Illinois 2026 Budget Changes: What Business Owners Need to Know

Cody Squires

In-Charge Staff Accountant | CPA

Governor J.B. Pritzker recently signed a new state budget bill into law for the state of Illinois. There are numerous changes that could impact you and your business. Some of the most notable changes include limiting the Net Operating Loss (NOL) deduction, a change in the entity level tax election (PTET), disallowance of the federal Qualified Small Business Stock gain exclusion, and a reduced sales tax holiday for roughly a week in August 2026.

What Is a Net Operating Loss (NOL) and How Is the Limit Changing?

If your business loses money in one year, you can normally use that loss to reduce your taxes in future years. Illinois limits how much of that loss you can use each year and is changing that limit.  

What’s changing:

• For tax years ending after December 31, 2024 and before December 31, 2027, corporate NOL carryforward deductions remain capped at $500,000 per year.
• For later tax years, the cap phases into a percentage-of-income limitation, with the deduction limited to the greater of the applicable percentage or $500,000. The percentage-of-income limitation increases year after year starting at 15% for tax years on or after December 31, 2027 and before December 31, 2028 and increases to 80% for tax years ending on or after December 31, 2031.

Bottom line: Corporations with large prior-year losses will continue to face restrictions on how quickly they can use those losses to offset current taxes, though the cap gradually loosens over time.

Pass-Through Entity Tax Election (PTET): New Options for Partnerships

PTET lets partnerships pay Illinois state tax at the business level instead of passing that tax burden on to individual partners. This helps partners get around the federal limits on deducting state taxes personally. Illinois is now giving partnerships two ways to calculate this tax. For tax years ending on or after December 31, 2026, partnerships making the Illinois entity-level tax election may choose between two annual tax-base methods: the full distributive share method or the Illinois-sourced income method. The elected method is irrevocable for that taxable year. Current guidance applies this new method to partnerships and does not clearly extend to S corporations:

1. Full distributive share method – This method allows the partnership to compute and pay tax on the full distributive share of net income allocable to each partner who is an Illinois resident. The apportioned income will be used to determine tax due from nonresident partners.
2. Illinois-sourced income method – This method allows the partnership to compute and pay tax only on each partner’s share of income derived from Illinois.

Bottom line: Partnerships with a mix of resident and nonresident partners should evaluate both methods before making the election, since the right choice can meaningfully change the amount of taxes paid.

Qualified Small Business Stock (QSBS): Illinois Is Removing a Tax Break

Under Federal tax law (Section 1202) certain gains on the sale of qualified small business stock can be excluded from taxable income. Illinois is joining California and decoupling from this code section.

What’s changing:

• Starting with tax years ending on or after December 31, 2026, Illinois requires you to add back any QSBS gain exclusion you claimed federally when calculating your Illinois taxable income.

Illinois Sales Tax Holiday Returns for Back-to-School Shopping

To end with some good news, for the first time since 2022, Illinois is providing a reduced sales tax rate in August for back-to-school season for certain tangible goods. The Illinois sales tax holiday runs from August 7, 2026, through August 16, 2026, applies to eligible clothing items under $125 and school supplies. Taxes on those items will be 1.25% instead of the general rate. City and local taxes will still apply.

What Should Your Business Do Next?

These changes affect different businesses in different ways depending on your entity type, income and whether you’re carrying forward prior losses. If you have questions about how any of these changes apply to your or your business, please contact the trusted advisors at CK. You can call us at (630) 953-4900 or fill out this form.