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In supplemental instructions to Colorado's 2021 corporate income tax return, the Colorado Department of Revenue corrected the placement of a subtraction for certain retroactive deductions under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) deductions enacted in 2021 as part of House Bill 21-1002.

Background

House Bill 21-1002 (HB 21-1002), enacted on January 21, 2021, allowed taxpayers that accelerated certain federal income tax deductions under the CARES Act to subtract the corresponding state income tax benefit starting in 2021. HB 21-1002 was intended to offset previous decoupling¹ from certain provisions of the CARES Act.

The Colorado subtraction specifically concerns modifications to the following federal income tax deductions enacted under the CARES Act:

• Retroactive changes to net operating losses (NOLs) under IRC Section 172(b)(1)(D) (CARES Act Section 2303)
• Relaxation of IRC Section 461(l) limitations on deduction of excess business losses by individuals (CARES Act Section 2304)
• Business interest expense limitations under IRC Section163(j)) (CARES Act Section 2306)
• Qualified improvement property (QIP) under IRC Section 168(e)(3)(E) (CARES Act Section 2307))

The original instructions for Colorado's 2021 corporate income tax return called for the subtraction to be placed on line 13 of Form DR 0112, which resulted in an incorrect computation of Colorado taxable income.

Supplemental instructions

The supplemental instructions require taxpayers to place the subtraction on line 17 of Form DR 0112, after completing a worksheet found in the supplemental instructions. The allowable subtraction is an aggregate amount, calculated in multiple steps based on the specified tax years affected by the CARES Act. The steps are as follows:

1. For each tax year ending before March 27, 2020, calculate the difference between Colorado taxable income based on Colorado law and what Colorado taxable income would have been had certain retroactive provisions of the CARES Act applied to that tax year.
2. Aggregate the differences calculated for each year.
3. Increase the subtraction amount by any business interest deduction that must be added back under Colo. Rev. Stat. 39-22-304(2)(i) for any specified tax year.

Corporations required to allocate and apportion income under Colorado law for one or more of the specified tax years must multiply their apportionment factor for the tax year by the taxable income difference calculated in Step 1 for each year and the interest deduction addback in Step 3 for that tax year (to the extent that the retroactive provisions of the CARES Act would have reduced apportionable income). The subtraction represents an apportioned amount that should not be multiplied by the apportionment factor for tax year 2021.

Implications

Corporations should consult the supplemental instructions for the correct computation and placement of the subtraction adjustments.

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ENDNOTES

¹ Colorado has rolling conformity to the Internal Revenue Code. In response to the CARES Act, House Bill 20-1420 (HB 20-1420) was enacted in July 2020, requiring taxpayers to add back the difference between interest deducted for federal income tax purposes under the CARES Act amendments to IRC Section 163(j) and interest that would have been deducted under IRC Section 163(j) before the CARES Act. HB 20-1420 also limited the Colorado NOL deduction to 80% of taxable income notwithstanding the CARES Act provision allowing federal NOLS to offset 100% of taxable income. Under regulations from the Colorado Department of Revenue, Colorado adopts changes to the IRC on a prospective basis only. The regulations prohibit taxpayers from applying the retroactive change in the CARES Act to the treatment of QIP as eligible for 100% bonus depreciation.