FY 2009-02
October 2008

Illinois Department of Revenue

Informational Bulletin

Brian Hamer 
Director of Revenue
                                                Pass-through Entity Payments

                                                To: All tax professionals, S corporations, 
                                                partnerships, and trusts.

For information 
or forms...

 Call us at:                                    This bulletin provides detailed information does fi le an Illinois tax return must report the 
 1 800 732-8866 or                              regarding the new law that requires         income and is allowed to take credit for the 
                                                partnerships, S corporations, and trusts    pass-through entity payment reported to him.
 217 782-3336
                                                (pass-through entities) to make tax 
 Call our TDD                                   payments on behalf of their nonresident     What does the new law require 
  (telecommunications device                    partners, shareholders, and benefi ciaries   pass-through entities to do?
  for the deaf) at:                             (nonresident owners). 
                                                                                            Pass-through entities that have nonresident 
 1 800 544-5304
                                                What is the new law on                      owners must fi le Form IL-1000, Pass-through 
 Write us at:                                                                               Entity Payment Income Tax Return, and make 
                                                withholding by pass-
  Illinois Department of Revenue                                                            a pass-through entity payment on behalf of 
 P.O. Box 19044                                 through entities?                           those nonresident owners.
  Springfi eld, IL  62794-9044                   For tax years ending on or after December 
                                                                                            Pass-through entity payments are required for 
 Visit our web site at:                         31, 2008, PA 95-0233 (SB 1544) and          all nonresident owners, except
                                                PA 95-0707 (SB 783) require pass-through 
 tax.illinois.gov
                                                entities to make Illinois tax payments on   
  individuals for whom the pass-through 
                                                                                               entity fi les Form IL-1023-C, Illinois 
 Callour 24-hour                                behalf of nonresident owners. Although 
                                                                                               Composite Income and Replacement tax 
  Forms Order Line at:                          this is referred to as “pass-through entity 
                                                                                               return; or
 1 800 356-6302                                 withholding,” it is not true withholding. 
                                                Instead, the pass-through entity is         
  non-individualowners, who document 
                                                required to make a payment based on its        to the pass-through entity on Form 
                                                nonresident owners’ share of apportioned       IL-1000-E, Certifi cate of Exemption for 
 This bulletin is written to                    Illinois business income. If the pass-         Pass-through Entity Payments, that they 
 inform you of recent changes;                  through entity’s payment covers the            will fi le a return and pay the Illinois Income 
                                                nonresident owner’s Illinois Individual        Tax.
 it does not replace statutes,                  Income Tax obligation, that owner does 
                                                                                            The pass-through entity must provide 
 rules and regulations, or court                not need to fi le Form IL-1040, Individual 
                                                                                            nonresident owners with a Schedule K-1-P, 
 decisions.                                     Income Tax Return.                          Partner’s or Shareholder’s Share of Income 
                                                The pass-through entity is required to      Deductions, Credits, and Recapture, or 
                                                notify the nonresident owner of the amount  Schedule K-1-T, Benefi ciary’s Share of Income 
                                                of pass-through entity payment made on      and Deductions, that shows the amount of 
 Printed by authority of the State of Illinois  his behalf. The nonresident owner who       pass-through entity payments made on their 
 110,000 copies - 10/08 - P.O. Number 2090199
                                                                                            behalf. 

Informational Bulletin - Pass-through Entity Payments                                                           FY 2009-02

NOTE: Nonresident owners are required       What forms will be used?                 What are the requirements 
to attach Schedule K-1-P or K-1-T 
to their Illinois tax return and cannot       Form IL-1000, Pass-through Entity      when the owner of an 
receive credit for the payments made on       Payment Income Tax Return,             entity is also a pass-
their behalf without the documentation.       must be completed and signed. Any 
                                                                                     through entity (tiered 
The pass-through entity must also             amount shown due on Form IL-1000 
accept completed and signed copies            should be sent with the tax return.    partnerships and 
of Form IL-1000-E, from non-individual       NOTE: Do not make pass-through          distributions)?
owners who elect not to have pass-            entity payments on Form IL-941,        Pass-through entities that are owners 
through payments made on their behalf.        Illinois Quarterly Withholding         of a pass-through entity with Illinois 
                                              Income Tax Return.
You should keep copies of Form                                                       business incomemust   fi le Form IL-1000, 
IL-1000-E in your fi les. At any time, we      Form IL-1000-X, Amended Pass-          and make a pass-through entity payment 
may request to review those certifi cates.     through Entity Payment Income          for their nonresident owners on the 
                                              Tax Return, must be completed by       Illinois business income passed through 
What does the new law                         a pass-through entity to reportan      to them, as well as on any Illinois 
require nonresident                           underpayment of tax due on Form        business income they earn directly. The 
                                              IL-1000.                               tiered entity must issue Schedule(s) 
owners to do?                                                                        K-1-P or K-1-T to its owners.
                                              Form IL-1000-E, Certifi cate of 
If the pass-through entity payment            Exemption for Pass-through             Example:
covers the nonresident owner’s Illinois       Entity Payments, must be used          Partnership A has business income of 
Individual Income Tax obligation, no          for those owners who are not           $1,000 and an Illinois apportionment 
IL-1040 must be fi led.                        individuals, to make the election      factor of 40 percent, for a total Illinois-
If the nonresident owner fi les an Illinois    to forgo the pass-through payment      sourced income of $400. It has two equal 
Income Tax return for any reason, the         process and elect to pay the           partners:
income passed through from the entity         required tax on their annual tax 
must be reported, and a credit can            return.                                  Individual A, an Indiana resident, 
                                                                                        and
be taken for the pass-through entity          Schedule K-1-P, Partner’s or 
                                                                                       Partnership B, a partnership doing 
payment made on his behalf.                   Shareholder’s Share of Income, 
                                                                                        business only in Indiana. Partnership 
                                              Deductions, Credits, and Recap-
                                                                                        B has not submitted an IL-1000-E. It 
How is the pass-                              ture, must be used by the pass-
                                                                                        has two equal partners, both individual 
through entity payment                        through entity to inform the partners 
                                                                                        residents of Ohio.
                                              and shareholders of the amount of 
calculated?
                                              pass-through entity payment made       Partnership A must fi le an IL-1000 
The pass-through payment equals the           on their behalf.                       and make a total pass-through entity 
sum of each nonresident owner’s share         Schedule K-1-P must be used by         payment of $9.00: 
of the business income from the pass-         partners and shareholders to claim     $200 x 3 percent = $6.00 distributable to 
through entity apportioned to Illinois,       a credit for the amount of pass-       Individual A, and
times the Illinois tax rate applicable to     through payment made on their          $200 x 1.5 percent = $3.00 distributable 
that owner.                                   behalf on their annual tax returns.    to Partnership B.
When are pass-through                         Schedule K-1-T, Benefi ciary’s          Partnership B must fi le an IL-1000 
                                              Share of Income and Deductions,        and make $6 in pass-through entity 
payments due?                                 must be used by the pass-through       payments on the $200 of Illinois 
Pass-through payments and Form                entity to notify benefi ciaries of a    business income that passed through to 
IL-1000 are due no later than the pass-       trust of the amount of pass-through    it from Partnership A:
through entity’s original due date (without   payments made on their behalf.
                                                                                     $100 x 3 percent = $3.00 distributable to 
regard to any extension) for fi ling its       Schedule K-1-T must be used            Individual Ohio resident A, and
Illinois income tax return. For example,      by the benefi ciaries of a trust that 
an S corporation using a calendar             made pass-through payments on          $100 x 3 percent = $3.00 distributable to 
taxable year would submit its 2008            their behalf to claim a credit for the Individual Ohio resident B. 
payment by March 15, 2009.                    amount ontheir   annual tax returns.   Partnership B must also fi le an IL-1065 
                                                                                     and pay replacement tax on the $200. 
                                                                                     It may claim a credit for the $3 of pass-
                                                                                     through entity payments made on its 
                                                                                     behalf on either its Form IL-1000 or 
                                                                                     Form IL-1065.

 Informational Bulletin - Pass-through Entity Payments                                                               FY 2009-02

NOTE: If Partnership B submits an            New columns are also added on Forms         What if I am overpaid? Can 
IL-1000-E to Partnership A, Partnership      IL-1065 and IL-1120-ST, Schedule B, and 
A will not be required to make a pass-       Form IL-1041, Schedule D. Partnerships,     I fi le an amended return?
through entity payment on the $200           S corporations, and trusts will provide     If you overpaid your tax on Form IL-1000, 
distributable to Partnership B. However,     separate owner information on these         you cannot fi le an amended return. 
Partnership B will still be required to pay  schedules that will allow us to match       The ownerwill  be responsible for fi ling 
replacement tax and make pass-through        pass-through payment amounts.               an annual tax return and claiming any 
entity payments on the $200.                                                             overpayment. Form IL-1000-X is for 
                                             What about software                         increased defi ciencies only. 
How will my partners, 
                                             vendors?
shareholders, and                                                                        Where can I ask 
                                             The IL-1000 and IL-1000-X will be part 
                                                                                         questions or fi nd updated 
benefi ciaries claim the                      of the tax forms the vendors may wish to 
pass-through payments?                       create. In addition, Form IL-1000-V will    information?
                                             be available for submission of payments. 
We are adding lines to all tax returns that                                              At this time, this bulletin contains the 
                                             (This is similar to the existing IL-1040-V, 
allow pass-through entity payments to be                                                 most up-to-date detailed information 
                                             IL-1120-V, etc.) 
credited towards an Illinois taxpayer’s tax                                              regarding pass-through entity 
liability. This includes Forms                                                           withholding. As new information becomes 
                                             What about electronic fi ling?               available, we will add it to our web page 
  IL-1040, Individual Income Tax Return,                                                 under “Businesses, Featured Topics.” 
                                             We are unable to accept the Form 
  IL-1120, Corporation Income and
                                             IL-1000 and payments electronically         Questions may also be submitted on our 
 Replacement Tax Return,                     for the 2008 tax year. In addition,         web site’s new blog, “Tax Talk.”
  IL-1120-ST, Small Business                 nonresident individuals claiming 
  Corporation Replacement Tax Return,        a credit may not fi le their Form 
  IL-1065, Partnership Replacement           IL-1040 electronically. A paper Form 
  Tax Return, and                            IL-1040 must be fi led.
  IL-1041, Fiduciary Income and 
  Replacement Tax Return,
  IL-1023-C, Composite Income and 
  Replacement Tax Return.

                                                     Quick Check
 If you are a pass-through entity, you must:                     If you are a pass-through entity that is also an owner of a pass-
    Use Form IL-1000 to make pass-through entity                 through entity receiving distributable Illinois-sourced income, you 
    payments on behalf of your Illinois nonresident owners,      must
    unless the owner has fi led Form IL-1000-E.
                                                                          Make the election to have the pass-through entity make    
    Notify all nonresident owners of their pass-through                   payments on your behalf or fi le Form IL-1000-E with the    
    payment amount on Schedules K-1-P or K-1-T.                           entity and pay the tax liability yourself;
                                                                          Make pass-through entity payments for your nonresident    
    File your annual Illinois income or replacement tax return            owners on the income passed through to you by the pass-  
    and pay any Illinois tax liability.                                   through entity, as well as on any Illinois business        
                                                                          income earned directly by you;
    Maintain exemption information from business owners  
    who fi le Form IL-1000-E.                                              Make the election to treat any pass-through payment made  
                                                                          for you as a credit on your Illinois income or replacement tax  
                                                                          return or use the credit as the pass-through payment for your  
 If you are an owner who is not a pass-through entity:                    owners if you do not fi le Form IL-1000-E.
    Do nothing, if the pass-through entity payments reported              File your Illinois income and replacement tax return and  
    on your Schedule K-1-P or K-1-T covers your Illinois                  pay any remaining liability.
    Income Tax liability.
                                                                  
    File your Illinois income and replacement tax return and      
    pay any remaining liability.