Mid-Year Illinois Tax Change for Sale of Pass-Through Entity Interests

Illinois has a new statute for taxation of the sale of pass-through entity interests.

The new Illinois statute (35 ILCS 5/303(b)(4)) says if a taxpayer sells stock in an S Corporation or sells interests in a partnership (other than investment partnerships), if the S Corp or partnership is subject to Illinois income tax, the taxpayer that sold the stock or partnership interest is likewise subject to Illinois income tax on that sale. In other words, if an individual sells stock in an S Corp that is subject to Illinois income tax, that individual’s sale of stock is subject to Illinois income tax. This change in the statute specifically applies to non-Illinois residents.

The amount of the gain (or loss) on the sale subject to Illinois income tax depends on how much of the entity’s income was apportioned to Illinois in the year of the sale and the two years prior to the sale. For example, if an average of 75% of the entity’s income was apportioned to Illinois in the year of the sale and the two prior years, the taxpayer who sold the S Corp stock or partnership interests will owe tax to Illinois on 75% of the gain on the sale. Likewise, if an average of 5% of the entity’s income was apportioned to Illinois in the year of the sale and the two prior years, the taxpayer-shareholder or partner will owe tax to Illinois on 5% of the gain on the sale.

This new statute is effective for tax years ending on or after June 16, 2025. In other words, if you sold your S Corp stock earlier in 2025, you are stuck with this tax even though you may not have been aware of this possibility at the time of the sale.

If you thought you were not going to be subject to Illinois tax because you became a resident of another state (Missouri or Florida, for example), if you own an S Corp or a partnership that does business in Illinois, your sale of stock or partnership interests will still be subject to Illinois income tax.