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[13] Decisions by the Secretary are subject to judicial review under the Administrative Review Law. The more paid-in capital a corporation has, and therefore the more its owners have paid in, the more the owners stand to lose in the event the corporation cannot pay its debts. The new law exempts the first $30 of a corporation’s franchise tax due in 2020, with the exemption amount increasing to $1,000 for taxes due in 2021, $10,000 for taxes due … The data is not correlated to individual users and we do not sell it to third parties. If your federal change increases the tax due to Illinois, you must file Form IL-1065-X and pay any additional tax within 120 days of IRS partial agreement or finalization. Finally, the Franchise Tax is apportioned and is subject to a cap. Filing Fee: $75 + minimum $25 franchise tax. This site uses cookies: This website uses “analytical” cookies and tracking tools. Illinois. [3] Under the new corporate system, individuals were protected from the debts incurred by the businesses they owned and operated. MyTax Illinois is a centralized location on our website where taxpayers may register a new business or electronically file tax returns, make payments, and manage their tax accounts. GA Corporate Income and Net Worth Tax. Similarly, Illinois’ franchise tax is administered by the Secretary of State rather than the Department of Revenue, which means separate filings, separate due dates, and a separate administrative regime. [11] In recent years, the State has discussed transitioning to a single sale factor apportionment methodology consistent with the state’s apportionment of corporate income. The Illinois Corporate Franchise Tax is currently calculated and due along with the filing of every business’ Corporate Annual Report with the Illinois Secretary of State. Corporate incomes are both visible and measured accurately by the Federal and State Government. For example, corporations pay $150 to file articles of incorporation, $50 to amend articles of incorporation, $25 to change registered agents, and so on. Illinois requires corporations to file an annual report and pay a franchise tax each year within the 60-day period immediately preceding the first day of the anniversary month of the incorporation date. A few years later, Company B purchases 90% of the stock of an existing venture in the same line of business—Company C—for $10,000. The Franchise Tax is imposed upon domestic corporations and foreign corporations for the authority to transaction business in Illinois. AL Business Privilege Tax FAQs. [8], In the case of a “vertical merger,” the paid-in capital of a subsidiary may be eliminated if either (1) it was created, totally funded, and wholly owned by the parent, or (2) the amount of the parent’s investment in the subsidiary was equal to or exceeded the subsidiary’s paid-in capital. [9] Source:  data from Illinois Secretary of State Business Services Division for calendar year 2018, March 18, 2019. The Secretary of State administers Illinois’ franchise tax along with a number of fees. The purpose of this article is to provide a summary of Illinois franchise law and federal franchise law as applied in Illinois. Welcome to the eBriefcase Management Center. The apportionment method for Illinois’ franchise tax is different from that used for Illinois’ income tax, and from any apportionment method used for any other state’s tax. But in the meantime, we are hearing from several banks around the state that Illinois has stepped up their reviews of holding company franchise tax filings in effort to collect any underpaid franchise tax. Generally speaking, but not always, a corporation should file a statement of correction with the Secretary which will supply the grounds for the need for an adjustment. In the case of a domestic corporation, the initial franchise tax is due upon the first issuance of shares. Whatever the reason for its existence, this very common structure frequently leads to an unfairly disproportionate tax liability. Not all foreign corporations with nexus in Illinois need pay the Franchise Tax. Website; Forms; Illinois Business Search; Due Date: Prior to the first day of the registration anniversary month. The State of Illinois will be phasing out their franchise tax beginning in 2020 and it will be fully eliminated in 2024. [7] This was the State agency that levied the franchise tax at the time. Each year thereafter, a corporation pays an “annual tax” on its paid-in capital in the state at the same rate (0.10%). Company A flourishes and after a few years decides to expand into a slightly different business, so it forms a new subsidiary. [6] A corporation may reduce its paid in capital by resolution of its board of directors by charging against its paid-in capital (i) the paid-in capital represented by shares acquired and cancelled by the corporation, (ii) dividends paid on preferred shares, or (iii) distributions as liquidating dividends. Illinois, like many states, apportions its corporate income tax based solely on a corporation’s sales volume in Illinois. [6] Commission on Government Accounting and Forecasting,  Economic Forecast and Revenue Estimate and FY Revenue Update,  March 5, 2019, page 36. These tools allow us to track new or past website visitors and help us to understand how users move around our website. Illinois law provides a list of activities that do not constitute “transacting business.”[3] Thus, even though a business may have nexus with Illinois for sales tax, corporate income tax, or some other Illinois tax, that business may not be subject to the Franchise Tax. E-mail: tfi@illinoistax.org Highlights of the report are summarized below. The franchise tax does not raise a significant amount of revenue today, and this was the case even at the time of its enactment. Frequently, the true franchise tax is lumped together with other fees imposed by the Secretary of State. Illinois’ franchise tax has its own unique quirks, making it an outlier even among the few states still imposing this kind of tax. File … Most importantly, corporations engaged in mergers and acquisitions with Illinois corporations should be careful to examine how such reorganizations may impact any additional franchise tax obligations by virtue of increasing paid-in capital. In general, a franchise tax is a tax on corporations that is separate from the corporate income tax. The choice of paid-in capital as the basis of the franchise tax was controversial even in 1872, so much so that Chicago railroad companies fought the tax all the way to the U.S. Supreme Court. For example, in 2007, which was considered an expansion year, revenues were 1.17 billion in the state of Minnesota. SB 689 also enacts a tax amnesty program for Illinois businesses with delinquent franchise taxes or license fees due to the Illinois Secretary of State. The franchise tax was conceived as a way for corporations to pay for the relatively new legal protections granted them by the state, and paid-in capital was likely chosen as a tax base because it was one of the only visible bases for the tax. The amount of paid-in capital in Illinois is the sum of (1) the value of the corporation’s property in Illinois, and (2) the gross amount of business transacted by it at or from places of business in Illinois compared to the sum of (1) the value of all its property, wherever located, and (2) the gross amount of its business, wherever transacted. Instead, the definition of paid-in capital is the “sum of the cash and other consideration received, less expenses, including commissions, paid or incurred by the corporation, in connection with the issuance of shares, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts added or transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise, minus reductions” provided elsewhere in the act. [9] In essence, even though all corporations face the additional burden of calculating and paying their franchise taxes, most of the revenues the tax raises come from only a small portion of filers. Each year thereafter, that original $10,000 investment is taxed under Illinois’ annual franchise tax 3 times because it is part of the paid-in capital of Companies A, B, and C.  This pyramiding has the effect of punishing businesses that expand. 430 East Vine, Suite A [11]  Hardly a resounding endorsement, even then. Regardless of your financial situation, file a tax return–even if you can’t pay what is due. Answering that question starts by explaining what the franchise tax is not. The apportionment formula used by Illinois is the sum of (1) the value of the corporation’s property (including intangibles) located in Illinois and (2) the gross amount of “business” (interpreted to mean gross revenues) transacted by it at or from places of business in Illinois. © Horwood Marcus & Berk Chartered 2021. At the time the franchise tax was enacted, corporations did not pay a corporate income tax. What do other states do? They argued that paid-in capital was an inappropriate, vaguely defined basis for the tax, and that the tax was unconstitutional. Illinois’ franchise tax is actually three separate taxes, all based on paid-in capital. While most states charge corporations an annual fee to operate in their state, Illinois is one of only a few states to tax corporations based on a measure of their net worth, paid-in capital, or capital stock. Benefiting Illinois Taxpayers for over 75 Years. Illinois’ franchise tax apportionment method penalizes corporations that have located or expanded their operations in the state. [11] State Railroad Tax Cases, 92 U.S. 575, 576 (1875). Of those, three (Arkansas, Delaware, Nebraska—a biennial tax) are based solely on the number of shares issued and par value of the stock, rather than on the value of the entity or its capital. In order to avoid late payment penalties, you must attach proof of the federal finalization date, showing the change was reported to Illinois within 120 days of IRS acceptance, or you may be assessed a late-payment penalty. In addition, corporations subject to the tax must pay an additional franchise tax when events occur that trigger a significant increase in the corporation's paid-in capital. [4] The term “paid-in capital” refers to the funds raised when a corporation issues stock plus any additions to capital, such as land granted by the government to the corporation or subsequent investments by shareholders. It is imposed on the privilege of exercising a franchise in Illinois or, in the case of foreign corporations, for the authority to transact business in the state. This article outlines Illinois’ franchise tax, including its history, revenue generation, outlier status, and administrative complications. As Table 1 indicates, a small percentage of corporations in Illinois account for most of the franchise tax revenues. The fee is $75 plus an amount that is calculated based on paid-in capital. In an article published in October of 1873, the Chicago Tribune noted that “A State tax of $40 each on all the liquor-saloons in Illinois would produce more money to the State Treasury than the Board of Equalization[7] will ever get by trying to tax the premium value of capital stock in private corporations.”[8] In that editorial, the Tribune made the argument that there were better ways to charge companies for the privilege of operating as a corporation than a tax on paid-in capital. Franchise Tax Apportionment . The franchise tax was originally conceived as a fee companies paid for the privilege of being considered “corporations.”  It was enacted in Illinois in 1872, when the “corporation” as a modern American institution was a relatively new idea. Finally, there is an “additional tax” on increases to paid-in capital, imposed at a higher rate (0.15%). The current rate of 4.8% has been in effect since July 1, 1989. franchise tax is called the “privilege tax” and has a graduated rate structure; the minimum privilege tax imposed is $100 and the maximum is generally $15,000. For traditional corporations, the tax is 2.5% of net income, and for other forms of business, the tax is 1.5% of net income. Illinois also imposes a franchise tax on corporations. With corporate franchise tax collection, these tax revenues are the most volatile. The annual franchise tax may not exceed $2 million per year. [4] See 805 ILCS 5/15.35 through 15.45 and 15.65 through 15.75, all part of the Buseinss Corporations Act of 1983, for the relevant statutory provisions regarding the imposition and calculation of the franchise tax. Using paid-in capital as a proxy for the benefit (or value) owners receive from incorporation, however, makes little sense. Illinois state law authorized the formation of corporations in 1849[2], and in 1855 the United States Supreme Court officially devolved power to form, alter and revoke corporate charters to the states. state’s apportionment of corporate income. The annual and initial taxes have a minimum of $25 (over and above the $75 annual report filing fee) and a maximum of $2 million, but the additional tax has no cap. Paid by both domestic and out-of-state entities “ [f]or the privilege” of doing business in Illinois, the franchise tax is payable annually upon the filing of the entity’s annual report with the Illinois Secretary of … For example: 11. The corporate franchise tax … For many, the only exposure they’ve had to annual reports is what they’ve received as a shareholder in a public company (a Form 10-K) or from a charity or foundation to which they’ve donated. A business can expand its facilities and hire more employees in the state without increasing its Illinois income tax liability, thereby encouraging in-state expansion. Franchise Tax. [3] Dodge v. Woolsey, 59 U.S. 331 (1855 ). Once assembled, you can create a PDF of your eBriefcase. Franchise tax liability, however, increases. This tax is based on a business’s net income. Without a federal income tax system, corporations could easily misreport their incomes to the state. What is the franchise tax? Georgia. Subscribe to Tax Facts, Economic Forecast and Revenue Estimate and FY Revenue Update. In addition, any franchisor that is currently and properly registered or exempted under the Illinois Franchise Disclosure Act, whose registration or exemption is due to expire between April 1, 2020 and June 1, 2020, is automatically granted an extension of 60 days from their anniversary date to file their franchise renewal application without penalty. Phone Number: (217) 782-6961. On the other hand, the administrative and policy flaws associated with the franchise tax are significant. Similarly, the additional paid-in capital component of the franchise tax is directly targeted at those businesses that are growing and expanding. Contact Us, Interested in TFI? The initial franchise tax rate is 0.15% of paid-in capital in Illinois, and the minimum payment is $25. When he first proposed repealing the business capital component of the state’s corporate tax, then-Governor Andrew Cuomo’s office made the following statement:  “New York’s corporate franchise tax is largely outdated and its complexity results in lengthy and complex audit processes that take businesses years to resolve. There is also a $75 fee to file a corporate annual report. However, if you have paid capital to report then then the form will need to reflect those gains accordingly. Maintain, defend, or settle any proceeding; Hold meetings of the board of directors or shareholders or carry on other activities concerning internal corporate affairs; Maintain offices or agencies for the transfer, exchange, and registration of the corporation’s own securities or maintain trustees or depositaries with respect to those securities; Solicit or obtain orders if orders require acceptance outside Illinois before they become contracts; own, without more, real or personal property; Conduct an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature; or. In most cases the franchise tax pre-dates the corporate income tax. “[10]  Illinois taxpayers share a similar sentiment regarding the Illinois franchise tax. Very few states employ a tax on paid-in capital in the manner Illinois does. All corporate income taxes are apportioned, including the Illinois income tax, but none use this particular formula. The inquiries by the Secretary of State appear to be focusing on the … Failure to file your Annual Report is a serious offense which can lead to your company being administratively dissolved by the Illinois Department of Business Services. For security verification, please enter any random two digit number. [4] Additional franchise tax is due upon a number of events that might increase a corporation’s paid-in capital during a given year. Today the situation is different. Rather, the typical franchise tax calculation is based on the net worth of or capital held by the entity. For example, corporations pay $150 to file articles of incorporation, $50 to amend articles of … Franchise Taxes are a State Tax . Corporations are subject to a wide variety of taxes, including the much more substantial corporate income tax. [5] See, for example, the Fiscal Year 2020 Budget Proposal prepared by the Governor’s Office of Management and Budget and the Fiscal Year 2019 Budget Summary prepared by the Commission on Government Finance and Accountability, both of which include only a single line item labeled “Corporate Franchise Tax(es) and Fees.”. Franchise taxes can be different in each state. DE Corporate Franchise Tax. The Secretary of State administers Illinois’ franchise tax along with a number of fees. However, in June of 2019, Governor J.B. Pritzker signed into law Senate Bill 689 (now Illinois Public Act 101-0009) which provided for the eventual phase-out of Illinois’ Corporate Franchise Tax on both domestic and foreign … Because franchises are governed by both federal and state regulations, franchise law is complex, and an experienced franchise attorney should be an essential part of your team, whether you are a franchisor or franchisee. As a result, it is time-consuming and costly to calculate, both for taxpayers and the taxing agency. Illinois's corporate income tax rate is 4.8% plus a 2.5% personal property replacement tax (7.3% total). Options were limited, so paid-in capital (an amount shareholders would insist corporations track properly) was taxed by the state. The Illinois Franchise Tax is a weird tax. Knowing the ins and outs of the Franchise Tax is a must for any corporation doing business in the state. The Illinois corporate franchise tax is a capital-based tax imposed on Illinois corporations and non-Illinois corporations qualified to do business in Illinois. AR Corporate Franchise Tax. The maximum tax payable in Alabama ($15,000), Georgia ($5,000), and Oklahoma ($20,000), while not de minimus, effectively turn the tax into a graduated annual filing fee. This apportionment method makes Illinois less competitive with its peers economically, and it creates an administrative burden. 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