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May 16, 2024

Colorado replaces unique "three of six" combined reporting test with MTC standard starting in 2026

Colorado will adopt the Multistate Tax Commission's standard for combined reporting for tax years beginning on or after January 1, 2026 under House Bill 24-1134 (HB 24-1134), which was approved by Governor Jared Polis on May 14, 2024.1

HB 24-1134 moves away from Colorado's unique "three of six" test and creates new section Colo. Rev. Stat. 39-22-303(11.5), requiring the members of an affiliated group of C corporations that are members of a unitary group to file a combined report.

A unitary business is defined under the new statute as "a single economic enterprise of an affiliated group of C corporations that, through their activities, are sufficiently interdependent, integrated, and interrelated to provide a sharing, exchange, or significant flow of value to the separate parts." A unitary business includes any business that is conducted by a member of the group through an interest in a partnership, whether held directly or indirectly through a series of partnerships or pass-through entities. Colorado's existing water's edge method is retained by HB 24-1134.

Net income of each combined group member will be computed the same as it currently is under existing law but with intercompany transactions eliminated. HB 24-1134 expressly applies federal consolidated return rules for determining intercompany eliminations as if the combined group were a consolidated filing group. Dividends between members of the combined group will continue to be eliminated as under existing law.

HB 24-1134 adopts the Finnigan rule for determining the combined group's apportionment factor — i.e., all Colorado-sourced receipts of combined group members are includable in the receipts factor numerator, regardless of whether the member has Colorado nexus. Intercompany transactions, including intercompany transactions between a corporate partner and a partnership with which the corporate partners have a unitary relationship, will be excluded from the numerator and denominator. The exclusion is as follows: (1) in the case of sales by the corporate partner to the partnership to the extent of the corporate partner's interest in the partnership; and (2) in the case of sales by the partnership to the corporate partner not to exceed the corporate partner's interest in all partnership sales. The Colorado Department of Revenue is authorized to promulgate rules in this area.

If a member of the combined group holds a partnership interest, the share of the partnership's apportionment factor to be included in the combined group's apportionment factor is determined by multiplying the partnership's apportionment factor by the ratio of the corporate partner's share of the partnership's apportionable income over the partnership's total apportionable income.

The law requires the combined report to be filed by the parent corporation of the combined group. If no parent corporation exists, or if the parent corporation is not a member of the combined group, the members of the group are to designate the filing member. Members of the combined group will be jointly and severally liable for the tax liability of the combined group. An affiliated group of C corporations may continue to elect to file a consolidated return as otherwise provided under Colorado law.


HB 24-1134 aligns Colorado's combined reporting rules with those of other states. The legislature indicated that the existing "three of six" test is unique to Colorado, uses standards that are difficult for both taxpayers and the Colorado Department of Revenue to apply and creates "unnecessary tax compliance challenges."

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1 HB 24-1134 would take effect the day after the expiration of the 90-day period after the legislature finally adjourns. If, however, a referendum petition is filed against this legislation within that period, HB 24-1134 would not take effect unless approved by voters during the November 5, 2024 general election.

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Contact Information

For additional information concerning this Alert, please contact:

State and Local Taxation Group

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor