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Focus On Taxes: Illinois Repeals Previous Replacement Tax Code Change

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On December 16, 2009, Illinois Gov. Pat Quinn (D) signed legislation, effective immediately, repealing a law change that would have subjected businesses operating as professional service partnerships, LLPs or LLCs to an additional tax on profits.
January 11, 2010

Illinois Enacts Law Repealing Previous Replacement Tax Code Change Affecting Partnerships, LLPs and LLCs

On December 16, 2009, Illinois Gov. Pat Quinn (D) signed legislation, effective immediately, repealing a law change that would have subjected businesses operating as professional service partnerships, LLPs or LLCs to an additional tax on profits.

The new law repeals a change that we reported in an August 7, 2009 eFocus. The August bill eliminated the add-back of “guaranteed payments” deducted for federal income tax purposes for tax years ending on or after December 31, 2009 for Illinois’ 1.5% Replacement Tax calculations.  It also eliminated the subtraction for “personal service income” or a reasonable allowance for “compensation” paid or accrued for services rendered for tax years ending on or after December 31, 2009.

This new law ensures that partnerships, LLPs, and LLCs will not have to pay the additional 1.5% on partnership, LLPs and LLCs profits. Gov. Quinn said “the additional 1.5% tax would have been unfair to attorneys, accountants, doctors, consultants and hosts of other professionals operating under partnership structures because they already are subject to the state’s 3% personal income tax on distributive income.”

What Does This Mean?

Generally, the net impact of these changes will result in no increase in the Illinois Replacement Tax liability for professional service partnerships. The new law restores the previous tax calculations. It specifically allows for the deduction of personal service income as part of calculations of a business partnership’s base income for the 1.5% Replacement Tax.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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