IVCA Investigating Public Act 96-0045 Revising Personal Property Replacement Tax Deductions

IVCA Investigating Public Act 96-0045 Revising Personal Property Replacement Tax Deductions

August 26, 2009

CHICAGO - “ As written, this PPRT revision is likely to increase Illinois-based partnership taxes.

The General Assembly has passed and the Governor has signed legislation that among many other provisions would repeal the ability of a partnership or LLC filing a tax return in Illinois from deducting reasonable compensation paid to partners for services in computing the PPRT, unless that amount is actually paid out as a guaranteed payment for services.  The legislation takes effect for this tax year - “ "tax years ending before 12/31/09".

Eliminating this key deduction means that private equity and venture capital firms based in Illinois and/or actively pursuing investment opportunities here likely will pay significantly more in PPRT.  The 1.5 percent PPRT may be applied to  management fees paid on Illinois-based funds and compensation of all partners based on the activities of the fund, manager or firm in Illinois.  These activities may include time spent on Illinois-related activities such evaluating investment opportunities here.  Carried interest potentially could also be affected although that remains unlikely.  The Revenue Department will interpret the new change and likely issue clarifying regulations.  Until then, the provision is subject to individual interpretation.  

IVCA is working with its members to better understand the potential ramifications of this tax change on our membership.  We are also reaching out to other affected constituencies including law and accounting firms and the Taxpayer Federation of Illinois to gauge their concern and potential interest in educating legislators about the severe negative impact this new tax will have on business investment in Illinois.  By adding a new tax on partnerships and LLCs, the PPRT change poses a competitive problem for the state.  This is particularly true with regard to private equity and venture capital investing since no other money-center state in the country has a similar tax.  

IVCA successfully educated legislators about the negative impact of the PPRT to Illinois venture & private equity investors in 2004 when we helped enact legislation exempting investment partners from the 1.5% PPRT on income derived from Illinois-based private equity funds.  This current issue is new and separate from that earlier resolution.

The most recent PPRT change was part of SB 1912, the Emergency  Budget  Implementation Act of Fiscal Year 2010 which ostensibly provides for changes in state programs necessary to implement the Governor's fiscal year 2010 budget recommendations.  On July 15th, a seven-page energy shell bill passed earlier by the Senate was amended by the House to include the 250+ page budget implementation provisions, passed by both the House and the Senate and signed by the Governor.

Not only did the affected parties NOT have an opportunity to provide input into the PPRT change, some tax and legislative experts question why this simple tax change (changing a tax rule of long standing) was included in a bill that was designed to make changes in state programs needed to implement appropriations legislation.  Rather the PPRT revision appears to be part of elected officials' piecemeal approach to revenue increases to offset severe budget deficits.  These officials continue to resist a broad, visible income tax increase with all its potential political backlash, looking instead to raise revenue by a variety of license, fee and other specific tax increases targeting businesses and individuals.

To view the legislation, please click here.  The section on partnership tax changes and the PPRT can be found on page 156 ff.