LLC taxes in Illinois

[rhill-riversidepec]

Our 2 member Illinois LLC is filing as a partnership for 2021.   Turbotax is saying that our LLC owes Illinois an income tax payment.  My understanding is that all tax liability is passed through to the members similar to federal.  Is this a turbotax bug.

[HelenC12 · Accepted solution]

@rhill-riversidepec  No, this is not a TurboTax bug. Yes, the income is pass through however, IL charges a Replacement Tax. 

• Replacement Tax, also known as Personal Property Replacement Tax, is a tax on the net income of corporations, subchapter S corporations, partnerships, and trusts. This tax replaces money lost by local governments when their power to impose personal property taxes was taken away. Replacement tax is collected from corporations, subchapter S corporations, partnerships, and trusts by the State of Illinois and paid to local governments.

• Partnerships are subject to replacement tax but do not pay the Illinois income tax. The income tax is paid at the partner's level. Generally, income from a partnership is passed on to the partners. The partners must include this income in their federal adjusted gross income (for individuals) or federal taxable income (for other taxpayers). This is the starting point for Illinois income tax purposes and where the income tax is paid.

• Partnerships, trusts, and S corporations pay 1.5 percent of net income as Replacement Tax.

[Edited 03/01/22|2:04 pm PST]

[Mike9241]

there is a way to reduce or avoid the state replacement tax.

IL 1065 line 26

Line 26 — Enter the greater of
• your personal service income as defined in the now-repealed
IRC Section 1348(b)(1); or
• a reasonable allowance for compensation paid or accrued for
services rendered by partners to you.

[bearsroom]

Do you know if this tax is deductible on my federal 1040?

Thanks

[Mike9241]

if you are usng the cash basis of accounting for federal income tax purposes and pay your 2024 Illinois replacement tax in 2025. it's not deductible until 2025. the state tax payment becomes a deduction on the 2025 federal form 1065 and an add-back for the Illinois 1065.

[bearsroom]

Thanks Mike,

I am an S Corp, is there still a way I can deduct the amount I paid in 2023 this year? Or is it only for partnerships?

[RobertB4444]

No.  As a cash basis taxpayer you deduct an expense in the year that it is paid.  In order to deduct the 2023 expense you will need to amend the 2023 return.

@bearsroom