Illinois Pass-Through Entity Tax (PTET)

Why PTET matters in this state

Illinois enacted its PTE election under 35 ILCS 5/201(p), effective for tax years ending on or after December 31, 2021, and removed the original sunset through subsequent legislation — the regime is now permanent. The state runs a flat 4.95% individual rate, so the federal-deduction arbitrage on Illinois-sourced pass-through income is mechanically straightforward: the entity pays 4.95% on net income, the owners take a refundable credit, and the entity-level payment becomes a federal Schedule K business expense deductible against ordinary income under IRS Notice 2020-75. Typical beneficiaries are Chicago-metro service-firm partners, downstate manufacturers, and S-corp owners with materially Illinois-sourced income whose personal SALT deduction is capped under IRC §164(b)(6). Compared to graduated-rate states like New York or New Jersey, the Illinois math is simpler — the rate is the same for every dollar of qualified net income — but the irrevocability mechanic is sharper, which makes pre-election modeling more important than the arithmetic itself.

Election mechanics

The Illinois PTE election is made on a timely-filed original Form IL-1065 (partnerships) or IL-1120-ST (S corporations), including any valid extension. The election is made by checking the election box and completing Schedule B as part of the return filing. Critically, the election is irrevocable once the extended due date passes — there is no on-amended-return cure for missed elections, and equally no late opt-out for elections the entity comes to regret. The PTE tax rate is 4.95% of net income for the taxable year, applied at the entity level (Illinois Department of Revenue Publication 129). Eligibility covers S-corps, partnerships, and LLCs taxed as either; publicly traded partnerships under IRC §7704 are excluded. Note that Illinois has both a 4.95% PTE election tax AND a separate 1.5% personal property replacement tax — they are different taxes and they stack at the entity level.

Owner credit walkthrough

The owner credit is refundable. Each partner or shareholder receives a credit equal to 4.95% of their distributive share of PTE-tax-bearing income, claimed on the personal Form IL-1040. Per Publication 129, if the credit exceeds the owner's Illinois tax liability the excess is refundable as an overpayment. Multi-owner allocation is pro rata by distributive share. The Illinois DOR previously issued estimated-payment penalty abatement for the 2021 and 2022 tax years (FY 2024-03) — that abatement does not extend to current tax years; standard estimated-payment rules now apply, and entities should run estimates throughout the year to avoid late-payment penalties. Nonresident owners claim the credit on Form IL-1040 (with Schedule NR) just as residents do.

2026 changes

No material 2026 Illinois PTE statutory changes pinned this session. The original sunset has already been removed; the regime is permanent.

Composite-return interaction

Illinois PTE stacks with composite/nonresident filing under 86 Ill. Adm. Code 100.5100. The manifest does not pin the precise interaction text for this session; the practical question is whether nonresident owners would prefer to be on the composite return (no individual filing) or off it (claim the refundable PTE credit on their own Form IL-1040). Consult a preparer if the entity has a material nonresident mix.

§199A QBI interaction

Illinois PTE reduces federal flow-through ordinary income per Notice 2020-75, trimming the §199A QBI base by roughly 4.95% of allocated income before the federal 20% deduction. For non-SSTB owners outside the phaseout, the §199A offset against PTE's federal arbitrage is small relative to higher-rate states. For SSTB owners already phased out, the offset is zero.