METROPOLIS, IL – This installment of our series on new laws focuses on crucial changes impacting businesses, particularly those operating across state lines. Effective January 1, 2026, Illinois is implementing significant changes to how large, multi-state corporations must calculate and report their income tax liability in the state.
These complex regulatory shifts are designed to capture more tax revenue from corporations whose activities span multiple states, and require immediate action by corporate tax departments.
New Rules for Corporate Income Tax Reporting
The key changes center around the state’s Combined Reporting rules—the methodology used to calculate what percentage of a unified business group’s total income is subject to Illinois corporate income tax.
1. Shifting to the Finnigan Method
Illinois is adopting the “Finnigan” method for determining the “sales factor” under unitary combined reporting. This is a significant move away from the “Joyce” method previously used:
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The Change: Under the new Finnigan rule, when calculating the Illinois sales factor for a group of related corporations, all sales made by every single company in the combined group are included in the sales factor numerator.
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The Impact: This change makes it more likely that sales generated by the unitary group will be assigned to Illinois for tax purposes, even if the specific company making the sale does not have a physical presence (nexus) in the state. For many multi-state corporations, this will result in a higher effective tax rate in Illinois.
2. Limiting the GILTI Deduction
Another major regulatory change involves the treatment of certain foreign earnings of U.S. companies, specifically Global Intangible Low-Taxed Income (GILTI).
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The Change: The state has implemented a provision that limits the deduction a company can take for GILTI. This income, which is related to intangible assets held by foreign subsidiaries, will now be subjected to state taxation to a greater extent than before.
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The Impact: By limiting the deduction, the state effectively increases the taxable corporate income base for companies with significant foreign operations.
Action Required by Businesses
These changes are not minor adjustments; they require fundamental restructuring of tax compliance and planning for 2026. Businesses subject to these rules must:
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Immediately model their new tax liabilities under the Finnigan methodology.
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Update their accounting systems to track and report sales according to the new combined reporting rules.
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Adjust estimated tax payments to avoid underpayment penalties throughout the year.
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