Illinois Replacement Tax: Rates, Credits, and Penalties

The Illinois replacement tax is an income-based tax that businesses pay on top of the regular state income tax, with the revenue routed to local taxing districts. Corporations pay 2.5% of net Illinois income. Partnerships, S corporations, and trusts pay 1.5%. Public utilities pay 0.8% of invested capital instead. You report it on the same Illinois return you use for income tax, using the form that matches your entity type.

Who Owes the Replacement Tax

Four kinds of entities pay the replacement tax directly: corporations (domestic and foreign corporations doing business in Illinois), S corporations, partnerships, and trusts. Each pays based on its own net Illinois income.¹

Partnerships and S corporations are worth flagging. Even though they’re pass-through entities for federal purposes, the entity itself pays Illinois replacement tax on its net income before anything flows to partners or shareholders. Public utilities are also subject to the tax, but theirs is figured on 0.8% of invested capital rather than on net income.²

The rates in one place:

Corporations: 2.5% of net Illinois income
Partnerships, trusts, and S corporations: 1.5% of net Illinois income
Public utilities: 0.8% of invested capital

These stack on top of Illinois income tax. A C corporation, for example, pays the 7% corporate income tax plus 2.5% replacement tax, for a combined 9.5% state rate.²

How Net Income Is Calculated

The base starts with federal taxable income and is then adjusted under the Illinois Income Tax Act. Common additions include federally exempt interest income, bonus depreciation differences, and net operating losses claimed federally. The Illinois Department of Revenue instructions for each form list every required addition and subtraction.

Multi-State Apportionment

Businesses earning income both in and outside Illinois don’t pay replacement tax on the full amount. Illinois uses a single-sales-factor formula: divide Illinois sales by total sales everywhere, then apply that percentage to net income. Only the apportioned share is taxed here.³

Misassigning where sales are sourced is one of the more common audit triggers, so this is worth getting right if you have meaningful revenue from customers outside Illinois.

Unitary Business Groups

When multiple corporations operate as a unitary business group, Illinois may require or allow them to file a combined return that treats the group as a single taxpayer. Only corporations with taxable presence in Illinois are eligible members. S corporations and noncorporate entities are not eligible for the combined return and keep filing separately.⁴

Forms and Filing Deadlines

There is no separate replacement tax return. You calculate the replacement tax as part of the Illinois income tax form for your entity type:⁵

Corporations: Form IL-1120
S corporations: Form IL-1120-ST
Partnerships: Form IL-1065
Trusts and estates: Form IL-1041

Filing dates follow federal timing with one Illinois wrinkle for corporations:

Corporations with a fiscal year ending on any date other than June 30: 15th day of the 4th month after year end. Cooperatives file by the 15th day of the 9th month.
Corporations with a June 30 fiscal year end: 15th day of the 3rd month after year end.
S corporations and partnerships: 15th day of the 3rd month after the fiscal year ends.
Trusts and estates: 15th day of the 4th month after the fiscal year ends.

A calendar-year corporation files by April 15. A calendar-year S corporation or partnership files by March 15.⁶⁷

Automatic Extensions

Illinois grants extensions automatically. No separate application is required, but you have to pay what you owe by the original due date. The extension lengths:

Corporations: 7 months (8 months for a June 30 year end)
S corporations: 7 months
Trusts and estates: 6 months

An extension moves the filing deadline, not the payment deadline. If you owe tax and don’t pay by the original due date, late-payment penalties and interest accrue.⁶⁸

Electronic Filing

If your federal business income tax return has to be e-filed, Illinois requires you to e-file your state return for the same tax year. Amended returns are exempt, and if the Illinois Modernized e-File program doesn’t yet support a particular return, that return is also exempt.⁹

Estimated Tax Payments

This is where businesses most often trip up. Corporations must make quarterly estimated payments if combined Illinois income tax and replacement tax liability for the year will exceed $400. For S corporations and partnerships that elect to pay the pass-through entity tax, the threshold is $500.¹⁰

Payments are due April 15, June 15, September 15, and December 15 for calendar-year filers, with equivalent dates for fiscal years. You can pay in four equal installments, annualize income each quarter and pay based on actual earnings, or pay the full amount with the first installment. Missing an estimated payment triggers its own penalty separate from any late-filing or late-payment penalty on the annual return.¹⁰

The Pass-Through Entity Tax Election

Since 2021, partnerships and S corporations can elect to pay a pass-through entity (PTE) tax at 4.95% of net income. The election exists mainly as a workaround for the federal $10,000 cap on state and local tax deductions. When the entity pays the PTE tax, each partner or shareholder receives a credit equal to 4.95% of their distributive share of net income, which offsets their own Illinois income tax.¹¹

The election is made on the entity’s replacement tax return (IL-1065 for partnerships, IL-1120-ST for S corporations). Electing entities pay PTE tax for all their members and are not required to make separate pass-through withholding for nonresidents. The replacement tax itself still applies regardless of whether you elect PTE; the two are separate obligations reported on the same return.¹¹

Replacement Tax Investment Credit

Businesses that place qualifying property in service in Illinois can claim a credit of 0.5% of the property’s basis against replacement tax. An additional 0.5% is available if the business increases its Illinois base employment by at least 1% over the prior year. Employment gains under 1% get a prorated additional credit.¹²

Unused credit carries forward for five years.¹³ The percentages are small, but they add up for capital-intensive businesses. Check the current Form IL-477 instructions before claiming, since the legislature has periodically adjusted what costs qualify.

Penalties and Interest

Replacement tax follows the same penalty rules as other Illinois income taxes.

Late Filing

Miss the filing deadline (including any extension) and the penalty comes in two tiers. First, the lesser of $250 or 2% of tax due after subtracting timely payments. If you still haven’t filed within 30 days of receiving a notice of nonfiling, a second penalty applies: the greater of $250 or 2% of total tax shown due, capped at $5,000. The penalty applies even when no tax is owed.¹⁴

Late Payment

Late-payment penalties escalate quickly:

1 to 30 days late: 2% of the unpaid tax
31 or more days late: 10% of the unpaid tax
After an audit or investigation begins: 15% of any amount still unpaid
After an audit-prepared amended return is issued: 20% of any amount not paid within 30 days

The jump from 2% to 10% after just 30 days is steep, and the 15% and 20% tiers during audits make quick resolution far cheaper than letting a balance sit.¹⁵

Interest

Unpaid balances accrue simple interest calculated daily. The rate is tied to the federal underpayment rate under IRC Section 6621 and is reviewed each January 1 and July 1. From January 1, 2025 through June 30, 2026, the rate is 7%.¹⁶

1
Cornell Law School. Illinois Admin Code Title 86, 100.2140 – Credit Against Income Tax for Replacement Tax (IITA 201(i))
2
Illinois Department of Revenue. Personal Property Replacement Tax – Local Governments
3
Illinois.gov. Business or Farm Income Apportionment Formula (IAF) Worksheet
4
Cornell Law School. Illinois Admin Code Title 86, 100.5201 – Definitions and Miscellaneous Provisions Relating to Combined Returns
5
Illinois Department of Revenue. IL-1120 Instructions 2025
6
Illinois Department of Revenue. Corporation
7
Illinois Department of Revenue. Taxpayer Answer Center – Questions and Answers Answer
8
Illinois Department of Revenue. 2025 IL-1041 Instructions
9
Illinois.gov Revenue. Modernized e-File (MeF) for Business Income Tax
10
Illinois Department of Revenue. Pub-105, Estimated Payments Requirements
11
Illinois Department of Revenue. Publication 129, Pass-through Entity Information
12
Cornell Law School. Illinois Admin Code Title 86, 100.2101 – Replacement Tax Investment Credit
13
Illinois Department of Revenue. Illinois Income Tax Credits and Expirations
14
Illinois Department of Revenue. Pub-103, Penalties and Interest for Illinois Taxes
15
Illinois Department of Revenue. Publication 103, Penalties and Interest for Illinois Taxes
16
Illinois Department of Revenue. Interest Rates