Franchise Tax in Illinois: Complete Guide 2026
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Franchise Tax in Illinois: Complete Guide 2026
Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional for your specific situation.
Illinois has been in the process of phasing out its franchise tax, which has historically been levied on corporations and LLCs based on their paid-in capital. The state enacted legislation to fully repeal the franchise tax over a multi-year phase-out period, with the tax projected to be fully eliminated by 2026. However, businesses should confirm the current status of the repeal, as legislative timelines can shift. This guide covers the historical structure of the tax and the phase-out schedule to help businesses understand their remaining obligations and plan accordingly.
Illinois Franchise Tax Rates (2026)
| Component | Rate / Amount | Status |
|---|---|---|
| Initial franchise tax (new corporations) | ~0.1% of paid-in capital | Phasing out |
| Annual franchise tax | ~0.1% of paid-in capital | Phasing out |
| Minimum tax | ~$25 | Phasing out |
| Maximum tax (annual) | ~$2,000,000 | Phasing out |
| Phase-out exemption threshold (2025) | First ~$5,000 of liability exempt | Transitional |
| Projected full repeal | 2026 | Pending confirmation |
Under the phase-out schedule enacted by the General Assembly, the franchise tax exemption threshold has increased annually. By 2025, the first approximately ~$5,000 of franchise tax liability was exempt, and the tax is projected to be fully repealed for the 2026 tax year. Businesses should verify this timeline with the Illinois Secretary of State.
How Illinois Franchise Tax Has Worked
Paid-In Capital Base
The Illinois franchise tax has been calculated at approximately ~0.1% (or ~$1.50 per ~$1,000) of a corporation’s paid-in capital allocated to Illinois. Paid-in capital is defined as the sum of the corporation’s stated capital plus its paid-in surplus, essentially reflecting the total amount of capital contributions from shareholders. For multi-state corporations, only the portion of paid-in capital allocated to Illinois (based on property, payroll, and sales factors) is subject to the tax.
Initial vs. Annual Franchise Tax
New corporations registering with the Illinois Secretary of State have paid an initial franchise tax at the same ~0.1% rate, calculated on their initial paid-in capital at formation. Subsequently, the annual franchise tax has been due each year based on any increase in paid-in capital since the prior year, plus a base amount. Annual reports and franchise tax payments have been due by the anniversary of the corporation’s incorporation date.
LLC and Partnership Treatment
Illinois LLCs and partnerships have not been subject to the franchise tax in the same way as corporations. However, LLCs organized as corporations for tax purposes have fallen under the franchise tax regime. Most LLCs have paid annual report fees (approximately ~$75 for LLCs) rather than franchise tax.
Phase-Out Schedule
The Illinois General Assembly enacted a multi-year phase-out of the franchise tax, increasing the exemption amount annually:
| Year | Exemption Threshold |
|---|---|
| 2020 | First ~$30 exempt |
| 2021 | First ~$1,000 exempt |
| 2022 | First ~$1,000 exempt |
| 2023 | First ~$5,000 exempt |
| 2024 | First ~$5,000 exempt |
| 2025 | First ~$5,000 exempt |
| 2026 (projected) | Full repeal |
Impact of the Phase-Out
The franchise tax phase-out is projected to save Illinois businesses a combined total of approximately ~$400 million to ~$500 million annually once fully repealed. For individual businesses, the savings depend on the size of their paid-in capital allocated to Illinois. A corporation with approximately ~$10,000,000 in Illinois-allocated paid-in capital would have owed approximately ~$10,000 annually; under full repeal, that liability drops to ~$0.
However, Illinois still imposes a corporate income tax of approximately ~7.0% and a personal property replacement tax (PPRT) of approximately ~2.5% on corporations (and ~1.5% on partnerships and S corporations), which together create a combined corporate rate of approximately ~9.5%. The franchise tax repeal reduces but does not eliminate the business tax burden in Illinois.
Comparison to Other States
| State | Franchise Tax Type | Rate | Status |
|---|---|---|---|
| Illinois | Paid-in capital | ~0.1% | Phasing out / projected repeal |
| Texas | Margin tax | ~0.75% / ~0.375% | Active |
| California | Net income (C-corp) | ~8.84% | Active |
| Delaware | Authorized shares or capital | ~$400 to ~$200,000 | Active |
| Ohio | Commercial Activity Tax | ~0.26% of gross receipts over ~$1M | Active |
Illinois’s franchise tax elimination, if completed, would make it one of fewer states imposing a separate entity-level privilege tax, though the state’s corporate income tax and PPRT continue to provide substantial business-level revenue.
Tips for Illinois Businesses During the Transition
- Verify the repeal status. Confirm with the Illinois Secretary of State whether the franchise tax has been fully repealed for the 2026 filing period, as legislative changes can delay scheduled repeals.
- File outstanding annual reports. Even after franchise tax repeal, annual reporting requirements to the Secretary of State remain. Filing fees (approximately ~$75 for LLCs, ~$75 for corporations) continue to apply.
- Claim refunds for overpayments. If you paid franchise tax in excess of the exemption threshold during the phase-out years, check whether you are entitled to a refund or credit.
- Plan for ongoing corporate income tax. The combined approximately ~9.5% corporate income tax and PPRT rate remains one of the higher state corporate rates in the Midwest.
- Maintain compliance with the Secretary of State. Failure to file annual reports can result in administrative dissolution, regardless of franchise tax status.
- Review entity structure. With the franchise tax eliminated, the relative cost advantage of structuring as an LLC versus a corporation in Illinois may shift.
- Consult with a tax professional. The intersection of the franchise tax repeal with ongoing PPRT and corporate income tax obligations warrants professional review.
Key Takeaways
- Illinois’s franchise tax has been calculated at approximately ~0.1% of paid-in capital and is projected to be fully repealed by 2026
- The multi-year phase-out has gradually increased the exemption threshold, reducing liability for most businesses
- Illinois still imposes a combined corporate income tax and PPRT rate of approximately ~9.5%, separate from the franchise tax
- Businesses should verify the repeal timeline with the Illinois Secretary of State before assuming no franchise tax is due
- Annual reporting requirements and filing fees continue regardless of franchise tax status
- The franchise tax repeal is projected to save Illinois businesses approximately ~$400 million to ~$500 million annually
Next Steps
- See the full Illinois tax picture at Taxes in Illinois: State Tax Guide 2026
- Learn about federal corporate obligations in the Federal Income Tax Guide 2026
- Compare state tax burdens at State Income Tax Rates Comparison 2026
- Calculate your federal bracket with the Tax Bracket Calculator 2026
- Get local help: Find a CPA Near You