Certain Illinois taxpayers may see an increase to their current year tax year liabilities. Public Act 104-0006 enacted several changes to the Illinois Income Tax Act, including adopting the Finnegan method of apportionment, removal of two Safe Harbor exceptions and an updated dividend received deduction for Global Intangible Low-Taxed Income (GILTI) limit. Some taxpayers must begin paying estimated payments or modify their estimated tax payments.  

Pass-through Entity (PTE) Capital Gains Apportionment Changes 

Pursuant to ILCS 5/303(b)(4), Taxpayers with gains and losses produced from sales or exchanges of Subchapter S corporation shares or interest in partnerships – other than investment partnerships – will be allocable to Illinois if the pass-through entity (PTE) is taxable in Illinois. This change is effective for tax years ending on or after June 16, 2025. The specified gains and losses are to be allocated proportionally to the average of the PTE’s Illinois apportionment factor for the year of the sale or exchanges as well as the two tax years immediately preceding the year of the exchange or sale.  

Be sure to report capital gains or losses from sales or exchanges of shares in PTES on Illinois Schedule NB, Nonbusiness Income.  

Finnigan Method of Apportionment Adoption 

For tax years ending prior to December 31, 2025, unitary taxpayers were expected to follow the Joyce Method of apportionment.  

Now, pursuant to 35 ILCS 5/304(e), for tax years ending on or after December 31, 2025, Illinois unitary taxpayers must follow the Finnigan method of apportionment to calculate their apportionment factor on Illinois Schedule UB, Combined Apportionment for Unitary Business Group. Under this method of apportionment, a unitary group of corporations is considered taxable in a state if any member of the unitary group is subject to tax in that state. 

To calculate their apportionment, the unitary corporation would divide the combined Illinois sales of the members (numerator) by the total combined sales of the unitary business group everywhere (denominator). Any throwback sales included in the numerator should only include sales to a location where none of the unitary members have nexus.  

Additional rules were created to address throwback and throw-out sales when calculating unitary apportionment. 

Throwback Sales 

Definition: Sales of items shipped from a factory, office, store, warehouse or another place of storage in Illinois to a purchaser in a state or foreign country where the taxpayer isn’t taxable.  

Throwback sales are included in both the sales everywhere and Illinois sales figures when determining apportionment.  

Throw-Out Sales 

Definition: Sales of services that are “thrown out” because the taxpayer isn’t taxable in the state in which the services are received. 

Throw-out sales are excluded from both the sales everywhere and Illinois sales figures when determining apportionment.  

Safe Harbor Exceptions 

Certain exceptions to the related-party addback provisions for unitary filers will no longer be allowed by Illinois. The only Safe Harbor exceptions that will be allowed for tax years ending on or after December 31, 2025 when calculating related-party expense additions on Schedule 80/20, Related-Party Expenses, are: 

• An amount of interest and intangible expenses accrued, incurred or paid, either directly or indirectly, to a person if: 
• The person accrued, incurred or paid the intangible expenses and interest to another person who isn’t a related member and 
• The principal purpose of the transaction isn’t to avoid taxes and is paid pursuant to an agreement or contract reflecting the rates and terms between the unrelated parties. 
• An amount of intangible expenses and interest paid, incurred or accrued, either directly or indirectly, to a person if the taxpayer proves the adjustments are unreasonable by providing clear and convincing evidence.  
• An amount of interest and intangible expenses accrued, incurred or paid, either directly or indirectly, to a person which wouldn’t be included due to a written agreement between the taxpayer and the Director of the Illinois Department of Revenue that allows the taxpayer to use an alternative method of apportionment. 

Aligning IRC Sec. 163(j) Deduction Limits with Federal Guidelines 

If you are a taxpayer subject to the IRC SEC. 163(j) deduction limit, you are now required to allocate the reduced interest expenses you paid to certain foreign affiliates first to non-foreign affiliates and then to foreign affiliates. Illinois is now aligned with IRC Sec. 59A(c)(3) and the treatment of consolidated returns at the federal level. 

Dividend Received Deduction for Global Intangible Low-Taxed Income (GILTI) 

Illinois will limit the corporation income tax foreign dividends deduction for GILTI to 50% of the recognized amount regardless of foreign ownership percentage for tax years ending on or after December 31, 2025. Report GILTI deductions on Illinois Schedule J, Foreign Dividends. 

Avoiding or Minimizing Penalties  

Because of the changes listed above, your required estimated payment amounts may be impacted. If you, previously, weren’t required to make estimated payments, you may need to determine if the changes increase your tax liability to more than the estimated payment requirement. Make your payment on or before your next quarterly estimated due date and be sure to include the current estimated payment and the amount of all the previous quarterly payments due based on these changes to make up the difference.  

If you are already making estimated payments, recalculate your estimated payments based on the changes listed in this blog. Your first estimated payment after June 16 should include the additional amount that would have been due with your previous quarterly payments, in addition to your current full quarterly payment to make up the difference.  

Other methods to avoid or minimize late payment penalties for underpaying your estimated tax include using the annualized income installment method when filing your taxes. This allows you to compute your income and liability for each period in accordance with the Illinois Income Tax Act in effect as of the end of that period. You can find the annualized income installment method in Step 6 of Form IL-2220, Computation of Penalties for Businesses and Form IL-2210, Computation of Penalties for Individuals.  

This relief is appropriate when your first quarterly estimated payment due after June 16, 2025, is paid in a timely manner and makes up the difference in your previous estimated payments for the year. All subsequent payments will also need to be timely and should equal the required payment amount that’s due. Penalty assessments are based on your timely estimated installment payments equaling at least 90% of this year’s tax liability or 100% of the previous year’s tax liability. 

Anders State and Local Tax advisors work closely with our clients to help minimize their tax liability and keep them informed about the tax policies impacting their financial planning. Learn more about how our services can help, and the associated cost, request a meeting with an advisor below.