2025 Illinois Legislative Update

Summary:

• Illinois launches limited-time tax amnesty programs offering full penalty and interest forgiveness for qualifying taxpayers.
• FY2026 budget enacts sweeping tax reforms, including new apportionment rules, expense addback revisions, and a GILTI tax.
• New manufacturing credit introduced to incentivize large-scale investments in Illinois facilities.

Illinois taxpayers are facing one of the most significant tax overhauls in recent years. Alongside a trio of limited-time amnesty programs designed to help individuals and businesses wipe the slate clean on past liabilities, Illinois has enacted sweeping reforms that will reshape its tax landscape. From adopting the Finnegan method of apportionment and revising foreign expense addback rules to introducing a new manufacturing investment credit and taxing Global Intangible Low-Taxed Income (GILTI), the changes are both broad and consequential. For taxpayers operating in or selling into Illinois, these updates represent critical opportunities that warrant proactive planning.

Limited-Time Tax Amnesty Programs Offer Path to Compliance and Relief

For a limited time, Illinois taxpayers have the opportunity to reduce their outstanding tax liabilities and start fresh. As part of its broader fiscal reform efforts, the state has introduced a series of amnesty programs offering full forgiveness of penalties and interest for qualifying taxpayers who pay their overdue taxes in full.

• General tax amnesty: The Illinois Department of Revenue will administer a tax amnesty program from Oct. 1 to Nov. 15, 2025, covering unpaid taxes due during tax periods beginning June 30, 2018, to July 1, 2024. Full penalty and interest forgiveness are available if the tax is paid in full. This is applicable to only those taxes administered by the Illinois Department of Revenue.
• Franchise tax amnesty: The Illinois Secretary of State will administer a franchise tax amnesty during the same window as the general tax amnesty program, covering unpaid franchise taxes due during tax periods beginning June 30, 2019, or before June 30, 2025.
• Remote retailer amnesty: A remote retailer amnesty program is scheduled for Aug. 1 to Oct. 31, 2026, applying a simplified 9% rate on qualifying sales made since Jan. 1, 2021. This is designed to help remote sellers resolve historical sales tax exposures.

Sweeping Tax Reforms Under Illinois’ Fiscal Year 2026 Budget Demand Strategic Planning

The current amnesty programs are a timely opportunity for taxpayers, but it is equally important that taxpayers prepare for the tax reforms recently enacted by Illinois Gov. Pritzker earlier this summer. The substantial income, sales, and excise tax provisions impacting businesses, remote sellers, and individuals will apply to tax years ending after Dec. 31, 2025.

Shift in Sales Factor Apportionment

In a unitary filing group, Illinois has historically followed a “Joyce” method of apportionment, including only the Illinois sales of members with Illinois nexus in the numerator of the apportionment factor while all members of the unitary group were included in the denominator’s everywhere number. Beginning with tax years ending on or after Dec. 31, 2025, Illinois adopts the “Finnegan” method for sales factor apportionment, requiring all unitary group members (even those without nexus) to report Illinois sales in the apportionment numerator.

While there may be instances where this may result in an increase to a state level net operating loss, this is seen largely as a tax increase by Illinois for entities that were previously included in the Illinois filing but apportionment factor representation wasn’t reflected.

Interest and Intangible Expense Addbacks Revised

Payments of interest and intangible expense paid to a foreign person with 80% or more of its business activity outside of the United States are generally subject to addback unless certain exceptions are met. The revised law repeals the following two exceptions for tax periods beginning after Dec. 31, 2025:

• Where the foreign person is subject to tax in a foreign country or another state jurisdiction; or,
• Where the payment was not for purposes of tax avoidance.

Additionally, under IRC §163(j), deductible interest will be allocated first to non-foreign persons then to foreign persons which appears to be an attempt at maximizing the combined interest addback modifications between IRC §163(j) and the foreign interest addback provisions at the state level.

Sourcing of Pass-Through Entity Sales

Capital gains from sales of S corporations or partnerships are now allocated to Illinois if the entity is taxable in the state, based on a three-year average apportionment factor. This is movement seen across the country with Illinois attempting to tax gain from a sale of a business operating in Illinois regardless of whether or not the selling entity has a taxable presence in the state.

GILTI Tax Introduced

Starting with tax years ending on or after Dec. 31, 2025, Illinois will tax 50% of Global Intangible Low-Taxed Income (GILTI). Previously excluded from state taxation, this aligns Illinois more closely with federal international tax frameworks resulting in a tax increase for GILTI impacted Illinois income tax filers.

New Manufacturing Credit Introduced

Applicable to tax years beginning Jan. 1, 2026, the Advancing Innovative Manufacturing (AIM) Credit offers up to a 7% credit on qualifying capital improvement investments in new or existing manufacturing facilities. The credit requires a minimum of $10 million capital improvement investment related to the manufacturing of critically needed goods. While potentially meaningful with the right set of facts, the full breadth of investment in coordination with other state level taxes, abatements, incentives should be reviewed to determine the true benefit of this credit.

KSM’s State & Local Tax Group closely follows state and local tax activity throughout the country. Thus, if you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or fill out the form below.