Well, once again the third week of March is upon us and that means March Madness! In other words, 4 days to complete our NCAA brackets and less than a month to the end of the Tax Season (April 15). But as I look out the window and reflect, I realize March Madness also means: late season snowstorms; the Government of Cypress confiscating (or should I say “taxing”) bank accounts; the US Government operating without a budget for the 4th straight year; and, Illinois trying to find a way out of the fiscal hole.
Illinois Senate Bill 1159 exemplifies the March Madness – the Bill contains Governor Quinn’s business tax increase. That’s right, another tax increase on Businesses in the state ranked last for business. The Bill among other things seeks to repeal the corporate domestic and foreign dividend deduction (intended to prevent triple taxation of dividend income).
What is the domestic and foreign dividend deduction? The Dividend deduction allows a corporation (Company A) that receives dividends from another company (Company B) to exclude those dividends from its income. Why? The theory is that the Company B had paid tax on its income prior to distributing the dividends (income taxed the first time) to Company A and when Company A distributes dividends to its shareholders the dividends will be taxed to the shareholders (income taxed a second time). However, by eliminating Company A’s dividend received deduction (Company B’s distributed income will have been taxed 3 times: once to Company B, then to Company A, and finally to the Company A shareholders.
As a tax professional, I refer to this type of legislation as “CPA full employment legislation” because with proper planning the third level tax will be avoided – and to some extent even the second level tax can be avoided. The only one helped by the legislation will be low tax states like TX, FL and NV and the only one hurt by the legislation will be the Illinois Treasury.
Talk about March Madness!