Colorado: Recently Enacted Legislation Restores CARES Act Benefits

House Bill 21-1002, which passed within the first few days of the Colorado legislative session, was signed into law on January 21, 2021 by Governor Polis. This bill creates a state income tax subtraction for corporations to offset previous decoupling from certain CARES Act provisions. Recall, Colorado has rolling conformity to the Internal Revenue Code. In June 2020, in response to the CARES Act, the legislature passed House Bill 20-1420, which required taxpayers to add back the difference between interest deducted for federal purposes under the amendments to IRC section 163(j) in the CARES Act and interest that would have been deducted under IRC section 163(j) prior to the CARES Act. House Bill 20-1420 also limited the Colorado NOL deduction to 80 percent of taxable income, despite the CARES Act temporarily allowing 100 percent of taxable income to be offset by NOLs at the federal level.  Around the same time, the Department of Revenue adopted an emergency regulation (later made permanent) providing that the state adopts changes to the IRC on a prospective basis only. That regulation prohibited taxpayers from applying the retroactive change in the CARES Act to the treatment of qualified improvement property (QIP) as eligible for 100 percent bonus depreciation.

House Bill 21-1002 seeks to offset the loss of the CARES Act-created tax benefits related to IRC section 163(j) and QIP in the prior years by authorizing corporations a new subtraction for income tax years beginning on or after January 1, 2021 but before January 1, 2022. The subtraction equals the sum of the amount by which a taxpayer’s Colorado “taxable income for the specified tax years” exceeds the taxable income for the Colorado “taxable income for the modified specified tax years” computed separately for each income tax year,  plus the amount added back by the taxpayer on its 2020 tax year return under Colo. Rev. Stat. §39-22-304(2)(i) (this is the statutory section that requires a taxpayer to add back the amount by which its federal interest expense deduction was increased due to the enactment of the CARES Act).  Once this sum is determined, the amount will be multiped by the taxpayer’s apportionment factor for the tax year.  “Taxable income for the specified tax years" means a corporation’s Colorado taxable income for tax years ending before March 27, 2020, as calculated under Colorado law applicable to the taxpayer's return as of the date the return was due. "Taxable income for the modified specified tax years" means the corporation’s Colorado taxable income for tax years ending before March 27, 2020, as calculated under the IRC and Colorado law applicable to the taxpayer's return as of the date the return was due, as modified by the retroactive provisions of the CARES Act (specifically with reference to the revisions to IRC section 163(j) under CARES Act section 2306 and the technical corrections to QIP under CARES Act section 2307) applied to the calculation of the taxpayer's federal taxable income. In performing this calculation, if the taxpayer sold QIP during the year to which the subtraction modification relates, the calculation is required to be done using the basis in such assets used to compute gain or loss on the sale as reported on the federal income tax return filed for that year.

In short, the deduction is calculated by adding up the following: (1) the amount that application of the retroactive provisions of the CARES Act would have reduced a taxpayer’s Colorado taxable income for each tax year ending before March 27, 2020; and (2) the amount the taxpayer was required to add back due to Colorado decoupling from the CARES Act changes to IRC section 163(j), multiplied by the taxpayer’s Colorado apportionment percentage for the applicable tax year.

The subtraction allowed each year applies after the application of other statutory subtractions allowed corporations, including the Colorado NOL deduction. For tax year 2021, the subtraction is capped by the lesser of the taxpayer’s state taxable income or $300,000. For tax years 2022 through 2025, the deduction amount is capped at the lesser of the taxpayer’s state taxable income or $150,000. For tax years after 2026, though the deduction will be limited by the taxpayer’s taxable income without specific cap. Please contact Derek Weisbruch at 303-382-7299 with questions on House Bill 21-1002.