Illinois Tax Update: Key Changes Businesses and Investors Should Know Following the Spring Legislative Session

Illinois lawmakers recently concluded the 2026 Spring Legislative Session, approving a $55.9 billion budget, the largest in state history, along with a series of tax measures designed to generate revenue while extending certain economic development incentives. 

The legislation includes several tax law changes affecting businesses, investors, and certain industries. While some provisions are industry-specific, others could have a broader impact on tax planning, compliance obligations, and investment decisions in the years ahead. Several changes take effect beginning in 2027, while others may influence planning decisions businesses and investors are making today. 

Below is an overview of some of the most notable developments. 

1. Expanded Pass-Through Entity Tax Election 

One of the more significant changes for partnerships involves Illinois’ Pass-Through Entity Tax (PTET) election. 

Beginning with the 2026 tax year, partnerships may elect to pay PTET on the full distributive share of income attributable to Illinois resident owners, rather than only Illinois-sourced income. The change aligns Illinois more closely with the approach adopted by states such as New York. Additional guidance is expected from the Illinois Department of Revenue. 

For some businesses and owners, the expanded election may create additional state tax planning opportunities, but it may also require revisiting estimated tax payments and overall tax strategies before year-end. 

2. Illinois Limits Net Operating Loss Utilization 

Beginning with the 2027 tax year, Illinois will limit the use of Net Operating Losses (NOLs) by C corporations. 

Under the new rules, NOL deductions generally will be limited to the greater of $500,000 or 15% of net income for the 2027 tax year. The allowable percentage is scheduled to increase annually until it reaches 80% in 2031. For 2025 and 2026, the Illinois NOL deduction is still capped at $500,000.  

Businesses that have accumulated NOL carryforwards may find themselves paying Illinois income tax sooner than anticipated, potentially affecting cash flow projections and long-term tax planning strategies. 

3. Illinois Decouples from Federal Qualified Small Business Stock Treatment 

A significant change for founders, investors, and owners of qualifying startups involves Illinois’ treatment of gains excluded under Internal Revenue Code Section 1202 (Qualified Small Business Stock). 

Under federal law, eligible taxpayers may exclude a substantial portion, and in some cases all, of the gain recognized on the sale of qualifying small business stock. However, Illinois has enacted an income tax addition equal to the amount of gain excluded under Section 1202. 

The change applies to tax years ending on or after December 31, 2026, and affects sales of such stock that were already contemplated and executed before the law change.  

As a result, taxpayers who anticipated receiving both federal and Illinois tax benefits from QSBS treatment may face increased Illinois tax liability upon the sale of qualifying stock. This change could influence exit planning, investment decisions, and business valuation considerations. 

4. Credit Card Processing Fee Law Delayed 

Illinois also delayed implementation of the Interchange Fee Prohibition Act until July 1, 2027. 

The law has attracted significant attention from retailers, restaurants, hospitality businesses, and payment processors because it would prohibit interchange fees from being applied to the sales tax and gratuity portions of certain credit card transactions. 

While the delay provides additional time for businesses and payment processors to prepare, organizations should continue monitoring developments and implementation guidance as the revised effective date approaches. 

5. Illinois Extends Several Business Tax Credits 

While several provisions in the legislation increase tax obligations or limit existing tax benefits, lawmakers also extended several credits designed to encourage investment, innovation, workforce development, and economic growth throughout Illinois. 

• Research & Development Tax Credit (extended through 2036): Encourages businesses to invest in qualified research activities, product development, and innovation. 

• Angel Investment Tax Credit (extended through 2032): Provides tax incentives to investors who make qualifying investments in eligible Illinois startup and early-stage companies. 

• Affordable Housing Tax Credit (extended through 2036): Supports the development and preservation of affordable housing projects throughout the state. 

• Apprenticeship Education Expense Credit (extended through 2031): Helps employers offset certain costs associated with qualifying apprenticeship programs and workforce development initiatives. 

• River Edge Redevelopment Historic Tax Credit (extended through 2033): Encourages redevelopment and historic preservation projects within designated River Edge redevelopment zones. 

The extensions provide additional certainty for businesses, developers, and investors evaluating long-term projects and capital investments in Illinois. 

6. New Taxes Target Certain Digital and Emerging Industries 

The legislation also introduces several new taxes affecting specific industries beginning July 1, 2027. 

• Targeted Advertising Services Tax: Imposes a 10% tax on certain digital advertising revenue generated from targeted advertising services on digital platforms. The tax generally applies to receipts exceeding $1 million. 

• Digital Asset Tax: Imposes a 0.2% tax on certain digital asset business activities conducted through exchanges, including certain cryptocurrency-related transactions. 

• Social Media Platform Fee: Establishes a graduated fee structure applicable to certain social media platforms, with the legislation prohibiting platforms from passing the fee directly to users. 

In addition, changes to the Sports Wagering Act expand the definition of taxable wagering activities to include certain contracts, swaps, and agreements tied to sporting events and impose a 1.75% transaction tax on exchange wagers. 

While these provisions primarily affect specific industries, businesses operating in digital advertising, cryptocurrency, social media, gaming, and related sectors should begin evaluating the potential financial, compliance, and operational impacts before the July 2027 effective date. 

 

Many of these changes will not take effect immediately, but several may influence decisions businesses and investors are making today. 

Evaluating the impact early can help identify planning opportunities, avoid surprises, and position businesses to respond proactively as implementation dates approach. 

If you have questions about how these changes may affect your business, investment strategy, or tax position, contact FGMK today. Our team can help you evaluate the impact of these developments and identify planning opportunities based on your specific circumstances.