Taxes on Business Income in Illinois
Illinois assesses a corporate level income tax. It also imposes a "personal property replacement" tax on all entities, even those not subject to corporate income tax. This tax is based on net taxable income. If you operate your business as a sole proprietorship or as a pass-through entity, you business income will be reported on your individual tax return.
In Illinois, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
Corporations Are Subject to Corporate Income Tax
All C corporations are required to pay an annual corporate tax of 7 percent on the amount of income that the corporation reports to the IRS. In addition, Illinois assesses a personal property tax replacement income tax based on net income. The rate is 2.5 percent for corporations and 1.5 percent for S corporations and all other business entities, even if they are not corporations.
S Corporation Income Is Taxed on Shareholders' Returns
If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any federal corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
Illinois extends this favorable tax treatment to state corporate income tax liability, but only with respect to the 7 percent corporate income tax. The income your S corporation makes will still be subject to a 1.5 percent personal property replacement tax.
Partnership Income Is Passed Through to Partners' Returns
If you operate your business as a partnership, you will be subject to a 1.5 percent personal property replacement tax on your partnership's net income.
LLC Taxation Is Based Upon Federal Classification
Illinois law recognizes businesses operating as limited liability companies (LLCs). As an LLC, your business will be treated, for tax purposes, exactly like a partnership. Accordingly, your LLC's net income will be subject to a 1.5 percent personal property replacement tax. However, if you have elected to have the LLC treated as a corporation for federal tax purposes, it will be treated as a corporation by the state of Illinois.