Last month, Illinois Governor J.B. Pritzker signed SB1257 into law enacting changes, in part, to the state’s Income Tax Act. A portion of the bill was aimed specifically at the state’s numerous not-for-profit organizations in an attempt to relieve additional burdens placed on them as a result of the Federal Tax Cuts & Jobs Act of 2017 (TCJA). For tax years beginning on or after January 1, 2019, organizations subject to federal unrelated business income (UBI) taxation on expenses paid for certain qualified transportation fringes will no longer also be subject to taxation in Illinois on these expenses.
The TCJA brought sweeping changes in taxation to all stakeholders from individuals to for-profit businesses to not-for-profit organizations. One change in particular that caused much controversy among the not-for-profit community was the addition of Internal Revenue Code §512(a)(7), which introduced the concept of taxing an organization based upon the expenses it incurred relating to qualified transportation fringes, such as pre-tax commuting and parking benefits.
Since the Illinois tax system follows the federal system, any organization that reported UBI on Federal Form 990-T was also required to file Form IL-990-T to report and pay tax on the income in Illinois at a rate of 9.5% for corporate filers. This is in addition to the 21% tax charged at the federal level on these expenses, resulting in an approximate 30% tax to organizations.
An uproar from the not-for-profit community ensued after the TCJA was passed, as organizations and advocacy groups realized the impacts of the legislation and how these previously beneficial expenses would be transformed into taxable income. This prompted states to start thinking about decoupling from the new tax law provision. The legislation just passed by Illinois allows them to join other states such as Hawaii, Minnesota, New York and North Carolina that have decoupled from federal law, in at least some form, regarding the taxation of these expenses as UBI.
Bear in mind that this new law decoupling Illinois from the federal tax law only relates to IRC §512(a)(7) qualified transportation fringes. Any other form of UBI reported on the Federal Form 990-T should still be reported and taxed on Illinois Form IL-990-T going forward.
This change to Illinois law becomes effective for organizations with tax years beginning on or after January 1, 2019. For tax years beginning prior to this date, organizations that are federally subject to tax on these expenses must still file Form IL-990-T and pay the tax. An organization with a fiscal year end (i.e. June 30, 2019) would still be required to file and pay based on the entire tax year and would not be eligible for the decoupling until the subsequent period.