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Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget

Yesterday afternoon, after months of wrangling and a marathon 4th of July weekend session, the Illinois House of Representatives voted to override Governor Bruce Rauner’s veto of Senate Bill (SB) 9, the revenue bill supporting the State’s Fiscal Year (FY) 2017-2018 Budget. The vote ended Illinois’ two year budget impasse and may avoid a threatened downgrade of Illinois bonds to junk status. The key tax components of the bill as enacted Public Act 100-0022 (Act) are as follows:

Income Tax

Rate increase. Income tax rates are increased, effective July 1, 2017, to 4.95 percent for individuals, trusts and estates, and 7 percent for corporations.

Income allocation. The Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two rates in effect for 2017.

  • Illinois Income Tax Act (IITA) 5/202.5(a) provides a default rule, a proration based on the days in each period (181/184), for purposes of allocating income between pre-July 1 segments and periods after the end of June when rates increase. Alternatively, IITA 5/202.5(b) provides that a taxpayer may elect to determine net income on a specific accounting basis for the two portions of their taxable year, from the beginning of the taxable year through the last day of the apportionment period, and from the first day of the next apportionment period through the end of the taxable year.

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Reporting Audit Changes – New York City Amends Provision on Apportionment

On April 13, 2015, Governor Andrew Cuomo signed into law two bills related to the 2015-2016 budget (S2009-B/A3009-B and S4610-A/A6721-A) (Budget Bill), containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s (the City’s) General Corporation tax.  For additional information regarding these changes see our Special Report.

One of the less-publicized changes to the New York City Administrative Code involves an amendment to the provision that prohibits changes to the City allocation percentage during the additional period of limitation that is initiated by the reporting of federal or New York State corporate income tax or certain sales and use tax changes to the City where a taxpayer is not conceding the reported changes for New York City purposes.  N.Y. Admin. Code § 11-674(3)(g).  Under the former rule, if the general three-year statute of limitations had expired (i.e., the three-year period from the date the City return was filed), neither the taxpayer nor the City could make changes to the taxpayer’s allocation percentage due to the reporting of federal or New York State changes.  (This same prohibition on changes to the allocation percentage applied (a) when the taxpayer had not notified the City as to a federal or New York State change, but in such situation there would be no limitation on the time period during which the City can issue an assessment and (b) when a deficiency was attributable to the application of a net operating loss or capital loss carry back.)

In the past, the Commissioner has argued that the language in section 11-674(3)(g) was only intended to bar the City from making its own audit adjustments to a taxpayer’s allocation percentage and did not bar the City from making changes to a taxpayer’s allocation percentage that track or reflect State changes to such percentage.  A 1991 Department of Finance Hearing Decision agreed with this interpretation.  See Matter of C.I.C. International Corporation, FHD(390)-GC-9/91(0-0-0) (Sept. 13, 1991).  However, in 1999, the New York City Tax Appeals Tribunal held that the limitation imposed by section 11-674(3)(g) barred the City from making any changes to a taxpayer’s allocation percentage during the additional two-year period of limitation following a report of a State change, even if those changes were merely employed to mirror State changes.  Matter of Ethyl Corporation, New York City Tax Appeals Tribunal, TAT(E)93-97(GC) (June 28, 1999).

In this year’s Budget Bill, the limitation provision was amended with respect to taxable years beginning on or after January 1, 2015 (the provision was not changed for taxable periods beginning before January 1, 2015).  For taxable years beginning on or after January 1, 2015, the City may adjust the allocation percentage within the additional period of limitation when the New York City assessment is based on the reporting of a New York State change.  (The prohibition on changes to the allocation percentage still remains with respect to the reporting of federal [...]

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