Colorado Legislation Amends Combined Reporting, Other Income Tax Provisions

August 2021

BY

Scott SmithNational Tax Office Technical Practice Leader, State and Local Tax

Colorado enacted H.B. 21-1311 on June 23, 2021. The bill makes significant changes to Colorado unitary combined reporting, enacts other corporate income tax changes and modifies certain individual income tax provisions.
 

Combined Reporting, Other Corporate Income Tax Changes

Colorado currently uses the Joyce approach to compute the receipts factor for apportionment purposes in combined groups. However, for tax years beginning on or after January 1, 2022, Colorado adopts the Finnigan approach. Under the Finnigan approach, the Colorado sales from every member of a combined reporting group will be included in the numerator of the receipts factor, regardless of whether a member has substantial nexus with Colorado or is protected by P.L. 86-272.
 
The legislation also modifies Colorado’s definition of “affiliated group.” Prior to H.B. 21-1311, Colorado defined an affiliated group as one or more chains of includable corporations through stock ownership with a common parent. Beginning in 2022, Colorado amends the definition to mean one or more includable C corporations connected directly or indirectly through stock ownership with a common parent.
 
For tax years beginning on or after January 1, 2022, Colorado presumes that a C corporation is incorporated in a foreign jurisdiction for the purpose of tax avoidance if it is incorporated in a “listed jurisdiction.” A taxpayer can rebut the presumption by proving that the corporation incorporated in a listed jurisdiction meets the federal economic substance doctrine. If the taxpayer cannot overcome the presumption, then they must include any member of an affiliated group incorporated in a listed jurisdiction in their combined group.
 
For tax years beginning on or after January 1, 2022, Colorado also amends its definition of “federal taxable income” for corporate income tax purposes. For non-U.S. corporations that are not included in a federal consolidated tax return, federal taxable income is the corporation’s income or loss as determined by a profit and loss statement prepared on a separate entity basis and subject to an independent audit. It includes all income from wherever derived and is not limited to items of income from sources within the U.S. or to effectively connected income within the meaning of the Internal Revenue Code (IRC).

For tax years beginning on or after January 1, 2022, but before January 1, 2023, taxpayers must add back the amount equal to the federal deduction for business meals that exceed 50% of the amount allowed under IRC Section 274(n)(2)(D).
 

Individual Income Tax Changes

For tax years beginning on or after January 1, 2022, taxpayers with an adjusted gross income (AGI) of $400,000 or more must add back a portion of their federal itemized deductions to determine Colorado taxable income. Single filers must add back deductions exceeding $30,000 and joint filers must add back deductions in excess of $60,000. In addition, the net capital gains income tax subtraction of up to $100,000 is repealed, in part. Only net capital gains realized on the sale of agricultural land qualify for the subtraction.

The addback of IRC Section 199A qualified business income deductions for tax years 2021 and 2022 was extended to 2025. This rule applies to taxpayers with AGI exceeding $500,000 for single filers and $1,000,000 for joint filers.