2026 Illinois budget bill changes
On June 16, 2025, Illinois signed into law the 2026 Illinois Budget bill that made significant changes to income and sales taxes, as well as income tax credits. The changes were effective June 16, 2025, unless stated otherwise.
One of the significant big changes from the 2026 Illinois Budget bill is switching the state from Joyce sourcing rules to Finnigan sourcing rules for tax returns that are filed on a unitary basis. Under normal apportionment rules, corporations can have sales in a state and not be required to file an income tax return in the state due to not having nexus. Some examples of this would be if the corporation did not have a physical presence in the state and minimal sales. Under Joyce sourcing rules, each corporation in a combined group return would calculate whether they have nexus in Illinois and source their sales based on this. The combined return would then total the sales of all the individual corporations to decide its apportionment factor. Under the Finnigan sourcing rules, though, if any of the corporations in the combined group have nexus in Illinois, all corporations have nexus in Illinois and must include their sales in the total.
Historically, this would have been a big change due to some corporations not having nexus in a combined return. This should not materially affect the apportionment of most corporations, however, due to the Wayfair vs. South Dakota court decision. This can have a change on many returns, though, so it is important to take note. This change goes into effect for tax years ending on or after December 31, 2025.
Another big change also pertains to nexus requirements. Beginning January 1, 2026, the “maintaining a place of business in Illinois” nexus test can include other taxpayers. If a retailer, marketplace facilitator, or marketplace seller meets the “maintaining a place of business in Illinois” test, all three of the taxpayers meet this test and must file a return in the state. This can affect many businesses that have only a small amount of sales or no sales at all to the state, forcing them to file a tax return.
Apportionment of capital gains resulting from the sale of pass-through entities (other than an investment partnership) is also being adjusted. The gains on the sale must be allocated to Illinois based on the average of the pass-through entity’s apportionment factor computed in the year of sale and the two previous years. If the pass-through entity was not in existence during any of the two previous years, these years are not included in the calculation.
Illinois is also enacting a new sports wagering tax. The tax will be $.25 per wager for the first $20 million in annual wagers and $.50 per wager in excess of this amount. This can significantly impact companies that have customers who prefer to make large amounts of small wagers.
A tax amnesty program was also added to the bill. This program states if a taxpayer has had income tax nexus occurring after June 30, 2018, and before July 1, 2024, the Illinois Department of Revenue will abate and not seek to collect interest or penalties that may be applicable. It is important to note this program will only be available from October 1, 2025, to November 15, 2025. There is also a similar occupation tax amnesty program for remote sellers available from August 1, 2026, to October 21, 2026.
A tax credit was also added to the bill. The advancing innovative manufacturing for Illinois tax credit was created to help support domestic manufacturing and is based on capital improvements made to a new or existing facility for the purpose of modernizing a manufacturing or production process. This credit must be awarded by the Department of Commerce and cannot exceed 7% of the taxpayer’s total capital improvements for the year.
As can be seen, there have been many recent tax law changes involved with the 2026 Illinois Budget Bill. If you have any further questions on any of these, please contact your tax advisor.
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