Colorado: Department Revises CARES Act Guidance

The Colorado Department of Revenue recently updated comprehensive guidance addressing the state’s conformity to the CARES Act (enacted March 27, 2020) and other federal COVID-19 relief acts. 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, for tax years beginning or ending between March 27, 2020 and December 31, 2020, to add back to federal taxable income 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 a regulation clarifying that Colorado does not incorporate federal statutory changes that are enacted after the last day of a tax year. Collectively, this meant that Colorado decoupled from many of the CARES Act changes for tax years ending before March 27, 2020, including the CARES Act provision that retroactively treated Qualified Improvement Property (QIP) as 15-year life property eligible for 100 percent bonus depreciation.

In January 2021,  House Bill 21-1002 was enacted to offset the loss of the CARES Act-created tax benefits related to IRC section 163(j) and QIP in 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 generally requires a corporation to calculate the difference between reported Colorado taxable income and the amount Colorado taxable income would have been reported had the CARES Act 163(j) and QIP provisions applied. This subtraction must be calculated for each affected tax year ending before March 27, 2020.

The guidance document addresses both individual and corporate conformity to the federal changes. It also provides additional instructions on computing the subtraction and discusses the limitations on the extent to which the subtraction may offset Colorado taxable income in any one year. Importantly, the document also includes certain examples related to QIP and clarifies the Colorado treatment of QIP placed in service in 2018 or 2019 when it was treated as 39-year life property for Colorado tax purposes. For taxpayers that took 100 percent bonus depreciation on QIP in 2018 or 2019 for federal purposes, no depreciation will be taken on the 2020 federal or Colorado return. However, such taxpayers will be allowed to “catch up” when they compute their subtraction in 2021. For tax years ending on and after March 27, 2020, Colorado conforms to the federal treatment of QIP, so any QIP placed in service in 2020 will be treated the same for federal and Colorado purposes. Please stay tuned to TWIST for additional conformity guidance.