DUGGAN BERTSCH wants to make you aware of a significant change in Illinois’ tax law which may affect business founders, early-stage investors, and those holding qualified small business stock (QSBS).

WHAT HAPPENED: 
On June 16, 2026, Illinois enacted Senate Bill 3019 into law (Public Act 104-0468, effective July 1, 2026), severing Illinois from the federal QSBS gain exclusions available under Internal Revenue Code (IRC) Section 1202. As Background, Section 1202 allows noncorporate taxpayers who sell stock in a qualifying small business to shelter a portion, or in some cases all, of their gain from federal income tax. Depending on when the shares were acquired, the excluded amount can reach up to $10-15 million (or 10 times the shareholder’s adjusted basis, if greater). With the passage of this legislation, Illinois joins a growing number of states which no longer permit their residents to carry forward this federal benefit at the state level.

WHAT THIS MAY MEAN FOR YOU:
For tax years ending on or after December 31, 2026, any gain you sheltered from federal taxes under Section 1202 must be added back into your Illinois taxable income. This means that a QSBS sale that is wholly or partly tax-free on your federal return will still be subject to the Illinois 4.95% flat rate. This law’s reach is broad, covering not only individuals but also irrevocable grantor trusts where the grantor resides in Illinois, as well as Illinois resident non-grantor trusts.

WHAT IS UNAFFECTED:
Notably, the legislation appears to have left intact Illinois’ conformity with the federal QSBS rollover provision under IRC Section 1045. That provision permits a shareholder who has held QSBS for at least six months to defer recognition of gain by rolling the sale proceeds into replacement QSBS within a 60-day window. Because this new addback language specifically targets gain excluded under Section 1202 and makes no reference to Section 1045, we believe gain properly deferred through a qualifying rollover should remain deferred at the state level as well. That said, the Illinois Department of Revenue has not yet weighed in on this reading, and we will keep you informed as any official guidance or regulatory updates emerge.

WHAT SHOULD YOU DO:
Illinois taxpayers now join taxpayers in other states and localities (including California, Maine, Alabama, Mississippi, Oregon, Pennsylvania, Vermont and the District of Columbia) in which the federal QSBS rules will not be followed, ultimately affecting after-tax investment returns. We recommend taking a fresh look at your exit and liquidity planning to account for the added state tax exposure. Planning using specific trust structures may mitigate these state tax concerns.   Please contact us to discuss your options.