Illinois PPRT Increase and Repeal

Public Act 96-0835

In July 2009, the General Assembly passed and the Governor signed legislation that among many other provisions would repeal the ability of a partnership or LLC filing a tax return in Illinois from deducting reasonable compensation paid to partners for services in computing the PPRT, unless that amount is actually paid out as a guaranteed payment for services. The law was to be effective for “tax years ending before 12/31/09.”

After intense opposition from the business community regarding the change which was not publicly discussed and was retroactive to the current tax year, the General Assembly repealed the PPRT increase in October. The Governor signed the legislation in December (Public Act 96-0835)

Eliminating this key deduction would have meant -- that private equity and venture capital firms based in Illinois and/or actively pursuing investment opportunities here would have likely paid significantly more in PPRT. The 1.5 percent PPRT could have been applied to management fees paid on Illinois-based funds and compensation of all partners based on the activities of the fund, manager or firm in Illinois. These activities could have included time spent on Illinois-related activities such evaluating investment opportunities here. Carried interest potentially could also be affected although that remains unlikely.

IVCA worked with its members to better understand the potential ramifications of this tax change on our membership. We also reached out to other affected constituencies including law and accounting firms and the Taxpayer Federation of Illinois to gauge their concern and potential interest in educating legislators about the severe negative impact this new tax will have on business investment in Illinois. By adding a new tax on partnerships and LLCs, the PPRT change would have posed a competitive problem for the state. This is particularly true with regard to private equity and venture capital investing since no other money-center state in the country has a similar tax.

IVCA successfully educated legislators about the negative impact of the PPRT to Illinois venture & private equity investors in 2004 when we helped enact legislation exempting investment partners from the 1.5% PPRT on income derived from Illinois-based private equity funds. This current issue is new and separate from that earlier resolution.

The 2009 PPRT change was part of SB 1912, the Emergency Budget Implementation Act of Fiscal Year 2010 which ostensibly provides for changes in state programs necessary to implement the Governor’s fiscal year 2010 budget recommendations. On July 15th, a seven-page energy shell bill passed earlier by the Senate was amended by the House to include the 250+ page budget implementation provisions, passed by both the House and the Senate without a single “no” vote and signed by the Governor.

Not only did the affected parties NOT have an opportunity to provide input into the PPRT change, some tax and legislative experts question why this simple tax change (changing a tax rule of long standing) was included in a bill that was designed to make changes in state programs needed to implement appropriations legislation. Reportedly the reason for the tax change was a technical clean up to remove a “loophole” that proponents claimed gave an unfair tax advantage to partnerships. That however is not accurate – the deduction for “reasonable compensation for personal services” paid to partners was intended to be the equivalent of the deductions S and C corps were allowed to take under the original PPRT legislation. (“S corporations are allowed a deduction for compensation including bonuses paid to owners at arriving at federal distributable income. C corporations are allowed the same deduction to arrive at federal taxable income. Partnerships, however, are not afforded the same treatment for income that represents “compensation” in arriving at federal distributable income. In order for partnerships to be afforded the same treatment Illinois allowed a deduction for a portion of their distributable income that represented reasonable compensation when the replacement tax was initially imposed”. Illinois Taxpayers Federation)

Based on these sound arguments from the business community, the General Assembly and the Governor agreed to repeal the change (HB 2239 signed into law in December).

Email: