Summary: Over the last several months, Illinois has enacted income and sales tax legislation impacting tax years 2025 and 2026, including some provisions that split from the One Big Beautiful Bill (OBBB). More tax legislation may be forthcoming as the state begins its 2026 legislative session.
In 2025, Illinois enacted two important bills, HB 2755 and SB 1911, that made significant amendments to the state’s income and sales taxes. Signed into law by Governor JB Pritzker on June 16 and December 12, respectively, these legislative measures introduce new requirements and opportunities for businesses operating in Illinois.
Sales Tax Overhaul: Key Changes for Retailers and Marketplace Facilitators
HB 2755 introduces the following changes to the state’s sales tax rules, effective January 1, 2026.
- Economic Nexus Redefined: The 200-transaction threshold for determining whether a retailer or a marketplace facilitator meets the state’s sales tax economic nexus requirements has been eliminated. Moving forward, retailers and marketplace facilitators without physical presence will create economic nexus once they have $100,000 in Illinois sales. Businesses that have been registered with the state due to meeting the 200-transaction threshold should reexamine whether they need to be registered and filing in Illinois.
- Expanded Marketplace Facilitator Rules: The marketplace facilitator rules have been expanded to include facilitators selling services subject to the state’s Service Occupation Tax, which typically applies to the incidental transfer of tangible personal property as part of a service transaction.
- New Penalty Tax Rate: For taxpayers making sales that are sourced under the state’s destination-based approach, a new 15% tax rate will apply if the taxpayer fails to provide sufficient information to determine the proper location. This new rate may also be retroactively assessed by the state during an audit covering periods prior to January 2026. Taxpayers should review their documentation to ensure they have sufficient support for determining the location of each sale.
For more information, please refer to the state’s information bulletins FY 2026-12 and FY 2026-13.
Income Tax Reforms: Impact on Businesses and Individuals
HB 2755 also introduces changes to the income tax rules, effective for tax years ending on or after December 31, 2025.
- Shift from Joyce to Finnigan Method: For combined unitary filers, the state switched from the Joyce method to the Finnigan method for computing the sales factor. This means that Illinois-sourced sales from all unitary group members are included, as opposed to just the Illinois sales of the taxpayer members (i.e., those with Illinois nexus). This change will likely reduce the impact of the state’s throwback rule.
- Elimination of Key Addback Exceptions: The following two exceptions to the state’s addback modification for interest and intangible expenses paid to a foreign person that conducts at least 80% of its business outside the U.S. are eliminated: (i) the “subject to tax” exception and (ii) the exception for arm’s-length agreements where the principal purpose for the payment is not the avoidance of Federal or Illinois taxes.
- GILTI Deduction Reduced: The 100% dividend received deduction that was applied to Global Intangible Low-Taxed Income (GILTI) has been cut in half to 50%, meaning that 50% of GILTI will now be included in the Illinois income tax base.
- Interest Expense Allocation Aligned with Federal Rules: For taxpayers that paid interest to foreign affiliates and that are subject to the IRC 163(j) deduction limit, the state’s rules for allocating the reduced interest expense are now aligned similarly to IRC 59A(c)(3). Reductions must now be allocated first to non-foreign affiliates and then to foreign affiliates.
Special Allocation Rule for Partnership and S-Corp Gains
Effective for tax years ending on or after June 16, 2025, HB 2755 requires taxpayers that recognize gain or loss from the sale of an interest in a partnership (other than an investment partnership) or an S-corporation to allocate the gain/loss to Illinois based on the average of the partnership’s or S-corporation’s apportionment percentage in the year of the sale and the two immediately preceding tax years. As a result of this change, an individual seller will no longer be able to allocate these gains solely to his or her state of residence.
Income Tax Changes Under SB 1911
SB 1911 brings several new income tax provisions that are effective for 2026.
- Permanent Extension of Pass-Through Entity Tax (PTET): The state’s PTET, which was set to sunset for tax years beginning on or after January 1, 2026, has been permanently extended. No other changes to the PTET were made.
- Decoupling from Federal Bonus Depreciation: Illinois will not conform to new bonus depreciation rules for qualified production property under IRC 168(n) as enacted under the OBBB.
- Net CFC Tested Income (NCTI) Inclusion: With the OBBB replacing GILTI with NCTI, Illinois updated its 50% GILTI inclusion rule (as discussed above) to apply to NCTI as well.
- Excess Business Loss Limitation Permanency: For trusts and estates, Illinois repealed the expiration of the excess business loss limitation rule under IRC 461(l), making this limitation permanent. The OBBB made the excess business loss limitation permanent for noncorporate taxpayers.
For more information, please refer to the state’s information bulletins FY 2025-29 and FY 2026-15.
It is worth noting that Illinois is a rolling conformity state, meaning that any changes made by the OBBB will generally be incorporated into Illinois law unless the state chooses to decouple from such change, as for example in the case of IRC 168(n) noted above or as may be enacted in other legislation.
Final Thoughts: How to Prepare for 2026 in Illinois
As businesses close their 2025 books and begin planning for 2026, it’s important to assess how these new rules will affect tax obligations and compliance strategies. Illinois’ 2026 legislative session began on January 14, 2026, and businesses should stay proactive by monitoring updates and reviewing any new guidance for all sales and income tax reporting.
