through to partners, shareholders or beneficiaries.

Commentary

Entities that previously filed composite income tax returns should consider the guidance provided by the Department and report the composite income on the partnership, S corporation and trust returns. As discussed above, the Department will be issuing new forms to allow for the voluntary prepayment of tax liability. The Department has indicated that these new forms will reflect the statutory changes to the withholding requirements. The instructions to these new forms are expected to provide further guidance concerning nonresident withholding.

Footnotes

1 P.A. 98-0478 (H.B. 3157), Laws 2013.

2 Informational Bulletin FY 2014-10, Illinois Department of Revenue, Jan. 2014.

3 P.A. 98-0478 (H.B. 3157), Laws 2013.

4 35 ILL. COMP. STAT. 5/502(f).

5 Id. 6 35 ILL. COMP. STAT. 5/709.5(a).

7 Id.

8 Informational Bulletin FY 2014-10, Illinois Department of Revenue, Jan. 2014.

9 Form IL-516-I and Form IL-516-B are not yet available on the Department's Web site.

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