Year end Illinois income tax deduction planning for pass thru entities
Illinois enacted a pass-through entity tax (PTE Tax) that may be elected by partnerships and S corporations to permit a federal deduction of state income taxes that otherwise are limited to $10,000 per year from 2018 to 2025 by the Tax Cuts and Jobs Act of 2017 (TCJA). In Internal Revenue Service (IRS) Notice 2020-75, the IRS announced its approval of the federal deduction of state PTE Taxes paid by the entity in circumstances where the partner or shareholder receives a state tax credit, and the PTE Tax essentially is paid in lieu of the state income tax otherwise imposed upon the partner or S corporation shareholder.

The new Illinois PTE Tax was signed into law by Governor JB Pritzker recently and applies to taxable years ending on or after December 31, 2021, and prior to January 1, 2026. Eighteen other states have also enacted PTE Taxes and 14 of those (including Illinois) are effective for 2021.
Recommendation:
For the year 2021: If you have positive K1 income from any pass through entity (LLC / S Corp), we recommend that your S corp or LLC should prepay IL PTE tax equivalent to 4.95% of estimated 2021 K1 income from respective corporation using one of the methods explained below on or before December 31, 2021.
You should also start paying estimated PTE tax for the year 2022 (in April, June, September and December). Please mark your calendar.
Additional information and Q/A:
What is the Pass-through Entity (PTE) tax?
The Pass-through Entity (PTE) tax is an entity-level income tax that partnerships and S corporations may elect to pay effective for tax years ending on or after December 31, 2021. The PTE tax rate is equal to 4.95% of the taxpayer’s net income for the taxable year. A partnership or S corporation making the election is liable for paying the PTE tax. If the electing partnership or S corporation fails to pay the full amount of tax deemed assessed, the partners or shareholders shall be liable to pay the tax assessed (including penalties and interest).
The election to pay the PTE tax is made on Form IL-1065, Partnership Replacement Tax Return, or Form IL-1120-ST, Small Business Replacement Tax Return, for tax years ending on or after December 31, 2021. When a partnership or S corporation makes the election to pay the entity-level tax, it is required to make quarterly estimated payments if the expected tax due (including both the Pass-through entity tax and replacement tax) is more than $500 or incur late estimated payment penalties per Illinois Income Tax Act.
Taxpayers are encouraged to make voluntary prepayment of the pass-through entity tax for the year 2021 to reduce any tax payment due when the return is filed. These prepayments can be made
- electronically using MyTax Illinois or ACH Credit or
- by mail using 2021 Form IL-1065-V, Payment Voucher for Partnership Replacement Tax, or 2021 Form IL-1120-ST-V, Payment Voucher for Small Business Corporation Replacement Tax.

What is pass-through entity income?
Pass-through entity income is the income that any partnership, subchapter S corporation, or trust passes through to its partners, shareholders, or beneficiaries.
Therefore it is advisable to pay Pass through entity tax for the year ending December 2021 as state income tax. This will allow to take credit in personal state tax return by incorporating the same in Sch K-1-Pand thus reduces your liability to pay state taxes.
Annual election of PTE Tax and Estimated payments:
The election to pay the PTE Tax is required to be made on an annual basis “at such time, and in such form and manner as prescribed” by the Illinois Department of Revenue. A separate election is made for each year and is irrevocable once made. The PTE Tax requires the partnership to make estimated payments in the same manner as individuals (in April, June, September and January). S corporations are to make estimated payments in the same manner as corporations (in April, June, September and December). If the PTE Tax is elected, the partnership or S corporation is not required to withhold income tax on nonresident partners (and Illinois does not allow composite returns).
State income credit for partners and shareholders:
Partners and S corporation shareholders are allowed a refundable credit for the PTE Tax paid by the pass-through entity. Partners and S corporation shareholders must addback their distributive share of the PTE Tax to their Illinois income so that the tax liability at the partner level equals the PTE Tax paid at the entity level.
Illinois explicitly allows a credit to resident partners and S corporation shareholders for “substantially similar” PTE Taxes imposed by other states. The Illinois credit for PTE Tax paid to other states is based upon the partner’s share of the partnership income allocated or apportioned to the other state (without specifying whether Illinois or the other state’s apportionment rules are applied for this purpose—another detail to be addressed by the Department of Revenue).
Please feel free to call tax department 847.524.0001 X 1003 or contact me for any query.