Illinois Bill Would Clarify Application of PTE Tax to Retired Partners

An Illinois lawmaker has proposed a bill that would tweak the state’s elective passthrough entity-level tax to exclude some retired members' income from the entity tax base.

S.B. 189, filed January 31 by Sen. Win Stoller (R), would exclude the retirement income of certain retired passthrough members from the state's optional passthrough entity-level tax. Under state law, the passthrough entity tax base includes retirement income that is excluded from Illinois income tax at the individual level.

Under legislation (S.B. 2531) signed in August 2021 by Gov. J.B. Pritzker (D), passthrough entities can elect to pay a 4.95 percent income tax at the entity level, and partners can claim a refundable tax credit equal to their distributive share of the entity’s net income, effectively avoiding the $10,000 federal cap on the state and local tax deduction enacted by the Tax Cuts and Jobs Act.

S.B. 189 aims to clarify that out-of-state partners aren’t subject to the entity-level tax on their retirement income, Stoller told Tax Notes February 1.

“Right now, they’re paying tax for retired partners,” Stoller said regarding passthroughs that opt to take advantage of the workaround. “Retired partners are paying tax and they don’t know,” he added. “It’s extra work for everybody.”

Stoller noted that the issue was raised to him by the Illinois CPA Society.

Marty Green, vice president of government relations at the society, told Tax Notes that the change would alleviate extra administrative burdens for tax officials that arise from out-of-state partners needing to file state tax returns to get credit for the income, which should be exempt.

“This technical correction is good tax policy, in our opinion," Green said.

“It’s a fairly simple language fix,” Stoller said. “I don’t know who would really be against it.”

S.B. 189 has been referred to the Senate Assignments Committee. It would take effect immediately.