Illinois Increases Replacement Tax on Partnerships

With the signing of SB 1912 on 7/15/09, Illinois has amended the computation of the replacement tax for partnerships which appears to be a 'revenue raiser' for the state.

On page 156 of the bill (SB 1912), the legislation repeals the addback of any guaranteed payments deducted for federal income tax purposes for tax years ending on or after December 31, 2009:

The amount of deductions allowed to the
partnership pursuant to Section 707 (c) of the Internal
Revenue Code in calculating its taxable income;
provided that no addition shall be required under this
subparagraph (C) for taxable years ending on or after
December 31, 2009, for deductions allowed for
guaranteed payments to an individual partner for
personal services by that partner;

On page 165 of the bill (SB 1912), the legislation repeals the subtraction for personal service income or a reasonable allowance for compensation paid or accrued for services rendered by partners to the partnership for tax years ending on or after December 31, 2009:

For taxable years ending before December 31,
2009, Any income of the partnership which constitutes
personal service income as defined in Section 1348 (b)
(1) of the Internal Revenue Code (as in effect December
31, 1981) or a reasonable allowance for compensation
paid or accrued for services rendered by partners to
the partnership, whichever is greater;

What Does This Mean?

For tax years ending on or after December 31, 2009, partnerships will only be allowed to deduct guaranteed payments for services rendered by partners, and will not be allowed to deduct "reasonable compensation." Hence, partnerships will most likely pay more tax.

If you operate a partnership that pays compensation on performance or some other measure that is not 'predictable' at the beginning of the year, this change may affect you the most.

If you have any questions, please contact me at leveragesalt@earthlink.net.

Click on the following to access the entire 273 page bill:

http://www.ilga.gov/legislation/publicacts/96/PDF/096-0045.pdf

For all future updates regarding this legislation, go to ILLINOIS.