Our LLC currently files as a partnership and has a large Illinois net loss carryforward -- if we make an S-corp election next year while keeping the same LLC, does that carryforward transfer to the new S corporation?

Plain-English summary

An LLC currently filing as a partnership on Form IL-1065 expected to have an Illinois net loss deduction (NLD) carryforward of about $800,000 from 2022 (reduced by some 2023 income). The LLC planned to make a federal S-corporation election effective January 1, 2024, while remaining the same LLC for state law purposes. The taxpayer asked two things: (1) confirm the 2024 return should be filed on Form IL-1120-ST, and (2) confirm whether the Illinois NLD carried forward from the partnership years could be used on the 2024 IL-1120-ST.

Form confirmed. The Department agreed Form IL-1120-ST is the correct return for the S corporation going forward.

The net loss carryforward does not transfer. A partnership and a corporation are separate, distinct taxable entities under both federal law and the Illinois Income Tax Act, even if the same LLC continues to exist as a legal matter. Under 86 Ill. Adm. Code 100.4500(b), absent a showing that the corporation is genuinely the SAME taxable entity as the partnership, a net loss deduction incurred by the partnership does not transfer to a subsequent corporation.

Why federal tax law treats this as a brand-new entity. Converting a partnership to an S corporation involves, from the federal tax perspective, a deemed LIQUIDATION of the partnership -- a transaction with its own tax consequences for the individual partners -- followed by the former partners reorganizing as a new corporation, which then separately elects S status (citing Rev. Rul. 84-111). The corporation and the prior partnership are treated as distinct taxable entities for federal purposes, even though state law may treat the underlying LLC as continuing without interruption.

Illinois's general rule reinforces this. Under 86 Ill. Adm. Code 100.4500(a), net loss deductions and credits may generally be claimed only by the same taxpayer or entity that incurred the loss or earned the credit (citing New Colonial Ice Co. v. Helvering), with only narrow statutory exceptions. Subsection (a)(3) specifically applies this rule to prevent a carryover when an entity is deemed a "new" entity for federal/Illinois tax purposes despite its continued legal existence -- precisely the situation here. The Department also confirmed that 35 ILCS 5/405 does not apply to this fact pattern, closing off another possible statutory basis for a transfer.

Bottom line: the partnership's $800,000 Illinois net loss deduction stays with the partnership (and, by extension, the individual partners' own tax situations from the deemed liquidation) -- it is not available to the new S corporation going forward.

What this means for you

LLCs planning to convert from partnership taxation to an S-corporation election

Don't count on carrying forward an existing Illinois net loss deduction into the post-election entity -- federally, the conversion is treated as a liquidation of the old partnership and formation of a new corporate taxpayer, and Illinois follows that same-entity rule for loss carryovers.

Business owners weighing the tax cost of an S election

Factor in the potential loss of any accumulated Illinois NLD as a real cost of converting, alongside the federal tax consequences the deemed liquidation triggers for the individual partners.

Accountants and tax professionals

86 Ill. Adm. Code 100.4500(a)/(a)(3)/(b) is the controlling framework any time an entity's tax classification changes (partnership to corporation, or similar) while the underlying legal entity continues -- the loss carryover follows the taxable entity, not the legal entity, and a genuinely new taxable entity forfeits the prior entity's carryovers absent an express statutory exception.

Common questions

Q: Does our Illinois net loss carryforward transfer to our new S corporation if we keep the same LLC? A: No -- the partnership and the S corporation are distinct taxable entities under both federal law and Illinois's net-loss-carryover rules, so the carryforward does not transfer even though the LLC itself continues to exist.

Q: Why is a partnership-to-S-corporation conversion treated as forming a new entity? A: Federally, the conversion is treated as a liquidation of the partnership followed by the partners forming a new corporation that then elects S status -- a real change in taxable entity, not a mere continuation.

Q: Is there any statutory exception that would let the loss carry over here? A: The Department specifically found 35 ILCS 5/405 inapplicable to this fact pattern, and identified no other statutory exception that would permit the transfer.

Q: What return should the S corporation file going forward? A: Form IL-1120-ST, Small Business Corporation Replacement Tax Return -- the Department confirmed this is correct.

Citations and references

Statutes, regulations, and cases:

• 35 ILCS 5/405 (found inapplicable here)
• 86 Ill. Adm. Code 100.4500(a), (a)(3), (b) (net loss/credit carryover limited to the same entity; no carryover to a "new" entity)
• 26 U.S.C. § 7701(a)(2), (3); 26 C.F.R. § 301.7701-2 (federal partnership/corporation classification)
• New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934)
• Rev. Rul. 84-111

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/it25-0013-gil.pdf

Original ruling text

IT 25-0013-GIL 12/11/2025 NET LOSSES
IITA Section 405 does not permit net loss carryovers when a partnership converts to a Subchapter S corporation. (This is a GIL). December 11, 2025 NAME COMPANY ADDRESS Re:

Illinois NLD Carryforward Question

Dear NAME:
This letter is in response to your letter dated December 11, 2023, 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: Taxpayer is currently an LLC filing as a partnership on IL-1065 and will do so for 2023 also. Effective 1/1/24, the LLC plans on making an S election. Taxpayer expects to have an Illinois NLD carry forward from 2022 (reduced by some income in 2023) of about $800,000. Taxpayer expects to make the Federal S election but maintain the same LLC for legal purposes.

1. The 2024 Federal return will be filed on 1120-S. We understand that proper
   Illinois filing will be on IL-1120-ST. Please verify this.
2. Can the Illinois NLD remaining from the 2023 IL-1065 be carried forward
   and used on the 2024 IL-1120-ST?

COMPANY/NAME
Page 2
December 11, 2025
We have been unable to locate an affirmative documentation allowing this. Since we are concerned about matching issues in the year after the change, please provide any supporting documentation or references. Thank you for your assistance in this matter. RULING You have correctly identified Form IL-1120-ST as the appropriate return type for an S corporation. A partnership is a separate entity from a corporation. Under federal law and the Illinois Income Tax Act (IITA), partnerships and corporations are distinct legal and taxable entities. Absent a showing that the corporation is the same taxable entity, any NLD incurred by a partnership would not transfer to a subsequent corporation. Please see 86 Ill. Adm. Code 100.4500(b). 26 USC Section 7701(a)(2) provides that the definition of partnership “…includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term ‘partner’ includes a member in such a syndicate, group, pool, joint venture, or organization.” 26 USC 7701(a)(3) defines a corporation as “…includes associations, joint-stock companies, and insurance companies.” 26 CFR Section 301.7701-2 states in pertinent part as follows: “…[a] business entity with two or more members is classified for federal tax purposes as either a corporation or a partnership.” 26 CFR 301.7701-2 (c)(1) states that a partnership is “…a business entity that is not a corporation under paragraph (b) of this section and that has at least two members.” 86 Ill. Adm. Code Section 100.4500 provides in pertinent part as follows: (a) Except as expressly provided by statute, carryovers of net loss deductions and credits are only allowed to be claimed by the taxpayer that incurred the loss or earned the credit. See, e.g., New Colonial Ice Co. v. Helvering,

COMPANY/NAME
Page 3
December 11, 2025
292 U.S. 435 (1934).
*

*

*

(3) In other situations that are not covered by an express provision of the IITA net loss deductions incurred and credits earned by one entity may be carried back or forward for use only by that same entity, and cannot be used by a different entity. This rule applies to prevent the carryover of items when an entity is deemed to be a new entity for purposes of the Internal Revenue Code and the IITA despite its continued legal existence…. Carryovers of net loss deductions and credits may be claimed only by the taxpayer or entity that incurred the loss or earned the credit, with only certain narrow exceptions provided by statute. The transition from partnership to S corporation from the federal standpoint involves liquidation of the partnership. These transactions cause tax consequences for the individual partners. The partners then reorganize as a corporation that then makes an S election. 35 ILCS 5/405 is not applicable to this fact situation. Where express provisions of the IITA do not apply, net loss deductions and credits earned may carry back or forward only for the same entity that originally experienced the loss or credit. If the surviving entity is a “new” entity for the purposes of taxation, then the credit or loss will not carry. In this situation, the original LLC is becoming a S corporation. The partnership ceases to exist and all assets are divided between the partners. The former partners may then elect to create an S corporation. However, that subsequent S corporation is a separate and distinct entity for tax purposes. For federal purposes, the subsequent S corporation and the former partnership are distinct taxable entities. Please see Revenue Ruling 84-111. This means that the NLD of the LLC/partnership are not available to the S corporation. 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) 782-2844. I hope this information is helpful. If you require additional information, please visit our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information Division at 800-732-8866.

COMPANY/NAME
Page 4
December 11, 2025

Sincerely,

J.L. Ackerman
Associate Counsel (Income Tax)