What Is Illinois Replacement Tax and Who Pays It?

The Illinois Replacement Tax is a levy on certain business entities operating within the state. Often referred to as the Personal Property Replacement Tax (PPRT), its purpose is to compensate local governments for revenue lost when their authority to tax business personal property was abolished. Enacted on July 1, 1979, this tax replaced funds previously collected by local governments through the personal property tax system. The Illinois Constitution of 1970 mandated the abolition of the business personal property tax and required replacement of lost revenue for local government units and school districts.

The Replacement Tax functions as a dedicated revenue source, collected by the state and then distributed back to local governments. This ensures municipalities and other taxing districts continue to receive funding previously from direct taxation of business personal property. The tax applies at the entity level, meaning the business itself is responsible, rather than individual owners or shareholders for their personal income tax.

Entities Subject to the Tax

The Illinois Replacement Tax applies to a range of business entities, including corporations, S corporations, partnerships, and trusts. These entities are subject to the tax based on their net income attributable to Illinois operations. Public utilities also pay this tax, with liability determined by invested capital.

Corporations, including C-corps and S-corps, pay the tax on their net Illinois income. C-corporations pay both corporate income tax and the Replacement Tax. S-corporations, while generally considered pass-through entities for federal income tax purposes, are directly subject to the Illinois Replacement Tax. The S-corporation itself is liable for the tax on its net income, even though its income typically passes through to shareholders for federal income tax.

Partnerships and trusts also pay the Replacement Tax on their net Illinois income. For partnerships, the tax is levied on the partnership’s net income attributable to Illinois, even though income tax is paid at the partner’s individual level. Limited Liability Companies (LLCs) are classified for tax purposes based on their federal election; if taxed as a partnership or an S-corporation, an LLC will be subject to the Replacement Tax.

Calculating Your Replacement Tax Liability

Calculating the Illinois Replacement Tax involves determining the tax base and applying the rate for the entity type. Corporations pay a 2.5% replacement tax on their net Illinois income. Partnerships, trusts, and S corporations are subject to a 1.5% replacement tax on their net Illinois income. Public utilities pay a 0.8% tax on their invested capital.

The starting point for “net Illinois income” is generally federal taxable income. This federal figure is then adjusted for Illinois-specific additions and subtractions to arrive at “base income.” Examples include adding back certain state or municipal interest income and subtracting interest income from U.S. Treasury obligations. For multi-state businesses, an apportionment formula is used to determine the portion of the base income that is attributable to Illinois.

For partnerships, the tax base calculation involves considering the partnership’s net income. The amount reported on Form IL-1065, Partnership Replacement Tax Return, specifically line 26, is used. This line requires the greater of personal service income or a reasonable allowance for compensation paid to partners.

S corporations determine their net income for Replacement Tax purposes, with the tax paid at the entity level, not by individual shareholders. While Illinois recognizes federal S elections, the state still requires these businesses to pay the Replacement Tax.

Reporting and Paying the Tax

Entities subject to the Illinois Replacement Tax must report their liability on forms provided by the Illinois Department of Revenue:
Corporations generally use Form IL-1120, Corporation Income and Replacement Tax Return, to report and pay this tax.
Partnerships file Form IL-1065, Partnership Replacement Tax Return.
S corporations use Form IL-1120-ST, Small Business Corporation Replacement Tax Return.
Trusts report their Replacement Tax on Form IL-1041, Fiduciary Income and Replacement Tax.

Due dates for filing these forms and paying the tax vary by entity type:
Most corporations: 15th day of the fourth month following the close of their tax year.
Partnerships and trusts: 15th day of the fourth month after their tax year ends.
S corporations: 15th day of the third month following the close of their tax year.
If a due date falls on a weekend or holiday, the deadline shifts to the next business day. Extensions for filing may be available, but they do not extend the time to pay the tax due.

Estimated tax payments for the Replacement Tax may be required for certain entities. Corporations that reasonably expect their combined income and Replacement Tax liability to exceed $400 must make quarterly estimated payments. These payments are due on the 15th day of the fourth, sixth, ninth, and twelfth months of the tax year.

Partnerships and S corporations are not required to make estimated Replacement Tax payments unless they elect to pay the pass-through entity tax. Utilities are required to make quarterly estimated payments based on their invested capital. Payments can be made electronically through MyTax Illinois or via ACH Credit, or by mail using specific payment vouchers.