Key figures
Illinois advisory
2026, with sources
- R&D credit
- 6.5% of the increaseOf qualifying Illinois research spending above a three-year base; tax years ending before Jan 1, 2032.
- Net loss deduction cap
- $500,000 a yearThrough tax years ending before Dec 31, 2027; then the greater of $500,000 or 15% of income, rising to 80%.
- QSBS (IRC §1202)
- DecoupledFederally excluded gain is added back for tax years ending on or after Dec 31, 2026.
Credits that a startup can actually use
The Illinois research and development credit is 6.5% of the increase in qualifying research expenses conducted in Illinois over a three-year base, following the federal Section 41 definitions. It offsets income tax only, is not refundable or transferable, and carries forward five years, so for a company burning cash it is an asset to track rather than cash to collect.
Illinois has a separate pass-through entity tax election for S corporations and partnerships, and the IL-1120 instructions note its expiration date has been removed. It matters for an LLC or S corporation, not for the usual Delaware C-corp.
The founders’ own position changed in 2026. Illinois started from federal adjusted gross income and so used to follow the federal QSBS exclusion; Public Act 104-0468 now adds back federally excluded §1202 gain for tax years ending on or after December 31, 2026. For an Illinois-resident founder, an exit that is tax-free federally is no longer tax-free in Illinois.
Remote hires and the Illinois border
An Illinois hire brings an IDOR withholding account, an IDES account, a 40-hour paid leave policy (or Chicago’s 40 plus 40), new-hire reporting for employees and contractors, and — after two years with five Illinois employees — a retirement plan or My Illinois Savings. It can also give the company Illinois income tax nexus and a reason to qualify with the Secretary of State.
Illinois’s reciprocity agreements with Iowa, Kentucky, Michigan and Wisconsin matter for companies near the border: a Chicago office hiring an engineer who lives in Kenosha, Wisconsin withholds no Illinois tax for them — Illinois permits, but doesn’t require, withholding Wisconsin tax instead. Placing a first Chicago-area employee in a suburb rather than the city also changes the minimum wage and the leave ordinance that applies.
Where founders go wrong in Illinois
Most Illinois surprises come from Chicago layering its own rules on top of the state’s, and from the state’s caps on deductions a startup assumes it has.
- Hiring one person in Chicago and missing the city’s own minimum wage and paid leave rules, which are stricter than the state’s.
- Assuming SaaS is untaxed because Illinois doesn’t tax it, then finding Chicago’s 15% lease tax applies to Chicago customers.
- Forgetting that a Delaware company qualified in Illinois owes the Illinois franchise tax and a $75 annual report every year.
- Not filing My Illinois Savings or a retirement plan once there are five Illinois employees for two years.
- Booking the full federal NOL as usable in Illinois without the $500,000 annual cap.
- Assuming QSBS gain is tax-free in Illinois; it is added back from tax years ending on or after Dec 31, 2026.
The federal baseline
This page covers what Illinois adds. The federal rules underneath it apply here too.
Common questions
Is the Illinois R&D credit worth anything to a pre-revenue startup?
It reduces Illinois income tax for research conducted in Illinois, at 6.5% of the increase in qualifying expenses over the average of the prior three years. It is not refundable, so a pre-revenue company only banks it; unused credit carries forward five years. The administrative rule lets it be claimed for tax years ending before January 1, 2032.
Does Illinois follow the federal QSBS exclusion?
No longer. Public Act 104-0468, signed June 16, 2026, requires individuals, trusts, estates and partnerships to add back gain excluded federally under IRC §1202 for tax years ending on or after December 31, 2026. An Illinois-resident founder who sells qualified stock in 2026 or later can owe the 4.95% Illinois rate on gain that is tax-free federally: about $247,500 on a $5 million gain.
Advisory next door
- INIndiana advisoryIndiana offers a nonrefundable research credit and fixed-date conformity that the legislature updates selectively; the remote-hire question is always which county.
- IAIowa advisoryIowa replaced its Research Activities Credit in 2026 with an IEDA-certified R&D credit of up to 3.5% of Iowa research spending, refundable and capped at $40 million a year. Individuals pay a flat 3.8%.
- KYKentucky advisoryKentucky’s state rates are moderate, but local occupational license taxes on wages and profits, a sales tax that reaches SaaS and a $175 minimum LLET catch startups, and 2026 conformity skips Section 174A.
- MOMissouri advisoryMissouri’s research credit is capped and allocated by the Department of Economic Development. Since 2025, individuals pay no Missouri tax on capital gains.
- WIWisconsin advisoryWisconsin’s research credit is 25% refundable, and its qualified Wisconsin business exclusion can make a founder’s long-term gain tax-free in Wisconsin if the company registers in time.
Founder guides on this
- R&D taxThe R&D tax credit and Section 174A for startupsEngineering salaries can earn a federal R&D credit against payroll tax, and Section 174A lets you deduct US research again. What qualifies, what to track.
- SAFEsHow to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.
- RunwayBurn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.
More of the Illinois guide
- AccountingAccounting and state tax in IllinoisCorporate tax, conformity to federal rules, apportionment and what it does to your books
- ReceivablesReceivables and sales tax in IllinoisSales tax registration, economic nexus, whether SaaS is taxable, and collecting from customers
- PayablesPayables and contractors in IllinoisPaying vendors and contractors: 1099 filing, use tax, contractor tests and withholding
- PayrollPayroll taxes and employer rules in IllinoisWithholding, unemployment insurance, paid leave, minimum wage and the rules on paydays
- ComplianceCompliance and filings in IllinoisRegistering to do business, annual reports, franchise tax and the filing calendar
Sources
Checked against each agency’s own page on . Rates and thresholds change, usually on January 1.
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA or the agency before you act on them.