United States

Illinois: Department of Revenue Issues Final Hedging Apportionment Regulations

Feb 08, 2016
From KPMG TaxWatch

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The Illinois Department of Revenue has published final apportionment regulations addressing the treatment of income, gains, and losses from hedging transactions. Under the new regulations, a hedging transaction is defined as “a transaction entered into by a taxpayer in the normal course of business primarily to manage interest rate risk or the risk of price or currency fluctuations.” These new rules do not apply to businesses already subject to industry-specific apportionment rules (e.g., financial institutions, transportation companies, etc.). Companies with a presence in Illinois that engage in hedging transactions should be aware of these provisions and evaluate their related documentation processes to ensure compliance with the new rules.

Under the new regulation, any income, gain or loss from a transaction identified as a hedge for federal tax purposes is generally excluded from the sales factor entirely. An exception applies if the taxpayer's books and records clearly identify a hedging transaction as managing risk relating to a particular item or items of gross receipts, including anticipated items of gross receipts that must be included in the sales factor. If the taxpayer’s books and records identify such a hedging transaction, any income, gain or loss from the hedging transaction is included in the denominator of the sales factor if the gross receipts from the hedged item are included in the denominator. Income, gain, or loss from hedging transactions are included in the Illinois numerator if the underlying gross receipts are sourced to Illinois. In situations where the underlying gross receipts are only partially included in the sales factor numerator, the related hedging income, gain, or loss must be sourced to Illinois in the same proportion as those underlying receipts. The regulations provide a series of examples to illustrate the application of the rules. Please contact Jeff Burns at 312-665-1077 or Brian Kuler at 312-665-5110 with questions.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.