Could a calendar-year corporation use Schedule SA to tax a Section 448 adjustment at the pre-2011 Illinois corporate rate?

Plain-English summary

The entire 2011 amount was taxed at the historical 7% corporate rate. The corporation argued that its Section 448 accounting-method income had been earned before 2011 and tried to place it on Schedule SA at the earlier rate.

Section 202.5 and Schedule SA applied only to a taxable year that straddled January 1. This corporation's year began January 1, 2011 and ended December 31, 2011, so no midyear rate change occurred within its taxable year. Because the adjustment was included in federal taxable income for that year, Section 201(b)(10) applied the 7% rate to it.

What this means for you

For historical rate-transition issues, start with the taxpayer's actual taxable-year boundaries and the federal inclusion year. The period economically associated with an adjustment does not by itself permit split-year rate reporting.

Common questions

Q: Could the corporation use Schedule SA?
A: No.

Q: Why did the pre-2011 origin of the income not control?
A: The income was included in the calendar-year 2011 federal taxable income, and that Illinois taxable year did not straddle the rate change.

Citations and references

• 35 ILCS 5/201(b)(9), (10)
• 35 ILCS 5/202.5
• 35 ILCS 5/202, 203

Subject

Rate Of Tax

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-12-0024.pdf

Original ruling text

IT 12-0024-GIL 08/29/2012 RATE OF TAX
General Information Letter: Amounts included in federal taxable income in calendar
2011 are subject to Illinois income tax at the higher rates applicable to income accrued
after December 31, 2010, even if the income was arguably attributable to periods before
January 1, 2012.
August 29, 2012
Dear:
This is in response to your letter dated July 10, 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 web site at www.ILtax.com.
Your letter states:
Please see attached Illinois income tax return. We have received correspondence on this
return. I have entered income on Schedule SA that was earned before 1/1/2011. This income
is a Section 448 change that we were required by the IRS to make. This was done on the
12/31/2009 return. I believe that I prepared the Illinois 2011 return correctly, using Schedule
SA to report this Section 448 income, as all Section 448 income was clearly earned before
1/1/2011.
I have attached the Final Notice of Tax Due, as well as the front page of the Federal 1120,
clearly showing the Section 448 income. I have also attached the supplemental schedule
showing the note on Section 448 income.
RULING
Section 201(b)(9) of the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/201(b)(9)) provides as follows
regarding the corporate income tax rate:
In the case of a corporation, for taxable years beginning prior to January 1, 2011, and ending
after December 31, 2010, an amount equal to the sum of (i) 4.8% of the taxpayer’s net income
for the period prior to January 1, 2011, as calculated under Section 202.5, and (ii) 7% of the
taxpayer’s net income for the period after December 31, 2010, as calculated under Section
202.5.
IITA Section 202.5 states:
(a)
In general. With respect to the taxable year of a taxpayer beginning prior to January 1 of
any year and ending after December 31 of the preceding year, net income for the period after
December 31 of the preceding year, is that amount that bears the same ratio to the taxpayer's
net income for the entire taxable year as the number of days in that taxable year after
December 31 bears to the total number of days in that taxable year, and the net income for the
period prior to January 1 is that amount that bears the same ratio to the taxpayer's net income
for the entire taxable year as the number of days in that taxable year prior to January 1 bears
to the total number of days in that taxable year.

IT 12-0024-GIL
August 29, 2012
Page 2
(b)
Election to attribute income and deduction items specifically to the respective portions of
a taxable year prior to January 1 of any year and after December 31 of the preceding year. In
the case of a taxpayer with a taxable year beginning prior to January 1 of any year and ending
after December 31 of the preceding year, the taxpayer may elect, instead of the procedure
established in subsection (a) of this Section, to determine net income on a specific accounting
basis for the 2 portions of the taxable year:
(1) from the beginning of the taxable year through December 31; and
(2) from January 1 through the end of the taxable year.
The election provided by this subsection must be made in form and manner that the
Department requires by rule, and must be made no later than the due date (including any
extensions thereof) for the filing of the return for the taxable year, and is irrevocable.
(c)

If the taxpayer elects specific accounting under subsection (b):
(1) there shall be taken into account in computing base income for each of the two
portions of the taxable year only those items earned, received, paid, incurred or accrued
in each such period;
(2) for purposes of apportioning business income of the taxpayer, the provisions in
Article 3 shall be applied on the basis of the taxpayer’s full taxable year, without regard
to this Section;
(3) the net loss carryforward deduction for the taxable year under Section 207 may not
exceed combined net income of both portions of the taxable year, and shall be used
against the net income of the portion of the taxable year from the beginning of the
taxable year through December 31 before any remaining amount is used against the net
income of the latter portion of the taxable year.

The Department provides Schedule SA in order to implement the specific accounting election of
subsection (b). The Instructions to Schedule SA state, in part:
The purpose of Schedule SA, Specific Accounting, is to provide a means for calculating your
income and tax at separate rates, due to an income tax rate increase in the middle of the tax
year. The Schedule SA allows you to figure your tax based on the specific accounting method.
IITA Section 201(b)(10) states:
In the case of a corporation, for taxable years beginning on or after January 1, 2011, and
ending prior to January 1, 2015, an amount equal to 7% of the taxpayer’s net income for the
taxable year.
The starting point in calculating "net income" for purposes of Section 201 is generally the taxpayer's
taxable income for federal income tax purposes. See IITA Sections 202 and 203. Therefore, in
general, any item of income that is included or excluded in the computation of a taxpayer's federal

IT 12-0024-GIL
August 29, 2012
Page 3
taxable income (whether by treaty or otherwise) is likewise included or excluded in the computation of
the taxpayer’s Illinois net income.
In this case, the taxable year of COMPANY, Inc. is its taxable year beginning January 1, 2011 and
ending December 31, 2011. Therefore, the provisions of IITA Section 202.5 do not apply. There has
not been a tax rate increase in the middle of your taxable year, and COMPANY should not have used
Schedule SA to determine the portion of its income “earned” before January 1, 2011. Instead, under
IITA Section 201(b)(10), all of the taxpayer’s net income for its 2011 taxable year is taxed at the rate
of 7%. Because the IRC Section 448 income is included as income for COMPANY’S 2011 taxable
year, under IITA Section 201(b)(10) it is taxable at the 7% rate.
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. If you have further questions
regarding this GIL, please call (217) 782-7055.

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)