03 September 2025 Colorado enacts tax changes impacting businesses and individuals during special legislative session
On August 28, 2025, Colorado Governor Jared Polis signed several bills passed during a special legislative session convened to address a state budget deficit resulting from passage of the "One Big Beautiful Bill Act" (OBBBA)1 and to enact other tax measures. The enacted changes impact state corporate and individual income taxes and state sales and use taxes, as well as certain tax credits. The federal QBI deduction, which was enacted in 2017 as part of the Tax Cuts and Jobs Act, allows eligible self-employed individuals and owners of pass-through entities to deduct up to 20% of their QBI. The OBBBA made the QBI deduction permanent and increased the existing phase-out range.2 In 2020, the Colorado legislature enacted a QBI addback, which initially applied to 2021 and 2022 and was later extended through 2025. House Bill 25B-1001 makes permanent the state's QBI addback in alignment with the OBBBA changes. Colorado law requires corporations incorporated in tax havens to be included in a combined report. The state uses a "listed jurisdiction" approach, which, for tax years beginning on or after January 1, 2026, is expanded to include Hong Kong, Ireland, Liechtenstein, the Netherlands, and Singapore. Current law provides that a corporation is presumptively incorporated in a foreign jurisdiction for the purpose of tax avoidance if it is incorporated in a listed jurisdiction. A taxpayer may rebut the presumption by proving to the satisfaction of the executive director of the Colorado Department of Revenue that incorporation in a listed jurisdiction was for reasons that meet the IRC Section 7701(o) economic substance doctrine. House Bill 25B-1002 (HB 25B-1002) adds language allowing the executive director to use discretion in making such a determination. Additionally, HB 25B-1002 creates an addback to federal taxable income in an amount equal to the federal deduction for foreign-derived deduction eligible income (FDDEI) under IRC Section 250.3 HB 25B-1002 also removes restrictions on which IRC Section 78 dividends from foreign subsidiaries can be subtracted from federal taxable income. This change allows all IRC Section 78 dividends to be deducted regardless of foreign jurisdiction. These changes apply to tax years beginning on or after January 1, 2026. Under current law, Colorado reduces the insurance premiums tax rate for companies with a home office or regional home office in Colorado. The legislature, referring to findings from the Colorado State Auditor, concluded that the reduced tax rate has not met its intended purpose of creating an incentive to "maintain a substantial workforce presence in the state." Consequently, House Bill 25B-1003 repeals the reduced 1% rate effective January 1, 2026, at that time, all insurers will be subject to the standard 2% rate. Beginning in Colorado's fiscal year 2025-26, House Bill 25B-1004 authorizes the Colorado Treasurer (Treasurer) to sell insurance premiums tax credits to insurance companies and corporate income tax credits to corporations that do business in Colorado, subject to procedures established by the state Treasury Department. The Treasurer is authorized to issue tax credit certificates in an amount equal to the lesser of $125 million in total certificate face value or total sales proceeds of up to $100 million, plus any administrative costs associated with the issuance of the credits. The Treasurer may contract with an independent third-party entity to conduct or consult on the bidding process. The Treasurer must offer qualified insurance companies that have a qualified home office or regional home office in Colorado the first right to purchase the tax credits. Regarding corporate income tax credits, C corporations authorized to do business in Colorado must apply to purchase the credit. Corporations that submit an application "shall make a timely and irrevocable offer, contingent only on the Department's issuance to the C corporation of the tax credit certificates, to make a specified purchase payment amount to the Department on dates specified by the Department … " The purchase price for the tax credit certificates must be set at the greater of a percentage determined in a manner consistent with market conditions as of the offer date established by the Treasurer or independent third-party, or 80% of the certificate amount. For tax credit certificates issued in FY 2025-26, the Treasurer, in consultation with the Governor's Office of State Planning and Budget, may determine the calendar years in which the taxpayer may claim the credit. Under current law, retailers are allowed to keep 4% of their state sales tax collections, up to $1,000 per retailer per filing period, to cover their expenses of collecting state sales tax on behalf of the state. This allowance is known as the sales tax vendor fee. House Bill 25B-1005 eliminates the state sales tax vendor fee beginning January 1, 2026. This change only applies to the state sales tax and has no impact on the vendor fee allowances that are permitted for state-collected local jurisdictions (districts, counties and certain municipalities) and home rule self-collected municipalities. Vendor fee allowances vary by jurisdiction. Taxpayers may want to consider the impact of these legislative changes on their Colorado state tax liabilities. With Montana recently ending its "listed jurisdiction" approach to tax havens, Colorado is now the only state that uses that approach, the criticisms of which are well documented. HB 25B-1003 authorizes the Department of Revenue to make a determination as to whether a taxpayer has rebutted the presumption of tax avoidance. This seems to be an invitation to taxpayers looking for certainty to seek a ruling based on their facts and circumstances. Taxpayers subject to the insurance premiums tax and corporate income tax may want to consider the provisions allowing for the purchase of tax credits.
Document ID: 2025-1788 | ||||||||
