Illinois Ends State QSBS Exclusion and Introduces New Corporate NOL Limits

Illinois has enacted two significant income-tax changes that may affect business founders, investors, and C corporations operating in the state. On June 16, 2026, Governor J.B. Pritzker signed Public Act 104-0468, which separates Illinois from federal tax treatment of qualified small business stock (“QSBS”) gains and imposes additional limits on corporate net operating loss (“NOL”) carryover deductions.

Section 1202 of the Internal Revenue Code permits eligible taxpayers to exclude gain from the sale of qualifying small business stock when certain requirements are satisfied. These requirements include rules governing the issuing corporation, the manner in which the stock was acquired, and how long the taxpayer held it.

For eligible stock, the federal exclusion may cover the greater of ten times the taxpayer’s invested capital or $10 million. The limit is $15 million for qualifying stock acquired after the enactment of the One Big Beautiful Bill Act.

Illinois generally begins its income-tax calculation with federal taxable income for entities or federal adjusted gross income for individuals. The state then makes certain additions and subtractions to determine the amount subject to Illinois income tax.

Under the new law, Illinois will require taxpayers to add federally excluded QSBS gain back into their Illinois income. This treatment applies to taxable years ending on or after December 31, 2026. Consequently, a founder or investor may qualify for the federal QSBS exclusion while still owing Illinois income tax on the same gain.

The change makes state-tax planning increasingly important as a sale or other liquidity event approaches. Taxpayers with Illinois connections may wish to evaluate the potential state-tax cost early enough to consider whether the timing and structure of a transaction, the negotiation of its economic terms, or a potential change in domicile could affect the result. The effectiveness of any planning strategy will depend on the taxpayer’s particular circumstances.

Public Act 104-0468 also changes how C corporations may use existing NOL carryovers to reduce Illinois taxable income.

For taxable years ending on or after December 31, 2027, a C corporation may use an Illinois NOL carryover only up to the greater of:

• 15% of the corporation’s net income; or
• $500,000.

The percentage limitation will increase annually. For taxable years ending on or after December 31, 2031, the limitation will reach 80% of the corporation’s net income.

Corporations with substantial NOL carryovers may therefore be unable to use those losses as quickly as anticipated. The limitation could increase current Illinois tax liabilities and affect cash-flow projections, transaction modeling, and the expected value of a corporation’s deferred tax assets.

Illinois taxpayers should review the potential effect of Public Act 104-0468 well before the applicable effective dates. The legislation may materially affect the state tax consequences of business sales, investment exits, and the utilization of corporate NOL carryovers, making advance tax planning increasingly important.