Could an Illinois S corporation subtract the federal payroll-expense disallowance tied to the FICA tip credit?

Plain-English summary

The S corporation could not restore the federal payroll expense on its Illinois return. Federal Section 45B prevented a double benefit by reducing the deductible FICA expense by the tip-credit amount.

Illinois Section 203(b)(2)(I) listed particular federal deduction disallowances that could be subtracted when computing corporate base income. Section 45B(c) was absent from that list. Because Section 203(h) prohibited modifications not expressly authorized, the amount could not appear as an Illinois subtraction.

What this means for you

Do not assume every federal credit-related deduction disallowance reverses on the Illinois return. Match the exact federal section against Illinois's express subtraction list.

Common questions

Q: Could the amount be entered on Schedule M?
A: No.

Q: Did S-corporation status create a separate exception?
A: No.

Citations and references

• 35 ILCS 5/203(b)(2)(I), (h)
• I.R.C. § 45B(c)

Subject

Subtraction Modifications – Other Rulings

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2012/it-12-0010.pdf

Original ruling text

IT 12-0010-GIL 05/15/2012 SUBTRACTION MODIFICATIONS – OTHER RULINGS
General Information Letter: No subtraction is allowed for amounts included in gross
income under IRC Section 45B.
May 15, 2012
Dear:
This is in response to your letter dated April 20, 2012. The nature of your letter and the information
provided require that we respond with a General Information Letter (GIL). A GIL is designed to
provide general information, is not a statement of Department policy and is not binding on the
Department. See 86 Ill. Adm. Code 1200.120(b) and (c), which may be accessed from the
Department’s website at www.ILtax.com.
Your letter states as follows:
COMPANY prepares income tax returns for a number of S Corporation entities providing retail
food sales resulting in tips paid to the wait staff.
Internal Revenue Code allows for the calculation of a FICA Tip Credit under Internal Revenue
Code Section 45B. A corresponding amount of FICA tax expense must be reduced on the
federal return to avoid a dual benefit.
Our question is:
Is the disallowed deduction on Federal 1120S for reduced payroll expense (equal to the
amount of the Tax Credit) resulting from Internal Revenue Code Section 45B FICA Tip Credit
allowed on the Illinois Form 1120-ST and reported on Schedule M resulting in a subtraction
from federal taxable net income on the Illinois Form 1120-ST?
RULING
Section 203(b)(2)(I) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/203(I)) provides the following
subtraction modification in the computation of base income of a corporation (including a subchapter S
corporation):
With the exception of any amounts subtracted under subparagraph (J), an amount equal to the
sum of all amounts disallowed as deductions by (i) Sections 171(a)(2), and 265(a)(2) and
amounts disallowed as interest expense by Section 291(a)(3) of the Internal Revenue Code ,
and all amounts of expenses allocable to interest and disallowed as deductions by Section
265(a)(1) of the Internal Revenue Code, and (ii) for taxable years ending on or after August 13,
1999, Sections 171(a)(2), 265, 280C, 291(a)(3), and 832(b)(5)(B)(i) of the Internal Revenue
Code, plus, for tax years ending on or after December 31, 2011, amounts disallowed as
deductions by Section 45G(e)(3) of the Internal Revenue Code and, for taxable years ending
on or after December 31, 2008, any amount included in gross income under Section 87 of the
Internal Revenue Code and the policyholders’ share of tax-exempt interest of a life insurance
company under Section 807(a)(2)(B) of the Internal Revenue Code (in the case of a life
insurance company with gross income from a decrease in reserves for the tax year) or Section
807(b)(1)(B) of the Internal Revenue Code (in the case of a life insurance company allowed a
deduction for an increase in reserves for the tax year); the provisions of this subparagraph are
exempt from the provisions of Section 250.

IT 12-0010-GIL
May 15, 2012
Page 2

IITA Section 203(h) states:
Except as expressly provided by this Section there shall be no modifications or limitations on
the amounts of income, gain, loss or deduction taken into account in determining gross
income, adjusted gross income or taxable income for federal income tax purposes for the
taxable year, or in the amount of such items entering into the computation of base income and
net income under this Act for such taxable year, whether in respect to property values as of
August 1, 1969 or otherwise.
A taxpayer reports the subtraction modification allowed under IITA Section 203(b)(2)(I) for certain
expense deductions disallowed federally on Department Forms 2011 Schedule M, Lines 15a through
15g. As can be seen, Section 203(b)(2)(I) does not include a subtraction modification for amounts
disallowed under Internal Revenue Code (IRC) Section 45B(c). Accordingly, under IITA Section
203(h), such amounts may not be subtracted. Because amounts disallowed under IRC Section
45B(c) may not be subtracted, they may not be included on either Schedule M, Lines 15a through
15g or Form 1120-ST.
As stated above, this is a GIL. A GIL does not constitute a statement of policy that applies, interprets
or prescribes the tax laws, and it is not binding on the Department.
Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)