Illinois Community Banks: Review the Increased 2017 Tax Rates
On July 6, 2017, a veto override by the Illinois State House and Senate ended the two year state budget stalemate. With this override, Senate Bill 9 (Public Act 100-0022) became law, which, among other provisions, permanently increases both the individual and corporate tax rates in Illinois.
Community banks will need to carefully consider these changes as they begin the second half of 2017.
For book purposes, C corporation banks should adjust their state tax expense calculation beginning in the month of July to reflect the new higher tax rate.
C corporation banks’ tax rates increase to 9.5 percent
Under the new budget, the income tax portion of the state tax rate has increased from 5.25 percent to 7 percent for C corporations. Combined with the personal property replacement tax rate of 2.5 percent, this brings the overall corporate tax rate back up to 9.5 percent. This is the same rate that was in effect from 2011 through 2014.
Since the state runs on a fiscal year, this change is effective July 1, 2017; it has not been made retroactive to January 1, 2017. Since most banks are calendar year taxpayers, their 2017 taxable income will need to be allocated between the lower 7.75 percent rate in effect through June 30, and the higher 9.5 percent rate through December 31, to determine the amount owed for 2017.
For book purposes, C corporation banks should adjust their state tax expense calculation beginning in the month of July to reflect the new higher tax rate. Depending on how your tax accountants have historically calculated your deferred taxes, it may also be necessary to adjust your deferred tax accounts.
High earnings in early 2017 may benefit from allocation provision
The standard method of allocating taxable income is a simple percentage. For calendar year taxpayers, 50 percent of the income would be allocated to the first half of the year and 50 percent to the second half. However, there is a special provision in the law allowing corporations to calculate their actual taxable income through June 30, 2017, and allocate based on that calculation if certain conditions are met. This could be advantageous if the bank’s earnings early in the year are substantially higher than its earnings later in the year.
Handling safe harbor tax estimates
If your bank has been making safe harbor Illinois tax estimates that were provided as part of your tax return or with your tax extension, you should continue to make these estimates through the end of the year. Since the estimates are based on the prior tax year, it is not necessary to adjust them at this time. However, you may owe additional tax when your 2017 return is completed or extended.
If you calculate your own tax estimates in-house and do not use safe harbor payments, you should update your third and fourth quarter tax calculations to reflect the new rate.
S corporation banks shareholders’ tax rates increase to nearly 5 percent
S corporation shareholders are taxed at the Illinois individual tax rate on their portion of the bank’s taxable income. Under the new budget, the individual tax rate has increased from 3.75 percent to 4.95 percent — slightly lower than the 5 percent rate in effect from 2011 through 2014.
Since the state runs on a fiscal year, this change is effective July 1, 2017; it has not been made retroactive to January 1, 2017. Shareholders will effectively pay half of their earnings at the lower rate and half at the higher rate for 2017, creating a blended rate of approximately 4.35 percent.
Adjust to reflect higher state rate
For tax distribution purposes, consider adjusting your third and fourth quarter tax distribution rate to reflect the higher state rate in effect, and have withholdings for non-Illinois residents be made based on this higher rate. The S corporation replacement tax rate of 1.5 percent has not changed under the new law, so there is no need to adjust your monthly state tax expense calculation.
Adjust payroll withholdings
With the increase in the personal tax rate, payroll withholdings for your employees will also need to be adjusted effective July 1, 2017. We recommend you work with your payroll processor to ensure that this change is properly reflected on your next check run.
How we can help
Each bank is unique, so you should carefully review how this this legislation will affect your institution and those you serve. Our CLA bank professionals know community banks, and we can help you align with these tax law changes so you can finish out 2017 on target.