Illinois Governor Pat Quinn signed legislation that substantially increases both corporate and personal income tax rates. The legislation also amends estimated tax, net loss deduction, and estate tax provisions.

Corporate income tax rate. The legislation increases the corporate income tax rate to 7% (from 4.8%) for taxable years beginning on or after January 1, 2011 and prior to January 1, 2015; 5.25% for taxable years beginning on or after January 1, 2015 and prior to January 1, 2025; and 4.8% for taxable years beginning on or after January 1, 2025.

Personal income tax rate. The legislation increases the personal income tax rate to 5% (from 3%) for taxable years beginning on or after January 1, 2011 and prior to January 1, 2015; 3.75% for taxable years beginning on or after January 1, 2015 and prior to January 1, 2025; and 3.25% for taxable years beginning on or after January 1, 2025.

Spending limit provision. The legislation provides that if state spending for any fiscal year beginning in fiscal year 2012 and through fiscal year 2015 exceeds specified spending limits, then corporate and personal income tax rates will revert back to the rates of 4.8% and 3%, respectively.

Net loss carryover. The legislation provides that, in the case of a corporation (other than an S corporation), no carryover deduction will be allowed under ILCS 5/207 (Net Losses) for any taxable year ending after December 31, 2010 and prior to December 31, 2014. For purposes of determining the taxable years to which a net loss may be carried under ILCS 5/207(a), no taxable year for which a deduction is disallowed under this provision will be counted.

Net income—accounting options. The legislation provides that, with respect to the taxable year of a taxpayer beginning prior to January 1 of any year and ending after December 31 of the preceding year, net income for the period after December 31 of the preceding year is that amount that bears the same ratio to the taxpayer's net income for the entire taxable year as the number of days in that taxable year after December 31 bears to the total number of days in that taxable year, and the net income for the period prior to January 1 is that amount that bears the same ratio to the taxpayer's net income for the entire taxable year as the number of days in that taxable year prior to January 1 bears to the total number of days in that taxable year.

In the case of a taxpayer with a taxable year beginning prior to January 1 of any year and ending after December 31 of the preceding year, the taxpayer may, instead of using the procedure described above, elect to determine net income on a specific accounting basis for the two portions of the taxable year: (1) from the beginning of the taxable year through December 31; and (2) from January 1 through the end of the taxable year.

Estimated tax safe harbor provision. For purposes of estimated tax payments, the legislation amends the definition of the term “required annual payment” to mean the lesser of: (1) 90% of the tax shown on the return for the taxable year, or if no return is filed, 90% of the tax for such year; or (2) for installments due prior to February 1, 2011, and after January 31, 2012, 100% of the tax shown on the return of the taxpayer for the preceding taxable year if a return showing a liability for tax was filed by the taxpayer for the preceding taxable year and such preceding year was a taxable year of 12 months; or (3) for installments due after January 31, 2011, and prior to February 1, 2012, 150% of the tax shown on the return of the taxpayer for the preceding taxable year if a return showing a liability for tax was filed by the taxpayer for the preceding taxable year and such preceding year was a taxable year of 12 months.

Estate tax provision amended. The legislation also amends the definition of “state tax credit” for estate tax purposes. For persons dying after December 31, 2010, “state tax credit” means the full amount calculable under the Internal Revenue Code as the credit would have been computed and allowed on December 31, 2001, with an exclusion amount of $2 million, and with a reduction to the adjusted taxable estate for any qualified terminable interest property election.