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Business Owners’ Complete Guide to Illinois Small Business Taxes

Small Business Tax Law
Small Business Tax Law

Illinois is a populous state with a thriving community of small businesses. However, it also has one of the most complex tax structures in the country. Small business owners need to understand and navigate the Illinois tax environment. They especially need to be aware of how the legal business structure they choose affects their tax obligation.

Small Business in Illinois

There are over a million small businesses in Illinois. Over 99 percent of the state’s businesses are small businesses, and they account for almost half the jobs in Illinois. Small business owners have a large in-state customer base; only five states have greater populations. However, Illinois is a state with significant taxes, and the tax laws are complicated. There are not only the usual levies such as state income tax and sales tax, but some businesses may be subject to liabilities such as franchise tax and personal property replacement tax.

Businesses can mitigate their Illinois tax burden with some of the deductions and credits available in the state. It’s important for entrepreneurs to be aware of and take advantage of everything they can do to reduce the taxes they pay.

Registering an Illinois Small Business

Proper registration is critical, and not only because you need to comply with tax laws and other regulations. You need to be registered to access the various support programs that are in place for companies like yours.

You will have to:

  • Choose a business name. Check with the Secretary of State to make sure you have a unique one that is available.
  • File Articles of Organization or an Incorporation Form, depending on your legal structure.
  • Secure an Employer Identification Number (EIN) from the IRS.
  • Register and get permits for state and local sales taxes.
  • Obtain whatever licenses are required for your line of business.

Illinois Taxes and Tax Rates

Depending on your legal structure and your line of business, there are a number of taxes that you will be required to pay in Illinois:

  • Corporations such as C-corps and S-corps are subject to the Illinois corporate income tax of 7.00 percent on their profits. With partnerships and limited liability companies (LLCs) do not pay this corporate tax; instead, profits pass through and are taxed on the business owner’s personal Illinois tax return. The state individual tax rate is a flat rate of 4.95 percent.
  • There is an Illinois franchise tax based on a corporation’s paid-in capital. Both corporations and LLCs are potentially subject to this tax. Sole proprietorships and unincorporated partnerships do not pay this levy. The state legislature has repealed this tax, but the repeal doesn’t take place until December 31, 2025. The rate has been $1.50 per $1,000 of paid-in capital, but the amount is changing as the repeal is completed. Many businesses are exempt from this tax, and the amount can be calculated in a couple of ways. It may take professional tax accounting assistance to determine whether you are subject to the franchise tax and how much franchise tax you are required to pay.
  • Illinois sales tax is 6.25 percent. In addition, most municipalities impose a local sales tax of between 1.00 and 4.00 percent. There is a reduced rate for qualifying food and prescription drug sales.
  • Companies that have employees must pay unemployment (UI) insurance taxes and worker’s comp premiums. These are highly variable based on industry risk, safety record and experience rating. UI rates range from 0.55 to 7.80 percent of taxable wages.
  • Businesses that own real property are required to pay property taxes. The assessment process and the actual rate depend on the locality of the property.
  • The Replacement Tax, also known as the personal property replacement tax, was enacted to replace money for local governments that lost their power to impose personal property taxes. It ensures that the business is taxed on the current value of the property. The rate is 2.5 percent of profit for corporations and 1.5 percent for LLCs. The money is collected by the state and paid out to local governments.
  • Self-employment tax is required when profits are passed directly through to owners, as they are in sole professorships and LLCs.

As you can see, the legal structure of the business has a major impact on a company’s tax burden. That is why so many small businesses, nationwide as well as in Illinois, have chosen to organize as LLCs.

Tips To Reduce Taxes

While business taxes in Illinois can be challenging, there are a number of ways for small businesses to minimize their tax obligations:

  • The Illinois Small Business Job Creation Tax Credit provides a credit of up to $2,500 for the creation of each new job in Illinois. A company must have 50 or fewer full-time employees and create two jobs per year. The credit can generally be carried forward to subsequent years.
  • Companies that do research and development may be able to claim a credit of 6.5 percent of qualifying expenses that exceed a base amount.
  • The employee training credit can provide a credit of 50 percent of some training expenses, up to $4,500 per employee.
  • The Angel Investment Credit offers investors a credit of up to 25 percent on certain investments in Illinois small businesses.

There are credits and deductions for contributing to an employee retirement plan, investing in new equipment and technology and for companies in fields such as transportation and logistics. It’s important to be aware of all the available credits and deductions to avoid paying any more tax that you’re legally obligated to.

In addition, the legal structure of your business has a major impact on your tax obligation.

Legal Structure of Your Business

The most common options for small businesses are:

  • Sole proprietorship. The profits of the business are personal income, and there are no special tax filings. However, owners are personally liable for losses, lawsuits and any other expenses the business may incur. Sole proprietors can potentially lose not only what they’ve invested but also personal assets such as homes and bank accounts.
  • Corporations such as S-corps and C-corps. Owners are protected from liability and cannot lose more than their investment. However, there are special filing requirements, and profits may be taxed twice: once when the company pays corporate taxes, and again when the owners declare the dividends on their individual tax returns.
  • LLCs. Like corporations, these provide protection from personal liability. However, the LLC doesn’t pay corporate income tax. The profits are passed through to the owners, and the owners pay taxes on their individual returns.

Forming an LLC allows pass-through taxation, and it’s not as hard as you might think. There are only a few steps to getting your Illinois LLC up and running, and there are step-by-step instructions available online to walk you through the process. Small businesses all over Illinois and all over the U.S. are taking advantage of the tax and liability characteristics of LLCs.

Resources for Illinois Small Businesses

The Illinois Small Business Development Center (SBDC), which cooperates with the U.S. Small Business Administration, provides support to help new companies launch and grow. The SBDC offers free advice and support programs that include help with:

  • Writing a business plan.
  • Applying for funding and some of the available incentives.
  • Improving small business operations.
  • Finding ways to expand into new ventures.
  • Access to education and training opportunities.
  • Assistance with financial analysis and training.

Effective Tax Strategies in Illinois

Illinois law specifies taxes on small businesses, but the extent of your tax obligation can vary considerably depending on the actions you take as a business owner. Here are some of the key factors to focus on as you launch your Illinois small business:

  • From the very start, make a commitment to practicing good record-keeping. Complete and accurate financial records not only make tax preparation easier but also help you determine whether you are eligible for the credits and deductions available in Illinois. Also, good records enable you to substantiate your income, expenses, credits and deductions if they are ever challenged in an audit.
  • Understand your tax obligation. Make sure you are complying with all the regulations and submitting all the proper filings.
  • Learn about all the available credits and deductions, and take advantage of as many as you’re eligible for. Illinois has several that are intended specifically for small businesses.
  • Be prudent in selecting your legal entity structure. Consider whether a sole proprietorship, corporation or LLC is ideal for your tax and liability situation.

Illinois is a promising state in which to launch a small business. Thousands of others have done so, and you can, too. With a bit of planning, you can run your operation in a way that minimizes your Illinois taxes while complying with all the state tax laws.