BUSINESS ARTICLES
Understanding Illinois’ New Sales Tax on Property Leases
If you lease property in Illinois, a new state tax may impact your business. Starting January 1, 2025, Illinois is implementing a sales tax on personal property leases. Here’s what you need to know to prepare.
What is the New Sales Tax?
This tax applies to “true leases” of tangible personal property, such as equipment, furniture, or vehicles, where the lessee doesn’t intend to purchase the property at the end of the lease. Previously, sales tax was not collected on the lease receipts but instead required the lessor to pay the sales tax when the property to be leased was originally purchased. Now, many businesses will need to factor in this tax for leasing expenses.
Who Does This Impact?
The tax is relevant for:
- Businesses: Those leasing machinery, tools, or other equipment will likely see additional costs.
- Leasing Companies: Lessors are responsible for collecting and remitting the tax to the state. Lessors can now claim an exemption from sales tax when purchasing any personal property that they intend to lease. Lessors will present a modified version of the current Illinois resale exemption certificate to the seller.
- Consumers: In some cases, higher leasing costs may trickle down to customers.
Exemptions may apply to certain industries or types of property. Check with your tax advisor to see if your lease qualifies.
How Much is the Tax?
The tax is tied to the Illinois state sales tax rate, which is currently 6.25%, but local tax rates may also apply. This could mean higher overall costs for businesses in certain areas of the state.
How to Prepare
To avoid surprises, start reviewing your lease agreements now. You should:
- Talk to Your CPA: They can help you understand the financial implications and navigate any exemptions.
- Update Your Budget: Adjust financial projections to account for higher leasing expenses.
- Review Contracts: Work with your lessor to ensure compliance with the new rules.
- Update Systems: Lessors should ensure that their billing systems are up-to-date to ensure they are properly collecting required sales tax.
Why It Matters
This change is part of Illinois’ broader effort to modernize its tax code and capture revenue from previously untaxed transactions. While it might streamline state revenue collection, businesses must adapt to the added complexity and expense.
How We Can Help
Navigating tax changes like this can be challenging, but the right preparation can make things go smoother. Whether you’re a lessor, lessee, or both, understanding the details of this new tax now can save you headaches later. If you need help assessing the impact on your business, Dugan + Lopatka’s CPAs are here to walk you through every step.