Illinois Lease Tax Updates 2024: What Lessors Need to Know

Starting January 1, 2025, Illinois is implementing a significant change in lease tax responsibilities, shifting how lessors collect and remit taxes on leased property. Let’s take a closer look at the new rule.

Here’s what you can discover:

  1. Background of Illinois Tax on Leases and Rentals
  • Traditional Illinois Tax Structure vs. Other States
  • Shift in Tax Collection Practices
  • The Growing Trend of Taxing Lease Payments
  1. Key Changes Effective January 1, 2025
  • Tax Collection on Lease Payments
  • Applicability to New and Renewed Leases
  • Exclusions and Specific Categories Affected by the Change
  1. Implications for Lessors and Businesses
  • Impact on Financial Management and Cash Flow
  • Accounting Efficiency and Tax Liability Recording
  • Compliance Costs and System Requirements
  • Competitive Impact on Leasing and Business Strategy
  1. Next Steps for Lessors
  • Preparing for the Transition to Incremental Tax Collection
  • Reviewing Lease Agreements and Updating Accounting Practices
  • Consulting with Tax Professionals and the Illinois Department of Revenue

Not quite what you need? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Background of Illinois Tax on Leases and Rentals

Across the United States, states typically tax the lease “stream,” meaning the tax is collected on each periodic lease payment made by the lessee rather than at the initial purchase by the lessor. States like California and Illinois, however, followed a different approach for years. Illinois required lessors to pay tax upfront at the time of property purchase, separating tax responsibility from the lease stream and placing it entirely on the lessor. This unique approach often added complexity for Illinois lessors, who faced significant initial costs detached from the cash flows generated by the lease itself.

With the new update, Illinois aligns with the typical state approach, taxing the lease stream rather than the property’s purchase price. This change reflects a growing trend among states to streamline tax collection, tying it more closely to the revenue generated by leasing activity and allowing for easier compliance.

2. Key Changes Effective January 1, 2025

The latest amendment to the Illinois tax law, effective January 1, 2025, brings fundamental changes to the lease tax system, particularly for those engaged in leasing tangible personal property. Here’s what the new system entails:

  1. Tax Collection on Lease Payments: The revised law under Section 35 ILCS 120/2 states that, starting in 2025, a tax is imposed on persons engaged in the business of leasing tangible personal property, including items like computer software and photographic products. Lessors are now responsible for collecting tax on each lease payment as it is received from the lessee, rather than paying it upfront at the time of purchase. This adjustment aligns Illinois’ leasing tax structure with the practice in most other states and connects tax obligations more directly to lease cash flows.
  2. Applicability to New and Renewed Leases: The updated tax structure applies to leases in effect, entered into, or renewed on or after January 1, 2025. Lessors must remit the tax applicable to the portion of the lease payment received in each tax return period, streamlining the tax calculation with the flow of payments received from lessees.
  3. Specific Exclusions Apply: The amendment includes exemptions for motor vehicles, watercraft, aircraft, and semitrailers, as specified in section 1-187 of the Illinois Vehicle Code. For these categories, the prior system remains in effect: dealers owe retailers’ occupation tax, lessors owe use tax, and lessees remain exempt from retailers’ occupation or use tax. This means that lessors of these specific items continue to remit tax at the point of purchase, while other tangible personal property is subject to the new lease payment-based taxation.

This policy update from Illinois’ 103rd General Assembly represents a significant adjustment, aiming to reduce the initial tax burden on lessors while improving tax compliance through incremental payments collected from lessees.

3. Implications for Lessors and Businesses

The shift to collecting tax on lease payments presents both benefits and challenges for Illinois lessors:

  1. Impact on Financial Management: By eliminating the upfront tax payment, lessors can improve cash flow and financial planning, passing the tax burden incrementally to lessees as part of each lease payment. This model aligns tax collection with business revenue, potentially easing financial strain, particularly for lessors with extensive lease portfolios.
  2. Enhanced Accounting Efficiency: Under this new approach, tax liability is recorded gradually, allowing lessors to align tax remittance with the ongoing income from leases. This adjustment may also simplify accounting practices by treating tax as a lease-related liability rather than an upfront expense.
  3. Potential Compliance Costs: Lessors will need to ensure they have robust systems in place to handle the tax calculation and collection process from lessees. This could involve initial setup costs, including software updates and training, as businesses adapt to the incremental collection requirement.
  4. Competitive Impact: The new structure can make leasing options more appealing to lessees, as tax costs are distributed over time rather than embedded in an elevated upfront cost. However, lessors should assess whether the added administrative responsibilities could influence pricing or require operational adjustments.

4. Next Steps for Lessors

With Illinois adopting a more lessee-centered tax approach on lease payments, lessors must stay vigilant about compliance requirements starting in 2025. The shift presents a substantial change, easing the initial tax burden but adding an ongoing responsibility to collect and remit tax on each lease payment. Businesses are encouraged to prepare by reviewing lease agreements, updating accounting practices, and ensuring they have the necessary tools to manage this transition effectively. Better yet, come to Miles Consulting and let us help you.

With these updates, Illinois lessors are poised to benefit from a more gradual tax collection approach—an opportunity to enhance financial planning and achieve smoother lease operations.

Do you want to know more? Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.