1999 Practitioners' Questions and Answers

Effective for tax years ending on or after 8/17/97, Sec 5/201(e)(9) provides that a partnership may annually "elect to pass through to its partners the credits to which the partnership is entitled under subsection (e)(replacement tax investment credit) for the taxable year. A partner may use the credit allocated to him or her under this paragraph only against the tax imposed in subsections (c) and (d) of this Section. If the partnership makes that election, those credits shall be allocated among the partners in the partnership in accordance with the rules set forth in Section 704(b) of the Internal Revenue Code, and the rules promulgated under that Section, and the allocated amount of the credits shall be allowed to the partners for that taxable year. The partnership shall make this election on its Personal Property Tax Replacement Income Tax return for that taxable year. The election to pass through the credits shall be irrevocable."

This election does not seem to make any sense in the context of a partnership having both individual partners and partners paying replacement tax (Corporations, Fiduciaries, Partnerships). If the partnership makes the election, any RTIC allocable to an individual is effectively wasted, since individuals do not pay replacement tax. If the partnership does not make the election, the benefit from the credit is only usable against the income of the individual partners. The concept of "Equity" amongst the partners would imply the credit allocable to replacement taxpayers should be "passed-through" to those partners, and any credit allocable to individuals should remain with the partnership. The law appears to be written to benefit only those partnerships with little or no individual ownership.

The Department is aware of the problems taxpayers are having with documentation of the Training Expense Credit. The major cause of these problems is the fact that the Training Expense Credit computation is not based on any federal income tax item. As a result, taxpayers must establish and maintain records solely for purposes of supporting this credit, and the Department is in the unusual position of being unable to rely on federal practices and IRS auditors. The Department is reviewing the matter internally and we are not opposed to amending the existing rules to provide additional detail as to the nature and extent of the documentation that must be maintained in order to properly claim the credit.

86 Ill. Adm. Code Section 100.2150(d)(3) provides:

Employers must maintain records sufficient to document that the training is eligible training. Employers must maintain records that document the amounts expended for eligible training expenses. An employer may maintain documentation as required for the Industrial Training Program of the Illinois Department of Commerce and Community Affairs (see 56 Ill. Adm. Code 2650.120), or as maintained by employers in compliance with the requirements of the Illinois Secretary of State's Workplace Literacy Program (see 23 Ill. Adm. Code 3040.220 and 3040.240) for purposes of documentation for the Training Expense Credit. Employers may claim the credit based upon average or standard costs of training each employee. The documentation of amounts expended for eligible training
expenses, or documentation maintained to claim the credit based upon average or standard costs, must be sufficient to demonstrate that the training for which the credit is claimed is on behalf of persons employed by the taxpayer in Illinois, or Illinois residents employed outside of Illinois by the taxpayer, the training qualifies for the credit under the standards of subsection (b) of this Section above, and the expenditures are eligible training expenses under the standards of subsection (d)(1) above. In the event an employer claims the credit based upon average or standard costs, this documentation must include detailed information concerning the methodology utilized in determining the average or standard costs.

This provision does not prohibit the use of "statistical or other proof." Average or standard costs are "statistical." However, it does require detailed information regarding the basis on which average or standard costs are computed. Similarly, any offer of "statistical" proof would be subject to review of the factual basis for the assumptions underlying the statistics. In other words, it will not be sufficient for a taxpayer to assert simply that employees spend an average of 8 days per calendar year in training and as the result the taxpayer's training expense credit includes roughly 3% of wages paid to eligible employees. While a taxpayer may show through statistical sampling, for example, that production employees at one of its production facilities spend an average of 8 days per year in training, the taxpayer must also be able to demonstrate that the sample of employees is a valid and representative statistical sample of the employees at that facility. The taxpayer will be required that the "training" is training of the sort that is eligible for the credit under the Department's rules. The documentation must include sufficient documentation to demonstrate to the Department's auditor that the training actually occurred (for example through the retention of class rosters, or perhaps through demonstrating that the company maintains a training documentation chain that results in the training being reported in each employee's personnel file). To the extent that the taxpayer contracts without outside trainers to provide the training, the taxpayer must maintain documentation that demonstrates the amounts paid to the outside training for teaching the training courses. These are, of course, only some general "off-the-cuff" examples of the type of detail that must be maintained in order to claim the credit.