The Illinois Department of Revenue has big plans this holiday season to bring different types of unitary businesses that use different apportionment formulas together under a single, combined Illinois corporate income tax return. Like many states, Illinois corporate income taxpayers are generally required to file a unitary combined corporate income tax return.  This combined reporting method aggregates in one tax return the income, deductions and apportionment factors generated by commonly owned corporations operating as a unitary group.

Elimination of the Unitary Business Non-Combination Rule

Historically, Illinois’s unitary business non-combination rule (“non-combination rule”) prohibited the inclusion of entities utilizing different apportionment formulas under Section 304 of the Illinois Income Tax Act (“IITA”) in a single combined filing.  As a result, entities required to utilize an industry-specific apportionment formula under IITA Section 304—such as insurance companies, financial organizations, federally regulated exchanges, and transportation service companies—could not be included in the same unitary combined return with unitary affiliates utilizing Illinois’s standard apportionment formula.

This all changed last year when the Illinois legislature amended IITA section 1501(a)(27) to eliminate the non-combination rule for tax years ending on or after December 31, 2017. Pursuant to this new law, all unitary businesses operating in Illinois—regardless of their required apportionment formula—are included in a single combined Illinois corporate income tax return.  Most recently, on November 9, 2018, the Department released a proposed regulation providing guidance regarding the implementation of this new law, stating:

[T]he business income of a unitary business group that includes members who apportion their business income under different subsections of IITA Section 304 is apportioned using the average of the apportionment percentages of each subgroup of members using the same apportionment formula (computed as if that subgroup were a separate unitary business group) weighted by the everywhere sales of the members of each subgroup . . . .

Illinois Admin. Code Section 100.3600(b) (proposed). Each “subgroup” consists of “like-apportioned” taxpayers—for instance, separate subgroups for general corporate taxpayers, insurance companies, financial organizations, federally regulated exchanges, transportation service companies, etc.  The proposed regulation outlines specific steps to determine an “apportionment fraction” for each individual subgroup by calculating apportioned income for each subgroup weighted against the everywhere sales of the entire unitary group.  The resulting apportionment fraction of each subgroup is then combined with the apportionment fractions of other subgroups to reach an aggregate, combined Illinois apportionment factor.

Key Takeaways

The Department of Revenue argued for years that the existence of separate unitary group filings provided opportunity for businesses to manipulate their overall Illinois tax liability. This new law attempts to prevent this result by capturing all income generated by unitary affiliates within a single, combined return multiplied by an aggregated Illinois apportionment factor representative of the entire unitary business.

While simple in concept, eliminating the non-combination rule is proving more complicated in practice. Indeed, the devil is in the details as evidenced by the Department’s proposed regulation, which provides very complex and nuanced rules for combining apportionment factors of different business lines.  Multistate corporate taxpayers should carefully evaluate how this proposed regulation affects their historical Illinois filings.  Public comments, concerns, and objections to the Department’s proposed regulation are due no later than Christmas Eve (December 24).

Contact the Authors:  Ted Bots and Drew Hemmings