State Franchise Tax Elimination
A Small Annual Savings for Illinois Corporations
Owners of Illinois corporations, including medical or professional service corporations, are required to file annual reports with the Illinois Secretary of State. (See Required Filings for Maintenance]. Annual reports must be submitted with a $75 filing fee and a “franchise tax” of $25 minimum.
The franchise tax is considered a tax for a corporation’s authority to operate in Illinois. (Interestingly, limited liability companies are not required to pay franchise tax.) The tax is calculated as a percentage of paid-in capital. Although the actual tax is usually a relatively small amount for small businesses, critics have cited its negative impact on attracting business to the state. To address this issue, one of the provisions in the new Illinois state budget is the phase-out of Illinois’ corporate franchise tax beginning on January 1, 2020.
Under this change, the franchise tax will be phased out over a four-year period. Beginning on January 1, 2020, the first $30 of franchise tax liability will be exempt from any amounts owed. Because many medical corporations only owe and pay the minimum $25 tax, these corporations will no longer pay any franchise tax. For all corporations, under the revised franchise tax provisions of the budget act, starting in 2021, the exemption will increase each year to $1,000, $10,000, and $100,000, respectively. After January 1, 2024, the franchise tax will be eliminated.
Medical and professional service corporation owners (and limited liability company owners) will still pay an annual report filing fee of $75. However, the elimination of the franchise tax is at least a small victory for Illinois corporation owner physicians.
Note: the Illinois Secretary of State has updated its annual report form to reflect the phase-out of the franchise tax. The ICS recommends using the updated form to ensure the correct calculation of the tax at the time of annual report filing.