Cost Segregation Study in Illinois

Illinois runs a flat 4.95% individual income tax, which makes the state side of a cost segregation analysis unusually easy to model. There are no brackets to navigate and no phase-outs to trip. What Illinois does have is a bonus depreciation addback that just got broader, and a replacement income tax that most out-of-state investors have never heard of.

Illinois also made its pass-through entity tax permanent in late 2025, removing the sunset that had made multi-year planning awkward. For an Illinois business owner who also holds real estate, that permanence is worth building a strategy around rather than re-evaluating annually.

How Illinois Income Tax Interacts With Federal Strategy

Illinois imposes a flat 4.95% individual income tax on net income. There is no graduated schedule, no preferential capital gains rate, and no local income tax layer, including in Chicago.

Layered on top is the Personal Property Replacement Tax, which most investors miss entirely. Partnerships, S corporations, and trusts pay an additional 1.5% replacement tax on Illinois net income. C corporations pay 2.5% on top of the 7% corporate rate. This is an entity-level tax, so it applies to the entity that owns your Illinois real estate, not just to you.

The replacement tax interacts with cost segregation the same way the income tax does. Because Illinois requires the bonus addback, the replacement tax base is computed without the accelerated deduction in the placed-in-service year. A study that eliminates federal taxable income on an Illinois property will not eliminate the 1.5% replacement tax in that year.

Illinois Pass-Through Entity Tax

Illinois adopted its pass-through entity tax in 2021 and made it permanent in December 2025. Public Act 104-0453, enacted through SB 1911, removed the sunset date that had previously limited the election.

The rate is 4.95%, matching the individual rate, applied to the electing entity's net income. Partners and shareholders receive an Illinois credit for their distributive share. The election is made on the entity's timely filed return for the tax year.

Permanence changes how the election should be used. Under the sunset, many Illinois owners treated the PTET as an annual opportunistic decision. With no expiration, the election becomes a default position for profitable Illinois pass-throughs, and the planning question shifts to the interaction with the replacement tax and with entity-level depreciation timing rather than to whether the regime will exist next year.

Illinois Depreciation Conformity

Illinois has rolling conformity to the Internal Revenue Code but is specifically decoupled from bonus depreciation. Taxpayers add back the federal 100% bonus depreciation deduction and compute Illinois depreciation as if the bonus election had not been made. The adjustment runs through Form IL-4562, Special Depreciation.

The decoupling expanded for 2026. Public Act 104-0453 amended Section 203 of the Illinois Income Tax Act to decouple Illinois from the 100% bonus depreciation now allowed under IRC Sec. 168(n), the qualified production property provision added by the One Big Beautiful Bill Act, for tax years beginning on or after January 1, 2026. Illinois had already decoupled from Sec. 168(k). It has now closed the 168(n) door as well.

The mechanics are taxpayer-friendly relative to some states. Illinois does not push you onto ADS. Line 16 of Form IL-4562 captures the federal depreciation you would have claimed had you not elected bonus, so the Illinois recovery follows ordinary MACRS over the reclassified lives.

Cost Segregation Considerations Specific to Illinois

Illinois cost segregation planning turns on three points.

First, the reclassification is fully respected. Illinois disallows the acceleration, not the engineering. Five, seven, and fifteen-year property identified in a study recovers over those lives for Illinois purposes on regular MACRS. Over a ten-year hold on a Chicago multifamily property, the Illinois benefit of the study is substantial even though year one is federal only. At a flat 4.95% plus 1.5% replacement tax, the state-side value of moving basis from 27.5 years to 5 years is easy to quantify precisely because the rate never changes.

Second, the 168(n) expansion matters for a specific investor profile. Owners building or converting production, manufacturing, or processing facilities in Illinois were the intended beneficiaries of the federal qualified production property rules. Illinois has now declined to follow. If your 2026 project was underwritten assuming both federal and Illinois immediate expensing on qualified production property, the Illinois half of that assumption is gone and the model needs to be rebuilt.

Third, Cook County property tax assessment is a parallel conversation that a cost segregation study touches without resolving. Cook County assesses commercial and industrial property at a higher ratio than residential, and reassessment cycles produce large swings in carrying cost. Cost segregation improves early-year after-tax cash flow, which is most valuable in the years immediately following a reassessment increase. Timing a study to land in a reassessment year is a small optimization that is available to Illinois owners and almost never used.

Finally, the passive activity rules apply unchanged. Illinois offers no relief from IRC Sec. 469, and a suspended federal loss is suspended for Illinois too. Short-term rental treatment or real estate professional status is what unlocks the deduction, in Illinois exactly as everywhere else.

Working With AE Tax Advisors in Illinois

AE Tax Advisors works with real estate investors, business owners, and high-income professionals across Illinois and all fifty states. We are a licensed CPA and IRS Enrolled Agent practice based in Billings, Montana, and we handle the engineering-based cost segregation study, the Illinois conformity adjustments, the entity structuring, and the return preparation as one engagement rather than three vendors who do not talk to each other.

That matters more in Illinois than it does in a state with simple conformity. A cost segregation provider who delivers a federal-only report leaves you and your preparer to work out the Illinois treatment after the fact, which is where the errors happen. We model the federal and Illinois outcome together before the study is commissioned, so you know what the number actually is on both returns before you spend anything.

Related reading: the complete guide to cost segregation, our cost segregation study service, short-term versus long-term rental tax treatment, lookback studies and Form 3115, and multi-state tax planning.

Illinois tax rates, pass-through entity tax rules, and depreciation conformity provisions described on this page reflect law in effect as of August 2026 and are provided for general information only. State conformity changes frequently and often retroactively. Nothing here is tax advice for your situation, and no client relationship is created by reading it. Talk to us about your facts before acting.