Illinois combines a flat 4.95% personal income tax with one of the highest corporate tax burdens in the country. C corporations pay 9.5% when the state's Personal Property Replacement Income Tax is added to the base corporate rate, and even pass-through businesses pay a 1.5% replacement tax at the entity level. Chicago adds some of the highest sales and lease taxes of any American city.
This guide walks through Illinois business taxes for 2026, from income and replacement taxes to the franchise tax and Chicago's local taxes, with worked examples and comparisons.
Corporate income and replacement tax
| Tax | Rate |
|---|---|
| Corporate income tax | 7% |
| Personal Property Replacement Income Tax (corporations) | 2.5% |
| Combined corporate rate | 9.5% |
The replacement tax was created in 1979 when Illinois abolished its tax on business personal property. Revenue goes to local governments.
Key points:
- Apportionment: Single sales factor.
- Combined reporting: Required for unitary business groups.
- NOL cap: Corporate net operating loss deductions are capped at $500,000 per year for tax years through 2026.
- Credits: EDGE (Economic Development for a Growing Economy) credits, research credits, and credits for data centers and film production.
- Returns: Form IL-1120 is due on the 15th day of the month after the federal due date.
Pass-through entities and personal income tax
Individuals pay a flat 4.95% on all taxable income. The Illinois constitution requires a flat rate, and voters rejected a graduated income tax amendment in 2020.
Illinois is unusual because pass-through entities also pay an entity-level tax:
| Entity | Replacement tax |
|---|---|
| Partnership or LLC taxed as partnership | 1.5% |
| S corporation | 1.5% |
| Trust | 1.5% |
The 1.5% replacement tax is paid by the entity on Form IL-1065 or IL-1120-ST. Owners then pay 4.95% on their share of income. Sole proprietors and single-member LLCs disregarded for federal purposes do not pay the replacement tax.
PTE election: Partnerships and S corporations can elect to pay the 4.95% income tax at the entity level, deductible federally. Owners receive a credit.
Sales and use tax
The state rate is 6.25%. Counties, cities and transit districts add local taxes, bringing the average combined rate to about 8.98%. Chicago's rate is 10.25%.
- Groceries and medicine are taxed at a reduced rate. The state 1% tax on groceries ends in 2026, but local governments can replace it.
- Services are generally not taxed, with some exceptions.
- Remote sellers with more than $100,000 of Illinois sales must collect. Since 2025, remote retailers must collect the local rate for the destination rather than only the state rate.
Chicago and Cook County taxes
- Personal property lease transaction tax: Chicago taxes leases of personal property, including cloud software and computing services, at 11%.
- Amusement tax: 9% on streaming services and entertainment.
- Cook County taxes: The county adds its own sales tax and taxes on parking, hotels and other activities.
- Chicago parking, hotel and restaurant taxes add further layers.
Franchise tax
Illinois charges corporations an annual franchise tax of 0.1% of paid-in capital allocated to Illinois. The first $10,000 of franchise tax liability is exempt, so most small corporations owe only the minimum annual report fee. LLCs do not pay franchise tax.
Payroll and property taxes
- Unemployment insurance: Employers pay on a wage base of roughly $14,000, rising with legislation. New employers start around 3.5%.
- Illinois Paid Leave for All Workers Act: Employers must provide up to 40 hours of paid leave a year.
- Property tax: Illinois has some of the highest property taxes in the country, especially in Cook County, which assesses commercial property at 25% of market value compared with 10% for homes.
Forming a business in Illinois: fees and ongoing costs
| Item | LLC | Corporation |
|---|---|---|
| Formation filing fee | $150 | $150 plus initial franchise tax |
| Annual report | $75 | $75 plus franchise tax |
| Replacement tax | 1.5% of net income | 2.5% of net income |
| Registered agent | Required | Required |
Worked example: $500,000 of profit
| Step | Amount |
|---|---|
| Taxable income | $500,000 |
| Illinois corporate tax at 9.5% | $47,500 |
| Federal tax at 21% on $452,500 | $95,025 |
| Total income tax | $142,525 (28.5%) |
For a single LLC owner with $150,000 of Illinois income, personal income tax is about $7,425. At $75,000 it is about $3,713. A multi-member LLC would also pay 1.5% replacement tax at the entity level.
How Illinois compares with its neighbors
Illinois's corporate rate is roughly double that of Indiana, Missouri and Kentucky. Many businesses in the Chicago area weigh moving operations across the border to northwest Indiana, though access to Chicago's labor market keeps many in place.
Choosing an entity in Illinois
- Sole proprietorship or single-member LLC: No replacement tax, only 4.95% personal income tax.
- Multi-member LLC or S corporation: 1.5% replacement tax plus 4.95% for owners, with a PTE election available.
- C corporation: 9.5% plus 21% federally, among the highest combined rates in the country.
Tax planning tips for Illinois businesses
Compare the replacement tax with self-employment savings. An S corporation saves federal payroll tax but pays 1.5% replacement tax. For a business with $150,000 of profit, the $2,250 replacement tax is usually smaller than the federal savings, but the gap narrows at lower profit levels.
Watch Chicago lease tax on software. Chicago treats cloud software and many computing services as leases taxed at 11%. Software companies selling to Chicago customers often need to register and collect.
Appeal property assessments. Cook County assessments change every three years by region, and appeals are common. Commercial property owners routinely reduce their bills through the Assessor and the Board of Review.
Use EDGE credits for expansions. Companies creating jobs in Illinois can negotiate EDGE credits based on withholding from new employees, worth up to 50% or more of the withholding in underserved areas. Agreements must be signed before you commit to the project.
Recent changes for 2025 and 2026
- State grocery tax eliminated from January 1, 2026, with local options to replace it.
- Destination sourcing for remote retailers began in 2025.
- NOL cap of $500,000 extended for tax years through 2026.
- Chicago lease tax increased to 11%.
Is Illinois a good state for business?
Advantages
- Flat 4.95% personal income tax, lower than most neighbors' top rates for high earners
- Chicago's deep talent pool and major transportation hub
- Strong finance, logistics, manufacturing and food industries
Drawbacks
- 9.5% combined corporate rate and entity-level tax on pass-throughs
- Among the highest property taxes in the country
- Chicago's high sales and lease taxes
- Pension funding pressures that create risk of future tax increases
Compliance checklist
- File Articles of Organization or Incorporation with the Secretary of State.
- Register with the Department of Revenue through MyTax Illinois.
- Register with the Department of Employment Security if you hire.
- Register with the City of Chicago for local taxes if you operate there.
- File annual reports and pay any franchise tax.
- File Form IL-1120, IL-1120-ST or IL-1065 each year.
Compare Illinois with its neighbors below or estimate your taxes in the United States calculator. See Partnership taxes for more on the replacement tax.