The Confusion Regarding Corporate Tax Payments in Illinois

corporate tax financial douments, tax loopholes, corporate taxes, Illinois business lawyer, Illinois tax laws, Illinois state income taxAt the end of January, Illinois Speaker of the House Michael Madigan submitted a proposal aimed at cutting the corporate income tax in half. This move has been viewed somewhat pessimistically because three years before, Madigan was responsible for substantially increasing the income tax rate for Illinois companies.

However, over the past year, Madigan has been spouting a different message, declaring that some corporations in Illinois “do not pay their fair share.” Though this shift in policy may be somewhat confusing, it does seem that Madigan’s statement about corporate freeloading is grounded in truth, though not because Illinois state tax law is being taken advantage of per se.

 New Findings Regarding Corporate Tax Payment in Illinois

Crain’s Business estimates that around two thirds of Illinois businesses do not pay Illinois state income taxes. The Taxpayers’ Federation of Illinois and the Illinois Chamber of Commerce found that many companies operating within Illinois have little or no state income tax liability, as they do not incur such liability under federal tax laws.

When determining the Illinois state tax rate for a business, the starting point is the company’s federal income tax rate. Additions or subtractions in the form of credits are applied to the federal income tax rate in order to determine the state taxable income for the company. Ninety-five percent of companies operating in Illinois do not pay Illinois state income taxes, because they have either negative or zero federal taxable income liability.

The Issue With Tax Loopholes

Speaker Madigan and other public figures claim that significant portions of businesses operating in Illinois are avoiding tax liability through state tax loopholes. However, this claim does not recognize the fact that such tax credits are not applicable to 95 percent of companies operating in Illinois.

Furthermore, the study mentioned above found that the remaining five percent of companies that are subject to Illinois state income tax do not take advantage of tax credits. The study by the above Illinois business organizations found that around two-tenths of one percent of companies had taxable income eliminated based upon an Illinois state tax credit.

Not only is this percentage of tax credit used minimal, but these same tax credit modifications did not have a significant impact on the tax amount owed by those companies who had incurred state tax liability.

 The Reality vs. Rhetoric

Some don’t find it surprising that corporate income tax loopholes have been overblown in the media. However, they believe that the bigger issue is not in the supposed exploitation of state income tax loopholes. Instead, the issue is the fact that the Illinois state tax system relies too heavily on federal tax standards.

Some suggest that the Illinois state tax policy should be drastically decoupled from federal tax law, instead of just focusing on the tax credits at a state level, since their impact on tax liability is quite minuscule. This way a system could be created that more effectively requires companies to pay taxes as compensation for all of the benefits that they receive from operating and doing business in Illinois.

A debate is brewing between business organizations and the state legislature about whether state tax loopholes are as heavily exploited as the general public is being led to believe. Contact the small business attorneys here at The Gierach Law Firm in Naperville, Illinois for all of your small business law questions or issues.