How to Make an Illinois PTET Election: Form IL-1120-ST and the 4.95% PTE Tax

The firm above is theoretical, not an actual EntityIQ client, but the forms and the math are the ones you would file. The Illinois PTE tax is one of the cleaner state workarounds in the country. The rate matches the individual rate, the election is a checkbox rather than a separate form, and the credit flows straight through on a schedule you already file. The cost is mostly the timing discipline of estimated payments and one addback most owners forget.

What the Illinois PTE tax is

The Illinois pass-through entity tax is 4.95% of the electing entity's net income for the tax year, the same flat rate Illinois charges individuals. It is elective, it applies to S corporations and to partnerships that are not publicly traded, and it has been available for tax years ending on or after December 31, 2021 under Public Act 102-0658. The mechanics live at 35 ILCS 5/201(p), and the Illinois Department of Revenue lays them out in Publication 129.

The point of the election is to move a state income tax off your personal Schedule A, where it is capped, and onto the business return, where it is not. The federal SALT deduction is limited by IRC §164(b)(6). The 2017 law set that cap at $10,000, and the 2025 budget act raised it to $40,400 for 2026 with a phase-down above $505,000 of modified AGI, which I cover in the 2026 SALT cap guide. State income tax paid at the entity level is a deduction against business income, not an itemized deduction, so it sidesteps that cap entirely. The IRS blessed this approach in Notice 2020-75, which confirmed that a state tax imposed on and paid by a pass-through entity is deductible by the entity and is not subject to the individual SALT cap.

What the election is worth

Take the engineering firm. Its $400,000 of net income generates $19,800 of Illinois tax at 4.95%, whether the owners pay it personally or the firm pays it. Paid personally, almost none of it clears the SALT cap, because the two owners already use that room on property tax and their other state taxes. Paid by the S-Corp, the full $19,800 is a deduction on the federal 1120-S, which lowers the income that flows to the owners. At a 37% marginal federal rate, that deduction is worth about $7,326. Engineering is one of the fields specifically excluded from the §199A specified service trade rules, so the owners keep their qualified business income deduction, but that same deduction is the catch in the next section.

How to make the election

The annual election is made on the entity's return, Form IL-1120-ST for an S corporation or Form IL-1065 for a partnership, by checking the box that says you elected to file and pay the Pass-through Entity tax. There is no separate election form to mail in advance. You make the choice each year when you file. That timing is the part that trips people up, because the cash has to go out long before the return does.

If the expected tax due, counting both the PTE tax and the 1.5% replacement tax, is more than $500, make estimated payments on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year using Form IL-1120-ST-V or IL-1065-V, or MyTax Illinois. Miss those and you owe a late-estimate penalty even though the election itself is fine. The deduction is also cash-basis at the entity level, so to deduct the tax in a given year, the entity generally needs to pay it by December 31 of that year, not in the spring when the return is due.

How the credit reaches the owners

Each owner receives a credit equal to 4.95% of their distributive share of the electing entity's net income, reported on Schedule K-1-P, and claims it against their Illinois tax on Form IL-1040. The owner also adds back their distributive share of the deducted PTE tax on Schedule M, Line 2, so the Illinois result is close to a wash. The benefit lives on the federal return. That addback is the step DIY filers miss most often. Skip it and you are double-dipping in Illinois, claiming the credit while the federal deduction has already lowered the income Illinois starts from. The Schedule M line puts the deducted tax back into the Illinois base, and the K-1-P credit then erases the Illinois tax on it. Net to the state, roughly zero. Net to the IRS, the full deduction.

A few details decide whether the election is worth the trouble. The 1.5% personal property replacement tax that Illinois charges S corporations and partnerships is separate and is still owed. The PTE tax does not replace it. The §199A interaction is real, because the deducted tax lowers qualified business income and trims the 20% deduction, which is why the headline 37% benefit lands closer to 29% after the give-back. And the election only helps owners who are individuals, estates, or trusts. A corporate partner gets nothing from it. The election is irrevocable after the extended due date for the tax year of the election. It is also an annual election, so a year you elect does not bind any later year. If you skip the election in a future year, no notice to the Department is required. Run the numbers each year, because a low-income year or a year you finally have SALT room can flip the answer.

If you are deciding whether your Illinois S-Corp election pays off in the first place, before you layer the PTE tax on top, run the EntityIQ S-Corp calculator. For the federal side of this same workaround, see the PTET deduction guide, and for another state's mechanics start to finish, the Utah PTET election walkthrough.

This article is educational and is not legal or tax advice. The numbers above are 2026 figures, and the owners are theoretical. Please consult a qualified CPA or enrolled agent before making the election.