Summary: Illinois’ 2026 legislative session concluded with bills that significantly impact business income tax, digital business activities, and sales tax administration. The new legislation modifies the net loss deduction limitation, pass-through entity tax rules, qualified small business stock treatment, and research and development credit while creating new taxes and fees on certain digital activities. It also updates marketplace facilitator responsibilities and establishes a temporary remote retailer amnesty program, with important implications for businesses operating in or selling into Illinois.

Illinois businesses are facing significant tax changes following the close of the state’s 2026 legislative session in June. Against the backdrop of a balanced $55.9 billion budget and ongoing economic uncertainty, lawmakers approved a broad mix of business tax changes, new taxes targeting the digital economy, and several significant sales and use tax administration updates designed to generate new revenue while modernizing the state’s tax system. Many of these provisions represent notable policy shifts, particularly Illinois’ move to tax targeted digital advertising, certain digital asset activities, and large social media platforms. Businesses with operations in or selling into Illinois should carefully review these developments, as many take effect in 2026 and 2027 and may require planning, system updates, or changes to existing tax compliance processes.

Key Business Income Tax Changes

Net Loss Deduction Limitation for C Corporations

For taxable years ending on or after Dec. 31, 2027, Illinois replaces the current $500,000 net loss deduction limitation with a phased percentage-based limitation for C corporations. The allowable deduction will be limited to the greater of $500,000 or the following percentage of Illinois net income computed without regard to the net loss deduction:

• 15% of net income for any taxable year ending on or after Dec. 31, 2027, and before Dec. 31, 2028;
• 30% of net income for any taxable year ending on or after Dec. 31, 2028, and before Dec. 31, 2029;
• 50% of net income for any taxable year ending on or after Dec. 31, 2029, and before Dec. 31, 2030;
• 65% of net income for any taxable year ending on or after Dec. 31, 2030, and before Dec. 31, 2031; and
• 80% of net income for any taxable year ending on or after Dec. 31, 2031.

Qualified Small Business Stock (IRC 1202) Changes 

For taxable years ending on or after Dec. 31, 2026, Illinois requires individuals, trusts, estates, and partnerships to add back, in computing Illinois base income, any gain from qualified small business stock that is excluded from federal gross income under IRC Section 1202.

Research and Development Credit Extended 

Illinois expands the research and development credit through taxable years ending before Jan. 1, 2037. Prior to this change, the credit was only available for taxable years ending before Jan. 1, 2032.

Pass-Through Entity Tax Changes

For taxable years ending on or after Dec. 31, 2026, Illinois allows partnerships to determine their pass-through entity tax (PTET) base for its Illinois resident partners using one of two methods:

• Full distributive share method (pre-apportioned): The partnership computes and pays PTET on the full distributive share of net income allocable to each Illinois resident partner, without applying an apportionment factor
• Illinois-sourced income method (post-apportioned): The partnership computes and pays PTET tax on the Illinois apportioned distributive share of net income allocable to each partner.

Partnerships will continue to compute and pay tax on the Illinois apportioned distributive share of net income allocable to nonresidents.

The election must be made annually, applies to all partners of the partnership for the taxable year, and is irrevocable for that taxable year. The Illinois Department of Revenue has issued guidance regarding the new election.

For taxable years ending prior to Dec. 31, 2026, Illinois computed a partnership’s PTET base using an Illinois-sourced, or post-apportioned, income method for both resident and nonresident partners.

Digital Business Tax Changes

Targeted Advertising Services Tax

Effective Jan. 1, 2027, Illinois will impose a 10% tax on gross receipts from targeted digital advertising services provided to users located in Illinois. The tax applies to providers with more than $1 million in Illinois gross receipts from targeted advertising services during the preceding 12 months.

The tax covers a broad range of digital advertising, including display, search engine, social media, native, video, banner, and incentivized advertising that uses consumer data – such as location, browsing history, search activity, or purchasing behavior – to target users. The tax does not apply to advertising on digital platforms owned or operated by news media entities, certain Illinois state and federal government transactions, or transactions in interstate commerce. Local jurisdictions are prohibited from imposing their own targeted digital advertising taxes.

Social Media Platform Fee

Effective Jan. 1, 2027, Illinois will impose a monthly fee on large social media platforms with more than 100,000 Illinois users. The fee is based on the platform’s average monthly Illinois user count, with graduated rates ranging from $0.10 to $0.50 per user, plus base fees for larger platforms. Covered platforms include those that allow users to create accounts, share user-generated content, and interact with other users’ content. Nonprofit organizations operating social media platforms are excluded.

Platforms must report their Illinois user counts and remit the applicable fee to the Illinois secretary of state monthly. The law also prohibits platforms from increasing prices or altering services specifically for Illinois users to recover the fee, and consumers may bring private legal actions for violations.

Uncertainty remains regarding the implementation of this fee. Among other issues, the legislation leaves open important questions surrounding the monthly reporting requirements, the methodology for determining and allocating Illinois users, what constitutes a “user” for purposes of the fee, and which platforms fall within the definition of a taxable “social media platform.” Given these unresolved issues, we anticipate that Illinois will issue additional guidance before the Jan. 1, 2027 effective date. Businesses that may be impacted should closely monitor future developments, as forthcoming guidance could materially affect the calculation, reporting, and administration of the fee.

Digital Asset Tax

Effective Jan. 1, 2027, Illinois will impose a 0.2% tax on certain digital asset business activities, including the exchange, transfer, and custody of digital assets. The tax applies to services provided by digital asset brokers, exchanges, custodians, and wallet providers. The tax will be collected from Illinois customers by the digital asset broker on taxable digital asset business activities. For purposes of the tax, the term “digital assets” primarily refers to cryptocurrencies and tokens and not loyalty points, in-game items, tickets, movies, or e-books.

The tax applies to the services provided to Illinois customers, not the ownership of digital assets, and applies to businesses with an Illinois physical presence or at least $100,000 in Illinois digital asset receipts during the prior 12 months. For electronically conducted transactions, the tax is generally sourced based on the customer’s location. A customer is presumed to be located in Illinois if the digital asset broker’s records reflect an Illinois home or mailing address, an Illinois IP address, or other information indicating the customer’s place of primary use is in Illinois.

Prediction Markets and Fantasy Contest Taxes

Prediction Markets Tax (Exchange Wager Tax)

Illinois is expanding the definition of sports wagering to include exchange wagers conducted through prediction markets or prediction exchanges. The legislation has established a new transaction tax on those wagers to be collected by new and current holders of licenses to operate sports wagering. The bill defines “exchange wager” to include agreements, contracts, transactions, or swaps offered, traded, or executed on a prediction market or exchange tied to a sporting contest or sporting event, and would include exchange wagering in sports wagering. The first $5 million exchange wagers each fiscal year by a license-holder are taxed at 1.75%, with subsequent wagers taxed at 3.5%, creating a separate tax framework for exchange wagering operators.

Fantasy Contest Privilege Tax

Effective July 1, 2026, Illinois imposed a new 15% tax on adjusted gross fantasy contest receipts and established a reporting and regulatory framework for fantasy contests in Illinois, requiring operators to obtain a state license and comply with audit, recordkeeping, and platform testing requirements. Fantasy contests and fantasy contest operators are now separately regulated from sports wagering under Illinois law.

Other Sales Taxes and  Compliance Changes

Hotel Marketplace Facilitator Tax Changes

Effective July 1, 2026, Illinois shifts hotel tax collection and remittance responsibilities booked through a marketplace facilitator (such as Airbnb, Vrbo, Expedia, and Booking.com) from many hotels and short-term rental hosts to the qualifying marketplace facilitator. Marketplace facilitators with more than $100,000 in Illinois hotel rental receipts during the previous 12 months must collect and remit applicable state and certain local hotel taxes, provide required notices to marketplace operators, and maintain supporting records.

Remote Retailer Amnesty Program

The Illinois legislature establishes the Remote Retailer Amnesty Program to help remote sellers resolve historical state and local sales tax liabilities for transactions occurring Jan.  1, 2021, through June 30, 2026. From Aug. 1 through Oct. 31, 2026, retailers with no permanent or temporary physical presence but who may have exceeded an economic nexus threshold in Illinois may use simplified tax rates to settle past state and local sales tax liabilities and take advantage of penalty and interest abatement for delinquent tax paid. Participants remain subject to Illinois Department of Revenue audits but are protected from local government audits for covered transactions. For periods following the amnesty program, taxpayers will be expected to resume applying Illinois’ standard local sourcing rules and collect and remit the appropriate state and local sales tax.

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.

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