Does a tax-exempt 501(c)(3) non-profit have to pay Illinois income tax or report to the Illinois Department of Revenue when it receives personal donations from Illinois residents?

Plain-English summary

An out-of-state non-profit organized under IRC 501(c)(3) wrote to the Illinois Department of Revenue asking whether it had any Illinois registration or reporting requirements when it receives personal donations from Illinois residents. The organization owns nature preserves open to the public, manages some donated conservation easements on land owned by others, has one employee, and files IRS Form 990 and a state 990 each year. It had been told by a Department "Hot Line" representative that, as long as its transactions stayed in the non-profit area, it had no Illinois reporting requirements, and it wanted that confirmed in writing.

The Department responded with a General Information Letter (GIL) rather than a binding ruling, since a GIL is designed to give general information and is not a statement of Department policy. It explained that under Section 203(b) of the Illinois Income Tax Act (35 ILCS 5/203), most corporations' Illinois "net income" starts from federal taxable income. But Section 205(a) (35 ILCS 5/205) carves out an exception for organizations that are exempt from federal income tax: their Illinois base income is not computed under Section 203 at all — instead it is only their unrelated business taxable income (UBTI), as determined under Internal Revenue Code Section 512. So if the organization has no UBTI subject to federal income tax, it has no Illinois income tax liability either.

On the separate question of registering as a charity or reporting charitable contributions, the Department clarified that this is not something it handles — that authority belongs to the Illinois Attorney General, and it pointed the organization to the Attorney General's charities registration and reporting webpage.

What this means for you

If you run a tax-exempt nonprofit receiving Illinois donations

If your organization is recognized as exempt from federal income tax and has no unrelated business taxable income, you owe no Illinois income tax on the donations or other non-profit activities you receive, even from Illinois residents. You do not need to register with or report to the Illinois Department of Revenue for that income.

If you need to register as a charity soliciting in Illinois

Charity registration and reporting of charitable contributions is handled by the Illinois Attorney General, not the Department of Revenue. Check the Illinois Attorney General's charities registration and reporting resources to determine what, if anything, you need to file there.

Common questions

Q: Does a 501(c)(3) nonprofit have to pay Illinois income tax on donations it receives from Illinois residents?
A: No — as long as the organization is exempt from federal income tax and has no unrelated business taxable income, it is not subject to Illinois income tax under 35 ILCS 5/205(a).

Q: Which Illinois agency handles charity registration and reporting of donations?
A: Not the Department of Revenue. That falls under the authority of the Illinois Attorney General.

Q: Is this letter a binding ruling the organization can rely on?
A: No. It is a General Information Letter under 86 Ill. Adm. Code 1200.120(b) and (c), which is not a statement of Department policy and is not binding. A taxpayer who wants a binding answer must request a Private Letter Ruling under Section 1200.110(b).

Citations and references

• 35 ILCS 5/203 — Illinois Income Tax Act, computation of net income beginning from federal taxable income
• 35 ILCS 5/205 — Illinois Income Tax Act, base income of federally tax-exempt organizations limited to unrelated business taxable income
• Internal Revenue Code Section 512 — definition of unrelated business taxable income
• 86 Ill. Adm. Code 1200.120(b) and (c) — General Information Letters, not binding on the Department
• 86 Ill. Adm. Code 1200.110(b) — procedure for requesting a binding Private Letter Ruling

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2015/it-15-0011-gil.pdf

Original ruling text

IT 15-0011 GIL – 9/08/2015 Exempt Organizations
Exempt organizations that do not have unrelated business taxable income are not subject
to Illinois income tax.

September 8, 2015

Re:

Reporting of Charitable Donations

Dear Mr. XXXX:
This is in response to your letter dated January 26, 2015, which was received by the Department
of Revenue on July 28, 2015, in which you request a letter ruling. The nature of your request
and the information you have provided require that we respond with a General Information
Letter, which 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
found on the Department's web site at www. tax.illinois.gov.
In your letter you have stated the following:
We are a non-profit registered as an IRC 501(c)(3) (YYYY) in STATE. I seek
your written response as to what, if any registration or reporting requirements we
have relative to receiving personal donations from Illinois residents.
I talked to a gentleman on your Hot Line today who assured me, as long as all our
transactions are in the non-profit area, we have no Illinois reporting requirements.
The State of STATE has qualified us as sales tax exempt, and we do not operate
any “for profit” businesses. We file an IRS 990, and a State of STATE 990, each
year. We basically own Preserves which are open to the public and manage a few
donated Conservation Easements on land owned by others. We have only one
employee. Our Mission is to protect land and to educate the public (especially
youth) re environmental conservation.
Please confirm the opinion of your hot line representative that we do not have a
reporting requirement to Illinois relative to donations we receive from Illinois
residents for our non-profit activities.

Response
Under Section 203(b) of the Illinois Income Tax Act (35 ILCS 5/203), the computation of most
corporations’ "net income" taxed by Illinois begins with the taxpayer's federal taxable income, as
properly computed for the taxable year. Various addition and subtraction modifications are then
made, and the resulting "base income" is then allocated and apportioned to Illinois. However,
under Section 205(a) of the Illinois Income Tax Act (35 ILCS 5/205), “The base income of an
organization which is exempt from the federal income tax by reason of the Internal Revenue
Code shall not be determined under section 203 of this Act, but shall be its unrelated business
taxable income as determined under section 512 of the Internal Revenue Code, without any
deduction for the tax imposed by this Act.” Accordingly, if your organization has no unrelated
business taxable income subject to federal income tax, it will not be subject to Illinois income
tax.
The Department of Revenue is not responsible for registration of charitable organizations and
reporting of charitable contributions. Rather, these matters are under the authority of the Illinois
Attorney General. Information regarding these matters can be found at the web site of the
Illinois Attorney General, at:
http://www.illinoisattorneygeneral.gov/charities/reg_reports.html#CharityRegistration
As stated above, this is a general information letter which 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 are not under audit and you wish to obtain a binding Private Letter Ruling regarding your
factual situation, please submit all of the information set out in items 1 through 8 of Section
1200.110(b). If you have any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax