Illinois Tax Credits for Businesses

Have you reviewed your business return lately to make sure you are getting all the tax credit Illinois has to offer? Illinois has two tax credits that should be evaluated on a yearly basis. The Replacement Tax Credit and the Research and Development Credit. These credits are very different but can have a large tax benefit for Illinois business operating in Illinois.

Research and Development Credit

The Research and Development Credit is a non-refundable credit available to different industries. Industries that may have qualifying expenses are manufacturing and software development. Here are some examples of activities that may qualify for the credit:

  • Developing an innovative product that is new to the market
  • Engineering and designing a new product
  • Designing or evaluating product alternatives
  • Introducing significant modifications to the concept or design of a product
  • Designing, constructing, and testing pre-production prototypes

Expenses that Qualify for Tax Credits

If the business engages in any of the above activities, the next step is to determine the expenses that qualify for the credit. Expenses that qualify are:

  • Wages paid to an employee who engages in, directly supervises, or directly supports qualified research
  • Amounts paid for supplies used to conduct qualified research
  • Amounts paid to another person for a contract to do research in which the taxpayer owns the rights to research

The available credit is equal to 6.5% of the difference between current years qualified expenses and the average of the prior three years. Illinois reinstated the credit for tax years ending after December 31, 2015 through tax year ending December 31, 2021 and can be carried forward for five years. If the business is a pass-through entity, the credit will be passed to the shareholders or partners.

Replacement Tax Credit

The Replacement Tax Credit is a credit based on the purchases of personal property that will be for used in manufacturing or retailing in Illinois. The credit is equal to .5% of the basis of the qualified property placed in service during the year. There is an additional .5% credit available if the Illinois employee count increases more than 1% from the prior year. The property is qualified if:

  • New tangible property
  • Used tangible property, if previously used in Illinois
  • Useful life of 4 or more years
  • Will be used in trade or business
  • Not acquired form a related party

Keep in mind that if section 179 expensing was taken on the asset, it is no longer eligible for the credit because there is no basis in the asset. There would also be a recapture of the credit if the asset is sold or moved outside of Illinois within 48 months of being placed in service. Other restrictions may apply so be sure to consult with us to see if the asset qualifies for the credit.

Expired Credits

The Investment credit has expired December 31, 2018, so 2018 will be the last chance to take the credit. This is a nonrefundable credit but can be carried forward five years. If the business is a pass-through entity the credit will be passed to the shareholders or partners. It is also important to review if the credit was taken on prior returns.

How DHJJ Can Help

Ensure you’re taking advantage of the Illinois business credits available to your business. Contact your tax preparer or the DHJJ State and Local Tax Group at 630-420-1360 or fill out the form below.

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