Illinois PTET 2026: Which Election Method Is Right for Your Partnership?

Illinois partnerships that elect to pay the Pass-Through Entity Tax (PTET) get a new choice for tax years ending on or after December 31, 2026. Each year, the partnership can pick one of two ways to calculate the tax. The right choice depends on where your income comes from and where your partners live. Estimated payments are already affected, so it’s worth looking at this now rather than at filing time.

What Is the Illinois Pass-Through Entity Tax?

Illinois lets partnerships and S corporations elect to pay state income tax at the entity level, at a rate of 4.95%. Each partner receives a credit against their own Illinois tax for their share of the tax paid. The entity can generally deduct the tax federally as a business expense, which helps owners work around the federal cap on individual state and local tax (SALT) deductions. That cap was temporarily raised in 2025 but still phases down for higher-income taxpayers.

What Changed for 2026: Two Calculation Methods

Under Public Act 104-0468, partnerships that make the PTE tax election can choose one of two methods for the tax base.

Illinois-sourced income method: The partnership pays tax on the Illinois-sourced portion of all partners’ distributive shares, resident and nonresident alike. This is how the tax has worked until now.

Full distributive share method: The partnership pays tax on the full distributive share of its Illinois resident partners, wherever that income was earned. Nonresident partners are still taxed only on their Illinois-sourced income.

The choice is made on the partnership’s Form IL-1065. The full distributive share method is available only to partnerships. S corporations can still elect PTET, but they can’t use it. Several tax firms report that the election is annual and irrevocable for the year, and that the law also removes the previous expiration date for the PTET election.

How Do the Two Methods Compare?

The methods treat resident partners differently and treat nonresident partners the same. Under the Illinois-sourced income method, the partnership pays tax only on the Illinois-sourced share of every partner’s income, resident or not. Under the full distributive share method, resident partners are taxed on their entire share regardless of where the income was earned, while nonresident partners are still taxed only on their Illinois-sourced share.

The other difference is eligibility. S corporations can elect PTET but can only use the Illinois-sourced method. The full distributive share method is for partnerships only.

In practice, the Illinois-sourced method tends to suit partnerships whose activity is mostly in Illinois, or whose owners are a mix of residents and nonresidents. The full distributive share method is more relevant when Illinois-resident owners have significant income from outside the state.

The full method isn’t automatically better. It increases the tax the entity pays and the cash needed to fund it, and it only pays off if the larger federal deduction outweighs that cost. Each owner’s SALT cap position and any credits for taxes paid to other states affect the result.

What This Means for Real Estate LLCs

Income from Illinois rental property is generally already Illinois-sourced. For an LLC that owns only Illinois property, the two methods may produce similar results. The full distributive share method matters most when resident partners’ income comes from outside Illinois, for example through:

• Out-of-state rental or investment property held in the partnership
• Multistate operations
• Services performed outside Illinois

If your LLC has any of these, it’s worth modeling both methods.

Estimated Payments: The Deadline That Can Catch You Off Guard

The Illinois Department of Revenue’s July 2026 bulletin (FY 2027-01) warns that the new law may require you to start making estimated payments or adjust the ones you’re already making. Partnerships expecting more than $500 in PTE tax must make estimated payments.

IDOR says the first estimated payment due on or after June 16, 2026 should include the current quarter’s amount plus any shortfall from earlier quarters. Partnerships using the full distributive share method should use the new worksheet in the bulletin. Those using the Illinois-sourced method can keep using the existing IL-1065 worksheet. Taxpayers can also reduce underpayment penalties by using the annualized income installment method on Form IL-2220.

Before You Elect: A Checklist

• Confirm which partners are Illinois residents and which are not
• Identify how much income is sourced outside Illinois
• Model the entity-level tax and each partner’s credit under both methods
• Recalculate your estimated payments
• Make sure income allocations, partner draws, and basis tracking are current, since you can’t compare methods or defend the election on unreliable books

Frequently Asked Questions About Illinois PTET

Does the two-method choice apply to S corporations?
No. The full distributive share method is available only to partnerships. S corporations may still elect PTET under the Illinois-sourced method.

Can I change my PTET method after filing?
Tax firms report the election is irrevocable for that tax year. You make the choice again each year.

When does the new election take effect?
For tax years ending on or after December 31, 2026.

Will the new method change my estimated payments?
It can. IDOR advises recalculating estimates and provides a separate worksheet for partnerships using the full distributive share method.

Is the PTET worth it for my LLC?
It depends on your partners’ residency, where your income is earned, and each owner’s federal SALT position. That’s why modeling both methods matters.

Tax Planning and Bookkeeping Help for Illinois Partnerships

Choosing the right PTET method comes down to two things: a tax plan built around your ownership structure, and books you can trust. If your income allocations, partner draws, or basis tracking are behind, you can’t accurately compare the two methods, and the election is harder to defend if it’s ever questioned.

At JIL & Associates, we help partnerships and real estate LLCs across Chicagoland with both. Our tax planning work includes modeling each PTET method against your partners’ residency and income sources and adjusting your estimated payments before year-end. As an Advanced QuickBooks ProAdvisor, we also offer bookkeeping cleanup and catch-up, so your numbers are accurate before you elect and stay that way throughout the year.

Call (630) 828-3648 or schedule a free consultation with us today!