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 2020 was one of the worst years on record for the state’s
economy, and Illinois’ 440,000 small businesses felt this pain more than most.
Luckily, up to $1 billion in state tax relief is on its way thanks to Illinois
automatically adopting a federal tax break intended to help struggling
businesses.
But Illinois Gov. J.B. Pritzker tried once to cancel that relief, and now he’s
trying again.
Leading up to and during his State of the State and budget address on Feb. 17,
Pritzker pushed to close what he dubbed “corporate loopholes” in the state’s tax
code. One was a provision in the Coronavirus Aid, Relief and Economic Security
Act, which Illinois tax code would typically adopt automatically, that would
essentially allow struggling small businesses that lost money in 2020 to get an
advance on their future tax returns.
Pritzker was encouraging state lawmakers to eliminate this provision for S
corporations, limited liability corporations and partnerships, the most common
tax filing statuses for small businesses. His move would effectively strip these
businesses of tax refunds they would be owed by the state of Illinois. The
provisions were already eliminated for C corporations, the most common
designation for large businesses.
It has been reported that 440,000 small businesses would be impacted by this
change. These businesses are set to receive an estimated $500 million to $1
billion in tax refunds from the state.
That money could go a long way to providing cash flow for businesses that are in
danger of closing permanently. However, state lawmakers may again consider
taking away this relief from struggling small businesses, which are Illinois’
most prolific job creators.
Traditionally, if a business lost money, it could ensure it didn’t overpay in
taxes by adjusting for the losses on either its past or future income. However,
the Tax Cuts and Jobs Act limited these procedures to only allow businesses to
perform a “carryforward” of those losses, letting them deduct losses from future
income.
Because of the economic shock of COVID-19 and state-mandated lockdowns, many
businesses found themselves facing massive losses in 2020 and without the cash
flow needed to pay their staff, rent or other bills. Because of these struggles,
the federal CARES Act let businesses apply 100% of their lost income to past
years, rather than only future years. This process is known as a “carryback” of
net operating losses for businesses.
A carryback would allow a business to deduct its losses during down years from
its income in previous years, giving it a refund for excess taxes already paid
based on its loss of income. This more immediate adjustment allows for
additional cash on hand to pay bills and might even prevent some businesses from
going under. That’s because businesses would have access to their money today,
rather than waiting a full year for their tax bills to be adjusted.
In both scenarios, the total amount paid in taxes remains the same. The only
difference is when losses are accounted for.
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Under a “carryforward” system, adjustments are made
to tax bills in the year after losses occur, allowing businesses to
pay lower future taxes. Under a “carryback” system, businesses get a
tax refund in the years when they are not profitable, and resume
paying taxes at their normal rates in years when they are
profitable.
Luckily for struggling businesses, during “lame duck” session the
101st Illinois General Assembly rejectedPritzker’s call to decouple
state tax policy from the CARES Act.
However, during his annual State of the State and budget address on
Feb. 17, Pritzker proposed a variety of other tax hikes, which he
once again called “cutting corporate loopholes.” He claimed he had
support from state lawmakers.
While eliminating carryback provisions for S-corps was not among the
nine tax policies that would take nearly $1 billion from the
Illinois economy, Pritzker previously said he was “anticipating that
it will get brought up soon in the new session of the General
Assembly.” Right now insiders believe this tax hike proposal will be
delivered through Senate Bill 217.
The carryback provision for S-corps within the CARES Act allows for
struggling small businesses to get their tax refunds when they need
it most, providing increased cash flow and potentially keeping their
businesses afloat. However, Pritzker wants to prevent this
accelerated relief, even though the policy doesn’t change the total
revenues the state collects in the long run. It just makes it more
difficult for Pritzker to balance his budget in the coming year.
Rather than denying struggling businesses much-needed relief,
lawmakers should commit to pension reformand structural changes that
can balance Illinois’ budget while respecting taxpayers and
promoting healthy economic growth.
A constitutional amendment to allow pension reform that preserves
workers’ earned benefits and allows for changes in unaccrued
benefits – such as converting the 3% compounding automatic annual
benefit increases into adjustments tied to inflation – would make
the system more sustainable and make pensions more secure. A “hold
harmless” pension reform plan developed by the Illinois Policy
Institute would save the state roughly $2.4 billion the first year
and more than $50 billion through 2045, while fully eliminating the
debt during that time.
Taking away $500 million to $1 billion intended to help small
businesses stay afloat during COVID-19 would inflict more damage on
the group that has provided nearly 60% of Illinois’ net new jobs in
recent years. The move would hurt them, and it won’t fix Illinois’
spending problem.
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