When you read the words “franchise tax,” you probably think about business franchises like McDonald’s and Subway. But in reality, a franchise tax is a state tax levied on businesses for the right to exist as a legal entity and to do business within a particular jurisdiction. As of 2019, there are 17 states that collect franchise taxes, but Illinois is taking measures to cut that number by one. In June of this year, Illinois Governor J.B. Pritzker signed his state’s $40 billion budget into law. Included in the 300-page budget is Senate Bill 689, which will phase out Illinois’s much maligned franchise tax and provide a tax amnesty for businesses that owe any fees or taxes that were imposed by the original tax. The process of phasing out the tax out will take four years and start in January of 2020.
Why is Illinois Phasing Out the Franchise Tax?
Both political parties have considered the franchise tax problematic for business growth, and it has been a target for repeal by the Illinois business community for decades. According to the independent organization Illinois Policy, franchise taxes harm the entrepreneurial spirit of small business owners who are less likely able to absorb the costs compared to much larger corporations. Both sides of the political aisle praised the signing, hopeful that Illinois small business owners will benefit from lower costs and less red tape.
How is Illinois’s Franchise Tax Administered?
Each year, Illinois corporations pay a rate based on either paid-in capital or an “allocation factor.” For the paid-in capital rate, Illinois corporations in their first year pay 0.15% of paid-in capital for the preceding twelve-month period, with a $25 minimum. For subsequent years, the tax is 0.1% for the preceding twelve-month period, with a $25 minimum and a $2 million maximum, plus 0.1% of the basis. For the allocation factor rate, the franchise tax is based on gross assets and revenue.
Illinois’s franchise tax raised $179 million in 2018, which amounted to less than 0.5% of all business tax revenues collected. In contrast, Illinois’s corporate income tax brought in more than $2.6 billion.
How Will SB 689 be Implemented?
The phase out will occur by exempting certain dollar amounts that would otherwise be due under the franchise tax statute as follows:
2020: The first $30 of franchise tax liability is exempt.
2021: The first $1,000 of franchise tax liability is exempt.
2022: The first $10,000 of franchise tax liability is exempt.
2023: The first $100,000 of franchise tax liability is exempt.
2024: Illinois franchise tax is fully repealed.
SB 689 also enacts a tax amnesty program for Illinois businesses with delinquent franchise taxes or license fees due to the Illinois Secretary of State. The franchise tax amnesty program will commence October 1, 2019, and will run through November 15, 2019.
If you’d like to know more about starting a business in Illinois or any state, Northwest can help.