The Illinois pass-through entity tax lets partnerships and S corporations pay state income tax at the business level instead of pushing the whole burden onto owners’ personal returns. The entity pays 4.95% on its Illinois net income, and each partner or shareholder gets a credit for their share of that payment on their individual Illinois return. The federal payoff is the point: because the tax is paid by the business, it comes off federal income as a business expense and sidesteps the individual cap on state and local tax deductions.135 ILCS 5/201(p)
Why Illinois Created the Election
The Tax Cuts and Jobs Act of 2017 capped individual state and local tax deductions at $10,000. For owners of profitable Illinois pass-throughs, that left large state tax payments with no federal deduction. Illinois responded in 2021 with Senate Bill 2531, adding subsection (p) to Section 201 of the Illinois Income Tax Act. The IRS had already signaled in Notice 2020-75 that it would treat state income taxes paid by a partnership or S corporation as deductible business expenses at the entity level, which removed the legal doubt hanging over this kind of workaround.
Who Can Make the Election
Two kinds of businesses qualify: partnerships (including multi-member LLCs taxed as partnerships) and S corporations. The election has been available for any tax year ending on or after December 31, 2021. Publicly traded partnerships under Internal Revenue Code Section 7704 are excluded.
Single-member LLCs cannot elect. The IRS treats them as disregarded entities, so their income flows straight onto the owner’s personal return and no separate entity exists to be taxed. Sole proprietorships and other disregarded structures are out for the same reason.
The election is annual. A business has to make it fresh for each tax year, and once the extended due date for that year’s return passes, the choice is locked in.
How the Tax Is Calculated
The rate is 4.95% of the entity’s net income attributable to Illinois sources. Net income here means the business’s total profit after allowable Illinois deductions and adjustments. The entity computes the figure and pays the Illinois Department of Revenue directly.
This is separate from the Illinois replacement tax that partnerships and S corporations already owe. Partnerships pay a 1.5% replacement tax and S corporations pay 2.5%. The PTE election does not replace those. It adds a 4.95% entity-level income tax on top, with the federal SALT deduction benefit and the owner-level credit as the tradeoff.
Investment partnerships have an extra step. An electing investment partnership first calculates its nonresident partner withholding, and the income subject to that withholding is subtracted from the base used to compute PTE tax. That prevents the same dollars from being taxed twice at the entity level.
Filing and Making the Election
The election lives on the entity’s annual Illinois return. Partnerships file Form IL-1065; S corporations file Form IL-1120-ST. Each form has a checkbox indicating the intent to pay PTE tax for the year, and checking that box is the election. There is no separate application.
Both forms require the entity to report its total net income and each owner’s distributive share. Filing is available electronically through MyTax Illinois or by mailing paper copies. Use the form version that matches the tax year being filed.
Estimated Payment Deadlines
Electing entities have to make quarterly estimated payments on the same schedule as other business income taxes: the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. For a calendar-year entity, that is April 15, June 15, September 15, and December 15.
Payments can go through MyTax Illinois, by ACH credit, or by mail with the appropriate voucher (Form IL-1065-V for partnerships, Form IL-1120-ST-V for S corporations). A missed deadline triggers interest on the unpaid balance and potential penalties.
Late Filing and Underpayment Penalties
Illinois imposes a two-tier late-filing penalty. The first tier is the lesser of $250 or 2% of the tax due, reduced by any timely payments. If the entity still has not filed within 30 days of a nonfiling notice from the state, a second-tier penalty applies equal to the greater of $250 or an additional 2% of the tax shown due, capped at $5,000.
For estimated payments, there is a safe harbor. An entity generally avoids the underpayment penalty if its estimated payments total at least 90% of the current year’s tax or 100% of the prior year’s liability, paid in four equal installments by the due dates. Fall short of both, and the Department of Revenue can assess a late-payment penalty on the shortfall.
How Owners Claim the Credit
When the entity pays PTE tax, each partner or shareholder gets a credit equal to their share of the payment. Individual owners claim it on Form IL-1040 against their Illinois income tax liability.
If the credit is larger than what the owner owes, the excess counts as an overpayment. The owner can take a refund or roll the surplus into the following year’s tax. That is what keeps the same income from being taxed twice: once at the entity level, then offset by the credit at the individual level.
What the Election Does for Nonresident Owners
For partners and shareholders who live outside Illinois, the election can cut out a separate filing. When an entity pays PTE tax, that payment replaces the pass-through withholding otherwise required for nonresident members. If a nonresident’s only Illinois-source income comes from the electing entity and the PTE credit fully covers their Illinois tax, they do not need to file an Illinois individual return at all. Nonresidents with other Illinois income, or whose credit falls short of their total liability, still file and claim the credit against what they owe.
Is the Election Still Worth Making After 2025?
Congress raised the individual SALT deduction cap in 2025 through the One Big Beautiful Bill Act, to $40,000 for 2025 and $40,400 for 2026. That change narrows the gap the PTE election was designed to close. Owners whose total state and local tax liability stays under $40,400 may not need the workaround at all.
Higher earners are treated differently. The $40,400 cap begins to shrink once modified adjusted gross income exceeds $505,000. For every dollar above that threshold, the cap drops by 30 cents, though it cannot fall below $10,000. Owners well above $505,000 still face a meaningful SALT limitation, and the election remains valuable for them.
The expanded cap is temporary. Starting with the 2030 tax year, the cap reverts to $10,000. Any business expecting to operate into 2030 and beyond should treat the PTE election as a long-term planning tool rather than a workaround for a problem Congress has solved. The core question each year is whether the federal savings from deducting the entity-level payment outweigh the administrative work and the cash-flow effect of paying the tax at the business level, and the answer now depends heavily on each owner’s income and total state tax picture.