The 2025 regular session of the Illinois General Assembly adjourned on June 1, 2025. The General Assembly passed a fiscal year (FY) 2026 budget package which includes corporate tax changes that will significantly impact multinational corporations and domestic corporations operating in multiple states, including Illinois. Included in Revenue Omnibus bill (HB 2755) are provisions to repeal business tax deductions for several interests, royalties and other expenses paid to overseas affiliates. The General Assembly estimated these would generate $64 million in new revenue for the state of Illinois by increasing corporate taxable income; however, some individual corporations believe the impact will be much greater.
Designed to combat corporate income tax avoidance, “addback rules” require taxpayers to include in their state taxable income certain expenses or deductions that were deductible for federal income tax purposes. Illinois first enacted addback rules in 2004 and is now one of 24 states with some form of related party addback rule. To ensure ordinary business transactions are not penalized, all these states—including Illinois—have implemented exceptions to their addback rules.
Prior to the passage of the FY 2026 budget, Illinois had five addback rules exceptions. The new budget eliminates the first two addback rule exceptions listed below, while the remaining three will continue to apply.
- The related member is subject to tax in another state or foreign country
- For interest only, the expense was arm’s length and not for the principal purpose of avoiding federal or Illinois income tax
- The related member, directly or indirectly, pays/accrues the expense to a foreign unrelated member, there is no tax avoidance, and the payments are arm’s length (conduit exception)
- An agreement made with a commissioner
- The addback is unreasonable
These changes will impact corporations operating in Illinois, potentially resulting in double taxation to foreign and out of state affiliates. The FY 2026 budget package passed the General Assembly, and it now awaits the governor’s signature before July 1, 2025.
Additionally, the FY 2026 budget package makes two other significant corporate income tax changes.
- Makes 50% of Global Intangible Low-Taxed Income (GILTI) corporate taxable income to prevent multinational corporations from shifting profits to low tax countries, estimated to generate $200 million in new revenue.
- Switches Illinois from the Joyce to the Finnegan model for allocating corporate income tax, estimated to generate $72 million in new revenue.
