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Illinois Franchise Tax

How to Calculate the Illinois Franchise Tax

This topic will address the following questions:

  • What is the Illinois franchise tax and how is it calculated?
  • Which method of calculations is good for my company?
  • How do I determine what my paid in capital should be?

Background:

Each domestic and foreign Illinois Corporation is required to pay franchise tax at the time of filing its first report of issued shares (articles of Incorporation or application for authority) for the privilege of exercising its franchises in the State of Illinois. Additional franchise tax is payable to the Secretary of State whenever the corporation reports a change in its paid-in capital over the amount last reported to the Secretary of State. Some of the documents that generate a change in paid in capital is a report of the issuance of additional shares; a report of an increase in paid-in capital without the issuance of additional shares; an amendment to the articles of incorporation increasing or decreasing the amount of shares the corporation is authorized to issue; a report of cumulative changes in paid-in capital; or a statutory merger.

Foreign Qualifications and Franchise Tax

If you are a company incorporated in another state and filing an application for authority to do business in Illinois, and you indicate on your application that your company has done business in Illinois prior to the filing date of your application for authority, your company will be held responsible for the franchise tax dating back to the date your company began doing business in Illinois, along with penalties and additional annual report filing fees for those previous years indicated on your filing. The Secretary of State will not file your application for authority unless the back taxes, filing fees and penalties are satisfied. Additional information is available for calculating your initial franchise tax under Research by choosing BCA 13.15 Application for Authority.:

Calculating Illinois Franchise Tax

The Secretary of State gives you two options for calculating your franchise tax on your annual report. The least painful of the computations is to elect to pay franchise tax on the entire amount of paid-in capital. This gives most incorporators the incentive to keep the paid-in capital (or par value per share) relatively low. 

 Easy – recommended for those with a low paid in capital

 The Annual Franchise Tax is computed at the rate of 1/10 of 1% (.10 of 1%) for the 12-month period commencing the first day of the anniversary month of the corporation on the proportion of its paid-in capital as of the last day of the third month preceding the anniversary month represented by the ratio of Illinois property and business to total property and business everywhere – minimum tax is $25.00 and maximum tax is $2,000,000. 

 Not So Easy – recommended for those with a high paid in capital

 The other choice for calculating your franchise tax is on the basis of the amount represented in this state of its paid-in capital on the last day of the third month preceding the anniversary month. The amount represented would be that portion of its paid-in capital that the sum of the value of its property located in this state (b-below) and the gross amount of business transacted by it or from businesses in this state (d-below), divided by the sum of the value of all of its property wherever located (a-below) and the gross amount of its business where ever transacted (c-below). There are exceptions of course and it is recommended to review the corporate statutes to verify which calculation you should follow.

 Value of the property (gross assets):

(a) owned by the corporation, wherever located:                               (a)   $ __________

(b) of corporation located within the State of Illinois:                      (b)   $ __________

Gross amount of business transacted by the corporation:

(c) everywhere for the above period                                                     (c)   $ __________

(d) at or from places of business in Illinois for the above period:     (d)   $ __________                                                                                           
ALLOCATION FACTOR = b + d = (to the 6th decimal place) divided by a + c  = allocation factor.

Multiply the allocation factor by the paid in capital and then by .0015. 

The final number is your franchise tax.  Remember to round up to the nearest cent and the minimum tax is $25.00.

 You may also want to review our page on How to Complete the Annual Report.

If you have previously filed the Federal 1120 form with the IRS, your paid in capital can be verified on Schedule L of the most recent signed Federal 1120.