Illinois Corporate Taxes: The 9.5% Income Tax Rate and the Franchise Tax Exemption

If you're forming a corporation in Illinois, one of your first questions will be about state income taxes. The answer is straightforward but comes with important nuances: Illinois charges what amounts to a 9.5% combined rate on corporate profits, but a recent change has eliminated franchise taxes for most small corporations. Understanding how this rate breaks down and what you actually owe depends on your business structure and size.

The 9.5% Corporate Tax Rate Explained

When people refer to the Illinois corporate tax rate, they're usually talking about a 9.5% combined liability. This breaks down into two separate taxes, both owed by C corporations:

• Corporate income tax: 7% of net income. This is what most people think of as the state income tax, and it applies to profit after deductions.
• Personal property replacement tax: 2.5% of net income. This tax was created decades ago to replace revenue lost when Illinois phased out personal property taxes. It applies to the same income as the income tax.

Together, these create an effective state tax rate of 9.5% on corporate net income. For a corporation earning $100,000 in net income in Illinois, the state tax liability would be $9,500 before any franchise tax considerations.

This rate applies equally to all C corporations regardless of size. A startup making $50,000 in profit pays 9.5% on that amount, as does a large manufacturer making millions. The percentage does not increase with revenue, and there are no tax brackets for corporations in Illinois.

How the Franchise Tax Works (and Who Pays It)

Illinois also imposes a franchise tax on corporations, but a major change in 2025 made it irrelevant for most small businesses. Until January 1, 2025, every Illinois corporation owed a franchise tax calculated as 0.1% of paid-in capital, with a minimum liability. As of 2025, that liability has a $10,000 exemption.

What does this mean in practice? If your corporation has $50,000 in paid-in capital, the franchise tax would normally be $50 (0.1% of $50,000). Since this is below the $10,000 exemption threshold, you owe $0 in franchise tax for that year. Even if your paid-in capital is $500,000 (0.1% equals $500), you still fall within the exemption and owe $0.

You would only owe franchise tax if your corporation's paid-in capital exceeded $10,000,000, the point at which 0.1% of paid-in capital passes the $10,000 exemption. This exemption applies to filing periods beginning January 1, 2025 and after, based on Illinois Public Act 103-0592.

The practical result: the vast majority of small Illinois corporations now owe zero franchise tax. Larger corporations or those with substantial paid-in capital may still owe this tax, but the $10,000 threshold eliminates it for typical startup and small business scenarios.

What You Still Owe Even with the Exemption

Here's a critical point: the franchise tax exemption eliminates the tax liability, but corporations still must file an annual report with the Illinois Secretary of State. That annual report costs $75 and is required regardless of whether you owe franchise tax or not.

The annual report (Form BCA 14.05-D) must be delivered to the Secretary of State within the 60 days before your corporation's anniversary month each year. If you formed your corporation in March, your anniversary month is March, and the report must be delivered in the 60 days before March 1.

In addition, owners pay the 4.95% Illinois individual income tax on salaries and dividends they receive from the corporation, and the corporation also owes federal corporate income tax.

The 2026 Franchise Tax Repeal Bills: What Happened

In 2026, two bills, HB5526 and SB3441, sought to fully repeal the franchise tax for Illinois corporations. Both bills did not pass. This means the franchise tax remains in the tax code, and the $10,000 exemption remains in effect, but a complete elimination of the tax did not occur. If repeal efforts resume in future legislative sessions, the landscape could change, but for now, the current framework stands.

For your planning purposes, assume the franchise tax and the $10,000 exemption will continue. If you are tracking pending tax changes, the Secretary of State and Illinois Department of Revenue websites are the authoritative sources for any updates.

Alternative: Pass-Through Entity Taxation

If you choose to structure your business as an S corporation, partnership, or limited liability company taxed as a partnership, you avoid the 7% corporate income tax, and the business pays the 1.5% personal property replacement tax on net income instead of 2.5%. An S corporation formed as a corporation still files the franchise tax with its annual report (most owe $0 under the $10,000 exemption), while LLCs owe no franchise tax.

Owners then report their share of business income on personal tax returns and owe the 4.95% Illinois personal income tax on that income. For many small businesses, this results in lower overall state tax, since 4.95% personal tax is less than the 9.5% combined corporate rate.

S corporations and partnerships also have the option to elect into Illinois's pass-through entity (PTE) tax, which is 4.95% on business income before it passes to owners. It is optional, and whether it helps depends on the owners' situation, so review it with a CPA.

Limited liability companies (LLCs) do not pay franchise tax under any circumstance. An LLC taxed as a partnership pays only the 1.5% replacement tax, while an LLC electing corporate treatment pays the same 9.5% rate as a C corporation.

Who Pays the Illinois Corporate Income Tax

The 7% corporate income tax and the 2.5% replacement tax apply only to C corporations incorporated in Illinois or authorized to do business in the state. Key points:

• Foreign corporations (incorporated in other states) doing business in Illinois are also subject to these taxes on income attributable to their Illinois operations.
• Nonprofit corporations and corporations exempt under Section 501(c) of the federal tax code are not subject to these taxes.
• Banks and financial institutions may be subject to different tax structures and should consult tax counsel.
• Pass-through entities (partnerships, S corporations, LLCs taxed as partnerships) do not pay the corporate income tax, but owners pay personal income tax on their share of profits.

The tax applies to net income, meaning you deduct ordinary business expenses before calculating what you owe. The Illinois Department of Revenue publishes guidelines on which deductions are allowable; these generally align with federal tax deductions, but state rules can differ.

Franchise Tax Calculator and Compliance

If your corporation's paid-in capital is $10,000,000 or less, you owe no franchise tax under the $10,000 exemption. If you want to verify this, the calculation is straightforward: multiply your paid-in capital by 0.001 (0.1%). If that result is less than $10,000, you owe no tax.

For example:

• Paid-in capital of $500,000: $500,000 × 0.001 = $500 tax (below $10,000 exemption = $0 owed)
• Paid-in capital of $2,000,000: $2,000,000 × 0.001 = $2,000 tax (below $10,000 exemption = $0 owed)
• Paid-in capital of $20,000,000: $20,000,000 × 0.001 = $20,000 tax (exceeds $10,000 exemption = $10,000 owed)

Corporations do not have a separate calculator tool provided by the state, but the formula is simple enough to compute on your own. If you have questions about whether your specific situation qualifies for the exemption, the Illinois Secretary of State, which collects the franchise tax with the annual report, can provide guidance.

Filing Deadlines and Requirements

Corporations must:

• File the annual report (Form BCA 14.05-D) with the Secretary of State within 60 days before the corporation's anniversary month. Failure to file by the first day of the anniversary month is grounds for administrative dissolution.
• File Illinois corporate income tax returns (Form IL-1120) if you have Illinois-source income. Most corporations file these returns annually; however, some small corporations may be eligible for different filing requirements.
• Pay estimated quarterly tax (Form IL-1120-ES) if Illinois income and replacement tax liability is expected to exceed $400.
• Register with the Illinois Department of Revenue to obtain a tax account number.

The Secretary of State's filing address is the Illinois Secretary of State, Department of Business Services. Online filing is available for the annual report at apps.ilsos.gov.

For tax returns and estimated payment deadlines, consult the Illinois Department of Revenue's website or a qualified CPA, as Form IL-1120 is generally due the 15th day of the 4th month after the tax year ends (April 15 for calendar-year corporations), with a different rule for June 30 year ends.

Why This Matters for Your Business Decision

The Illinois corporate tax rate and franchise tax exemption directly affect the cost of incorporating in the state. If you are considering whether to form a C corporation versus an S corporation, LLC, or partnership, the tax difference can be significant.

A corporation earning $200,000 in net profit in Illinois would owe $19,000 in state taxes (9.5% of $200,000), plus the $75 annual report fee. The same business structured as an S corporation or LLC taxed as a partnership would owe only $3,000 in state replacement tax (1.5% of $200,000) plus personal income tax on owners' shares. How much is saved depends on how much profit a C corporation would pay out to owners and have taxed again on their personal returns.

However, C corporations may be preferable for other reasons: retained earnings are not immediately taxable to owners, the structure is familiar to investors, and some industries favor the corporate form. Tax treatment is one factor in the choice, not the only one.

Getting Help and Staying Updated

Disclaimer: This guide is informational and does not constitute legal or tax advice. Tax law is complex, and individual situations vary. Before making decisions about business structure or tax planning, consult a qualified Illinois CPA or tax attorney who understands your specific circumstances.

For authoritative information, refer to:

• Illinois Department of Revenue: tax.illinois.gov, search for corporate income tax and franchise tax information.
• Illinois Secretary of State, Department of Business Services: ilsos.gov/departments/business-services.html, for annual report forms and filing requirements.
• A qualified Illinois CPA or tax attorney: for advice on business structure, estimated tax payments, and compliance.

The 9.5% Illinois corporate tax rate and the $10,000 franchise tax exemption are established facts as of 2026, but tax laws change. If you see bills introduced to repeal or modify the franchise tax, or if the corporate income tax rate is proposed to change, these resources will be your first notification.