SALT Round-Up—Current Developments in Key Jurisdictions

Illinois Updates Sale of Partnership Interest Rules with Notable Investment Partnership Exceptions

Recent tax legislation in Illinois included a new provision related to the sale of partnership interest or S corporation stock. Effective for tax years ending on or after June 16, 2025, a gain or loss from the sale of a nonresident personal income taxpayer’s sale of S corporation stock or an interest in a partnership, other than an investment partnership (IP), is allocable to Illinois using the average of the pass-through entities Illinois apportionment factor in the year of sale and the two tax years immediately preceding. Similarly, when another pass-through entity (except for an IP) or corporation sells an interest in another pass-through entity, the sales factor sourcing rule for the attributable gain also incorporates the same rule.

To ensure income is sourced, reported, and withheld appropriately, taxpayers should confirm their status as an IP. Under Illinois income tax law, an IP is not subject to replacement income tax, which is a 1.5% entity level tax on taxable income, and any IP income allocated to non-resident partners is categorized as non-business income allocated to the partner’s state of domicile, with limited exceptions. Additionally, under prior law, non-resident income from an IP was not subject to nonresident withholding. Therefore, the IP regime was largely considered to be a favorable structure for nonresident partners.

For tax years ending before Dec. 31, 2023, under the definition of an IP—including its holding of “qualifying securities”—an IP could not hold an interest in a lower-tier partnership that itself is not an IP. In an effort characterized as a benefit for private equity investment in entities conducting business in Illinois, the state amended the IP statute to allow for certain partnership interests to constitute qualifying securities for purposes of defining an IP for tax years beginning on or after Dec. 31, 2023.

To qualify as an IP, an entity must meet two tests:

• At least 90% of the partnership’s cost of its total assets consists of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership; and
• At least 90% of its gross income consists of interest, dividends, gains from the sale or exchange of qualifying investment securities, and the distributive share of partnership income from lower-tier partnership interests meeting the definition of qualifying investment security under subparagraph (B)(xiii); for the purposes of this subparagraph (ii), “gross income” does not include income from partnerships that are operating at a federal taxable loss.

Under the new law, a lower-tier partnership interest would meet the definition of qualifying investment security if, in the hands of the partnership, it qualifies as a security within the meaning of subsection (a)(1) of Subchapter 77b of Chapter 2A of Title 15 of the United States Code (the Securities Act of 1933). Illinois issued further guidance on how to determine if a partnership interest qualifies as an IP with brief discussion of how the Securities Act of 1933 has been applied in case law for purposes of determining whether a contract or interest constitutes a security as an addendum to the 2024 IL-1065 instructions. The same guidance can also be found in the IL-1065 instructions for the 2025 tax year. Due to the question of whether a partnership/LLC interest constitutes a security being a determination under the Securities Act of 1933, it is recommended that security status be verified prior to filing as an IP for Illinois income tax purposes.

The most significant benefit associated with the law change is the potential for a tax-free exit (Illinois income tax) from an investment in an operating partnership conducting business in Illinois for non-resident partners of an IP. This is because the gain or loss from the IP’s sale of its interest in the lower-tier partnership should be treated as nonbusiness income allocated to the partner’s state of domicile.

A potential drawback to the IP regime is a new mandatory withholding requirement (at higher rates) on the Illinois-sourced income flowing up to an IP from a lower-tier operating partnership. Residents will be able to claim the with-holding on Illinois income tax filings, while nonresidents may not be able to claim the withholding credit, except under very limited circumstances. Importantly, a nonresident partner of an IP may not present the IP with a withholding exemption certificate (Form 1000-E) like a nonresident partner of any other partnership under Illinois income tax law. Additional questions and complications arise if the IP intends on making an elective pass-through entity tax election in Illinois, in addition to uncertainty pertaining to how both Illinois and other states will treat this new withholding regime for purposes of a credit for tax paid to another state.

Finally, it is important to note that under Illinois income tax law, the IP determination is a classification with its own reporting methodology and tax implications, not an election. In light of this point and other complexities pointed out in this publication, taxpayers and their advisors should closely examine the state guidance to determine the appropriate filing method for their fact pattern and whether amended returns are warranted.

Texas Aligns Franchise Tax Depreciation Rules to One Big Beautiful Bill Act

As states consider the implications of the One Big Beautiful Bill Act (OBBBA), Texas has joined the list of jurisdictions providing early proactive taxpayer guidance. The Texas Comptroller of Public Accounts announced in a December news release that the Comptroller will conform to the bonus depreciation-expensing provisions of the OBBBA for purposes of calculating cost of goods sold (COGS) beginning with the 2026 franchise tax report year.

Unlike most states, Texas does not assess a tax on net income of an individual, business, or corporation. Rather, it imposes its franchise tax on a business’s calculated margin, which is determined using one of four methods: 1) 70% of revenue; 2) Revenue less COGS; 3) Revenue less compensation; 4) Revenue less $1 million.

Included in the calculation of COGS is “depreciation, depletion, and amortization … to the extent associated with and necessary for the production of goods, including recovery described by Internal Revenue Code Section 197 and property described in Internal Revenue Code Section 179” (https://tinyurl.com/3jm-6v5hb). Historically, Texas applied federal income tax depreciation provisions in effect under the 2007 Internal Revenue Code (IRC) for purposes of computing the COGS deduction. Accordingly, any federal statutory changes to depreciation methods enacted after 2007 were not reflected in the calculation of COGS for Texas franchise tax purposes.

Despite the Comptroller’s prior guidance, a recent statutory review confirmed that the Comptroller can apply the current IRC, rather than the 2007 IRC, for depreciation calculations. Therefore, beginning with the 2026 franchise tax report (2025 calendar year), the comptroller will apply the current IRC as in effect at the time (for the applicable tax period) to calculate depreciation for determining the COGS deduction. Doing so aligns the depreciation rules used to calculate COGS for Texas franchise tax purposes with those provided for in the OBBBA. The change permits taxpayers to deduct the full cost of qualifying fixed assets acquired after Jan.19, 2025, for franchise tax purposes.

In a subsequent administrative publication issued on Dec. 19, 2025, the Comptroller confirmed the prospective nature of this change. To address the prior-year disparities between the 2007 and current-year IRC depreciation rules, the comptroller is permitting a one-time net depreciation adjustment for each qualifying asset—assets placed in service prior to the 2026 report accounting period and not previously disposed of—on the 2026 franchise tax report. The adjustment is the numerical difference in depreciation claimed for federal income tax purposes with depreciation claimed for Texas franchise tax COGS purposes.

The updated guidance is welcome news for taxpayers whose Texas COGS calculation has been limited by conformity to an outdated version of the IRC. While the change itself is not retroactive, the depreciation adjustment provides equitable relief for taxpayers with prior-year disparities between Texas and federal depreciation calculations to the extent such assets continue to be in service during the 2026 franchise tax reporting period.

Taxpayers should note, however, that the change does present the prospect of reduced depreciation and COGS in future years for taxpayers deducting the full cost of qualifying assets in the current year. A further consideration would be the level of Texas apportionment in the current versus future report years relative to the amount of depreciation deducted under this change. This issue is exacerbated for taxpayers whose COGS (including depreciation under the OBBBA rule) exceeds revenue in a given tax year. In such a case, there would not be a carryover of unused depreciation to future tax years, limiting the tax effect of full expensing for Texas purposes. Moreover, Texas does not permit the carryover of net operating losses, potentially further limiting the Texas benefit of federal bonus depreciation.

Finally, guidance issued by the Comptroller does not note any conformity to the OBBBA provision allowing for the expensing of real estate comprising “qualified production property,” as defined under newly enacted IRC § 168(n). Needless to say, taxpayers should consult with their tax advisors to determine whether these changes impact their Texas franchise tax reports, or whether they should consider electing federal bonus depreciation.