Our investment partnership has an Illinois-resident majority partner and a nonresident minority partner -- for the pass-through entity tax, is only the resident partner's share of our portfolio income allocable to Illinois?

Plain-English summary

An investment partnership with $10,000,000 of portfolio/investment income asked the Department to confirm its planned approach to Illinois's pass-through entity (PTE) tax. The partnership has two partners: Partner A, a 75%-owner Illinois resident, and Partner B, a 25%-owner Illinois nonresident. Because Partner A is an Illinois resident, he's taxed on his entire distributive share ($7.5 million) for Illinois individual income tax purposes regardless of where the underlying income is sourced; Partner B, as a nonresident, wouldn't otherwise owe Illinois tax or withholding on his $2.5 million share. Based on that, the partnership proposed reporting only Partner A's share as Illinois-allocable nonbusiness income on Line 13 of the PTE Income Worksheet, and asked the Department to confirm.

The Department redirected to a different, partnership-level test rather than confirming the per-partner approach. Illinois's PTE tax lets a partnership elect to pay 4.95% of its Illinois net income at the entity level (35 ILCS 5/201(p)), computed as the portion of the partnership's own base income allocated to Illinois under IITA Article 3 (35 ILCS 5/202). For nonbusiness income items not otherwise specifically apportioned -- such as interest, dividends, and other portfolio-type income -- 35 ILCS 5/301(c)(2)(B) allocates them to Illinois based on whether the PARTNERSHIP itself had its commercial domicile in Illinois when the item was paid, incurred, or accrued. This is an entity-level test, not a partner-by-partner residency test.

What this means for the worksheet. The Department explained that the amount on Line 13 of the PTE Income Worksheet should equal the total nonbusiness income allocable to Illinois as reported on a pro forma Illinois Schedule NB, Column B. If the partnership's commercial domicile is in Illinois, the portfolio/investment income would be Illinois-allocable under Article 3 for PTE tax purposes and would be reported as a Column B item -- meaning the relevant test turns on where the partnership itself is commercially domiciled, not simply on whether individual partners happen to be Illinois residents or nonresidents.

Investment partnership status is separate. The letter also recites the specific definition of an "investment partnership" (35 ILCS 5/1501(a)(11.5)(A-5)): an entity that is at least 90% qualifying investment assets and at least 90% qualifying investment income. An electing investment partnership still files Form IL-1065 and completes the PTE Income Worksheet using the pro forma Schedule NB approach described above.

What this means for you

Investment partnerships with a mix of resident and nonresident partners

Don't assume you can simply exclude a nonresident partner's share of portfolio income from the PTE-tax base because that partner alone wouldn't owe individual Illinois tax on it. The relevant allocation test for nonbusiness income under Article 3 looks at the partnership's own commercial domicile, not each partner's individual residency status.

Accountants preparing the PTE Income Worksheet for an investment partnership

Determine the partnership's commercial domicile first -- if it's Illinois, the full amount of Illinois-allocable nonbusiness income (not just a resident partner's share) generally belongs on the pro forma Schedule NB, Column B, and flows to Line 13 of the worksheet.

Multi-partner entities weighing a PTE election

The PTE tax operates at the entity level using the partnership's own allocation rules -- individual partners' residency still matters for how they're separately taxed on distributions, but it isn't the test for what counts as Illinois-source nonbusiness income at the partnership level for PTE tax purposes.

Common questions

Q: Does a partner's individual Illinois residency determine how much of the partnership's portfolio income is Illinois-allocable for PTE tax purposes?
A: Not according to this letter -- the Department pointed to the partnership's own commercial domicile as the relevant test for nonbusiness income under 35 ILCS 5/301(c)(2)(B), not individual partner residency.

Q: What line on the PTE Income Worksheet reflects Illinois-allocable nonbusiness income?
A: Line 13, which should equal the total nonbusiness income allocable to Illinois as reported in Column B of the pro forma Illinois Schedule NB.

Q: What makes a partnership an "investment partnership" under Illinois law?
A: At least 90% of its assets must be qualifying investment securities, deposits, or reasonably necessary office space/equipment, and at least 90% of its gross income must come from interest, dividends, gains on qualifying investment securities, or certain lower-tier partnership income.

Q: If the partnership's commercial domicile isn't in Illinois, does that change the answer?
A: The Department's response ties Illinois-allocability of the nonbusiness income specifically to the partnership having its commercial domicile in Illinois -- the letter doesn't address the outcome if that isn't the case.

Citations and references

Statutes:

• 35 ILCS 5/201(p) (PTE tax election, 4.95% of Illinois net income)
• 35 ILCS 5/202 (net income defined as base income allocable to Illinois)
• 35 ILCS 5/301(c)(2)(B) (nonbusiness income allocated based on the partnership's commercial domicile)
• 35 ILCS 5/1501(a)(11.5)(A-5) (definition of "investment partnership")

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2025/it25-0011-gil.pdf

Original ruling text

IT 25-0011-GIL

10/02/2025

BASE INCOME

Pass-through entity tax computed by a partnership for a taxable year is determined
from the portion of the partnership’s base income as allocated to Illinois under the
provisions of IITA Article 3. (This is a GIL.)
October 2, 2025
NAME
TITLE
COMPANY
ADDRESS
EMAIL
Dear NAME:
This letter is in response to your email dated August 1, 2025, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings
(“PLRs”) are issued by the Department in response to specific taxpayer inquiries concerning
the application of a tax statute or rule to a particular fact situation. A PLR is binding on the
Department, but only as to the taxpayer who is the subject of the request for ruling and only
to the extent the facts recited in the PLR are correct and complete. Persons seeking PLRs
must comply with the procedures for PLRs found in the Department’s regulations at 2 Ill.
Adm. Code 1200.110. The purpose of a General Information Letter (“GIL”) is to direct
taxpayers to Department regulations or other sources of information regarding the topic
about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
https://tax.illinois.gov/ to review regulations, letter rulings and other types of information
relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we respond
with a GIL. In your letter you have stated and made inquiry as follows:
Based on Illinois Publication 129 and the Form IL-1065 instructions, it is my
understanding that investment partnerships are eligible to make the Illinois
PTET election. The instructions indicate that the investment partnership
should complete the PTE Income Worksheet as if it did not qualify as an
investment partnership.
I am seeking clarification on how to properly report the income in the following
example:
Partnership only has $10,000,000 of portfolio/investment income.
Partnership is owned by two partners, Partner A and Partner B. Partner A is a
resident of IL and Partner B is an IL nonresident. Partner A owns a 75% interest
in Partnership and Partner B owns 25% interest. Since Partner A is an IL

COMPANY
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October 2, 2025
resident, he is taxed on his total share of the partnership income for IL PIT
purposes. There is otherwise no IL allocable income that would subject
Partner B to IL nonresident withholding or PIT.
Partner A’s share = $7,500,000
Partner B’s share = $2,500,000
Based on the PTE Income Worksheet, we believe it should be completed as
follows. In the below example, we believe line 13 would only be the residents
share of the portfolio income since he is taxed on his total share of the income
for PIT purposes. There is no IL nonbusiness income allocable for purposes of
Partner B.

Will you please confirm our understanding is correct?
DEPARTMENT’S RESPONSE
The Illinois Income Tax Act (“IITA”) provides for taxable years ending on or after December
31, 2021, and beginning prior to January 1, 2026, a partnership (other than a publicly traded
partnership under Internal Revenue Code (“IRC”) Section 7704) or Subchapter S
corporation may elect to pay pass-through entity (“PTE”) tax for the privilege of earning or
receiving income in Illinois in an amount equal to 4.95% of the taxpayer’s net income for
the taxable year (35 ILCS 5/201(p)). A separate election shall be made for each taxable year

COMPANY
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October 2, 2025
on Form IL-1065, Partnership Replacement Tax Return, or Form IL-1120-ST, Small
Business Corporation Replacement Tax Return.
IITA Section 202 defines the net income of a taxpayer for a taxable year as that portion of
the taxpayer’s base income for such year which is allocable to Illinois under the provisions
of IITA Article 3, less the standard exemption allowed by IITA Section 204, and the
deduction allowed by IITA Section 207. In the case of a partnership as taxpayer, PTE tax is
that portion of the partnership’s base income for the year as allocated to Illinois under the
provisions of IITA Article 3. As provided in IITA Section 301(c)(2)(B), any item of income or
deduction which was taken into account in the computation of base income for the taxable
year by a partnership and which is not otherwise specifically allocated or apportioned
pursuant to IITA Section 302, 303 or 304 (including, without limitation, interest, dividends,
items of income taken into account under the provisions of IRC Sections 401 through 425,
and benefit payments received by a beneficiary of a supplemental unemployment benefit
trust as referred to in IRC Section 501(c)(17)) is allocated to Illinois if the partnership had
its commercial domicile in this State at the time such item was paid, incurred or accrued.
For taxable years ending on or after December 31, 2023, IITA Section 1501(a)(11.5)(A-5)
defines an “investment partnership” as any entity that is treated as a partnership for
federal income tax purposes that meets the following requirements:
(i) no less than 90% of the partnership’s cost of its total assets consists of
qualifying investment securities, deposits at banks or other financial
institutions, and office space and equipment reasonably necessary to carry on
its activities as an investment partnership; and
(ii) no less than 90% of its gross income consists of interest, dividends, gains from
the sale or exchange of qualifying investment securities, and the distributive
share of partnership income from lower-tier partnership interests meeting the
definition of qualifying investment security under subparagraph (B)(xiii); for the
purposes of this subparagraph (ii), “gross income” does not include income
from partnerships that are operating at a federal taxable loss.
An investment partnership may elect to pay PTE tax on income earned or received in
Illinois. An electing investment partnership must file Form IL-1065 and complete the PTE
Income Worksheet in the Form IL-1065 instructions to compute the amount of passthrough entity income to report on Line 60 of the return. The PTE Worksheet Instructions for
Lines 5 and 13 direct a taxpayer to complete a pro forma Illinois Schedule NB allocating
nonbusiness income amounts to Illinois.
In the scenario you provided, the amount of nonbusiness income or loss allocable to
Illinois on Line 13 of the PTE Income Worksheet should equal the total amount of

COMPANY
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October 2, 2025
nonbusiness income allocable to Illinois as reported in Column B of the pro forma Illinois
Schedule NB. If the commercial domicile of the partnership is in Illinois, then the
portfolio/investment income would be allocable to Illinois under IITA Article 3 for PTE tax
purposes and would be specified as a Column B item on the pro forma Schedule NB.
As stated above, this is a General Information Letter. A General Information Letter does not
constitute a statement of Department policy that applies, interprets or prescribes the tax
laws, and it is not binding on the Department. If you require additional information, please
visit our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer
Assistance Division at 800-732-8866.
Sincerely,
Jennifer Uhles
Associate Counsel
JU:se