June 7, 2022
Law firm clients | Colorado makes elective passthrough entity tax retroactive to 2018
Law firm clients organized as passthrough entities (PTEs) in Colorado should note that a recently enacted law (SB 22-124) makes Colorado's elective PTE tax (enacted in 2021 by the SALT Parity Act) retroactive to January 1, 2018. The new law also makes other changes to the PTE tax, as well as to the resident credit for taxes paid to other states. The SALT Parity Act was intended to enable most Colorado PTE owners to claim a federal tax deduction for state and local taxes exceeding the annual federal $10k deduction limitation ($5k for married individuals filing separately) imposed under IRC Section 164(b)(6), consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690). As originally enacted, the Colorado PTE election was available for tax years beginning on or after 1 January 2022.
Colorado is the first state to make its elective PTE regime retroactive. PTEs, including law firms, and their owners subject to Colorado taxation should consider these changes and follow the necessary procedures for making retroactive PTE elections under Colorado's new law. For federal income tax purposes, it is uncertain whether the IRS will respect such a lengthy retroactive election under Notice 2020-75 even if allowed by a state.
EY Tax Alert 2022-0829 provides details.