Illinois recently enacted legislation that offers significant benefits to delinquent taxpayers and corporations doing business in Illinois. The new legislation phases out the Illinois franchise tax over a four year period beginning in 2020, and it establishes an amnesty program for unpaid franchise taxes and license fees owed to the Illinois Secretary of State and for unpaid taxes owed to the Illinois Department of Revenue.
Franchise Tax Repeal
The Illinois franchise tax is imposed on domestic and foreign corporations for the privilege of doing business in Illinois. Its repeal is welcome news to many who have long criticized the way the tax is calculated, the administrative burdens it places on taxpayers, and its traps for the unwary.
The franchise tax is calculated as a percentage of the amount of a corporation’s paid-in capital that is allocated to Illinois. The amount of a corporation’s paid-in capital that is allocated to Illinois is based on the percentage of the corporation’s total property and total business that is allocated to Illinois. A corporation’s paid-in capital is generally the amount of consideration paid to the corporation in connection with the issuance of shares (less certain expenses) plus the amount of other shareholder contributions to the corporation, minus certain reductions. Unfortunately, once established it can be difficult for a corporation to reduce its paid-in capital for franchise tax purposes. A corporation may reduce its paid-in capital only (i) by the amount of paid-in capital represented by shares acquired and cancelled by the corporation, but only to the extent of the amount paid by the corporation for such shares, (ii) by dividends paid on preferred shares, (iii) by distributions as liquating dividends, or (iv) pursuant to an approved reorganization in bankruptcy that specifically directs a reduction in paid-in capital.
Given the difficulty in reducing paid-in capital, a corporation with significant paid-in capital can be stuck paying high franchise taxes even for years in which the corporation performs poorly and even if the value of the corporation drops significantly from when it received its paid-in capital. This is just one of the franchise tax traps that have surprised corporations doing business in Illinois.
Fortunately, the new legislation phases out the franchise tax beginning in 2020. The new law exempts the first $30 of a corporation’s franchise tax due in 2020, with the exemption amount increasing to $1,000 for taxes due in 2021, $10,000 for taxes due in 2022 and $100,000 for taxes due in 2023. For 2024 and following years, the franchise tax is repealed and no franchise tax will be due.
The new law provides two amnesty programs for delinquent taxpayers. One program is for taxpayers owing franchise taxes or license fees imposed by the Illinois Business Corporation of 1983 for any tax period ending after March 15, 2008 and on or before June 30, 2019. This amnesty program is available only between October 1, 2019 and November 15, 2019. Taxpayers with unpaid franchise taxes or license fees for the relevant period can realize significant benefits by participating in the program. If a taxpayer pays all unpaid franchise taxes and license fees for any taxable period included in the amnesty program, the Secretary of State will abate and not seek to collect any interest or penalties, and it will not seek civil or criminal prosecution, for the period for which such taxes and fees are paid. Considering that unpaid franchise taxes accrue interest at a rate of 2% per month, the waiver of interest can result in significant savings. Further, amnesty will be available with respect to any taxable period for which a taxpayer pays all back franchise taxes and fees, even if the taxpayer does not pay all taxes and fees that it may owe for all periods. Amnesty is not available, however, for any taxpayer who is a party to any criminal investigation or any civil or criminal litigation pending in court for nonpayment, delinquency or fraud concerning franchise tax or license fees.
A second amnesty program is available for unpaid taxes owed to the Illinois Department of Revenue for taxable periods ending after June 30, 2011 and prior to July 1, 2018. Like the franchise tax amnesty program, this program runs from October 1, 2019 through November 15, 2019, and provides that the Department of Revenue will abate and not seek to collect any interest or penalties, and it will not seek civil or criminal prosecution, for any taxable period for which amnesty is granted. However, unlike the franchise tax amnesty program, a taxpayer’s failure to pay all taxes owed to Illinois for any taxable period will invalidate any amnesty under this program, and amnesty under this program is not available to any taxpayer who is a party to any criminal investigation or any civil or criminal litigation pending in court for nonpayment, delinquency or fraud concerning any taxes owed to Illinois.
The Illinois franchise tax is scheduled to be completely phased out in 2024, which will provide significant tax savings for corporations with large paid-in capital allocated to Illinois and eliminate an administrative burden for all corporations doing business in Illinois. Taxpayers should be aware, however, that although the franchise tax is scheduled to disappear for years after 2023, a taxpayer’s franchise tax liability for years before 2024 will remain.
The new amnesty programs offer qualifying delinquent taxpayers a great opportunity to resolve tax liabilities at a significant savings and without civil or criminal prosecution. Even taxpayers who do not believe they owe back taxes should consider double-checking their tax returns, annual reports and other tax-related filings for the tax periods covered by the amnesty programs to confirm that the filings were accurate and that all required taxes have been paid. With regard to franchise taxes, taxpayers should also confirm that they reported all changes in paid-in capital, since the failure to do so would result in unpaid tax. A taxpayer that knows it currently owes taxes or reviews its past filings and discovers that it owes taxes should work with its tax advisers to determine if it should participate in the amnesty programs and, if so, to be ready to request amnesty when it becomes available on October 1, 2019.