Illinois extends PTET election availability, limits Section 1202 exclusion and more with S.B. 3019

Illinois enacted Senate Bill 3019 (S.B. 3019) on June 16, 2026, as part of its fiscal year 2027 budget legislation. The bill makes several changes to the state’s income tax framework that take effect beginning with tax years ending on or after December 31, 2026.

The changes address three areas of particular significance for taxpayers and tax professionals: the continued availability and expanded structure of Illinois’ pass-through entity tax (PTET), Illinois’ treatment of gain qualifying for the federal qualified small business stock (QSBS) exclusion, and the use of net operating losses (NOLs) by C corporations.

These provisions create new differences between federal and Illinois tax treatment and change how certain tax attributes may be used in future years. The following sections outline the changes and their effective dates.

Key takeaways

• PTET: Beginning with tax years ending on or after December 31, 2026, partnerships may choose between the full distributive share method and the Illinois-sourced income method. The election is annual and irrevocable for the taxable year.
• PTET scope: The full distributive share method is available only to partnerships. S corporations are not eligible for this method.
• QSBS: Illinois will decouple from the federal IRC Section 1202 exclusion, requiring federally excluded QSBS gain to be added back to Illinois income for applicable tax years.
• QSBS effective date: The add-back applies to transactions occurring on or after December 31, 2026, regardless of when the QSBS was acquired.
• C corporation NOLs: Illinois will limit C corporation NOL deductions beginning in 2026, with the limitation increasing from a $500,000 maximum deduction in 2026 to the greater of 80% of net income or $500,000 beginning in 2031.
• NOL carryover period: Each year in which the NOL limitation applies extends the NOL carryover period by one year. The limitation does not apply to S corporations.

PTET extension and new computation methods

For tax years ending on or after December 31, 2026, Illinois extends the availability of its pass-through entity tax (PTET) election and provides partnerships with two methods for determining the PTET base. The election remains available annually, eliminating the prior expiration date.

Under the new rules, an electing partnership may choose between the following methods:

• Full distributive share method: The partnership computes PTET on the full distributive share of net income allocated to each Illinois resident partner, without regard to the apportionment provisions of Section 304. For nonresident partners, the partnership uses the partner’s Illinois-apportioned income. This method is available only to partnerships; S corporations may not elect it.
• Illinois-sourced income method: The partnership computes PTET only on the portion of each partner’s distributive share of net income that is derived from or attributable to Illinois sources. The method applies regardless of the partner’s residency.

The method is reelected annually and is irrevocable for the taxable year once the election is made. Accordingly, partnerships should evaluate the two methods based on their partner composition and income before making the election.

Decoupling from IRC Section 1202 QSBS gain exclusion

For tax years ending on or after December 31, 2026, Illinois decouples from the federal gain exclusion under Section 1202 for QSBS. Taxpayers must add back to Illinois base income any gain excluded from federal gross income under Section 1202. The provision applies to individuals, trusts and estates, and partnerships.

The Illinois add-back applies to the amount of federally-excluded gain, including gain that may be eligible for a federal exclusion of up to 100%. Accordingly, a gain that is excluded from federal income tax under Section 1202 may be included in Illinois taxable income.

The change applies to tax years ending on or after December 31, 2026. Accordingly, taxpayers with QSBS transactions affecting tax years ending on or after December 31, 2026 should account for the Illinois add-back when determining their state tax liability.

C Corporation NOL carryover limitations

For tax years ending on or after December 31, 2026, Illinois limits the amount of NOL carryover deductions that C corporations may claim. The limitation does not apply to S corporations.

The maximum NOL deduction is phased in as follows:

The percentage limitations are applied to net income computed without regard to the NOL deduction. For each taxable year in which a limitation applies, the carryover period for the NOL is extended by one year. A year subject to the limitation is not counted for purposes of determining the years to which the NOL may be carried.

What’s next

For taxpayers affected by these provisions, the significance extends beyond the mechanics of calculating a current-year liability. Partnerships will need to account for the consequences of their annual PTET method election, QSBS holders will need to incorporate Illinois treatment into transactions occurring under the new rules, and C corporations will need to consider the effect of the NOL limitations on the timing of deductions and carryforward utilization.

These changes make the 2026 tax year an important transition point for Illinois taxpayers and their advisers. Sikich’s Illinois-focused tax professionals can help you understand the impact of S.B. 3019, evaluate your options, and develop a tax strategy aligned with your needs.

Find more insights on S.B. 3019 here.