States everywhere continue to process through the impact that the COVID-19 pandemic has had on state tax revenues. Colorado is no exception, and over the summer, several changes occurred of which businesses with activities within the Centennial State should be aware.
Income Taxes— H.B. 1420 and H.B. 1024
The economic downturn in 2020 has reduced state tax revenues and increased expenditures. In an attempt to shore up state coffers, the Colorado government enacted two bills this summer aimed at increasing tax revenue by decoupling the Colorado income tax code from certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA).
House Bill 1420
H.B. 1420 establishes for income tax years ending on and after the enactment of the CARES Act but before Jan. 1, 2021, and for income tax years beginning on and after the enactment of the CARES Act but before Jan. 1, 2021, taxpayers must add to federal taxable income:
Individual Income Tax
- An amount equal to the difference between a taxpayer's net operating loss (NOL) deduction as determined under federal income tax law before the amendments made by Section 2303 of the CARES Act (relating to modifications of federal net operating losses), and the taxpayer's NOL deduction as determined under federal law after the amendments made by Section 2303 of the CARES Act.
- An amount equal to a taxpayer's excess business loss as determined under Section 461(l) of the Internal Revenue Code (IRC) without regard to the amendments made by Section 2304 of the CARES Act (relating to modifications of loss limitations), but with regard to the technical amendment made by Section 2304(b)(2)(B) of the CARES Act. The technical amendment states that the losses are determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee.
- An amount equal to the amount in excess of the limitation on business interest under IRC Section 163(j) without regard to the amendments made to Section 163(j) by Section 2306 of the CARES Act (relating to modifications of the business interest limitation).
- An amount equal to the deduction allowed under IRC Section 199A for a taxpayer who files a single return and whose adjusted gross income is greater than $500,000, and for a taxpayers who file a joint return and whose adjusted gross income is greater than $1 million; except that this subsection does not apply to a taxpayer who files a Schedule F, profit or loss form farming, or successor form, as an attachment to a federal income tax return.
Corporate Income Tax
- An amount equal to the amount in excess of the limitation on business interest under IRC Section 163(j) without regard to the amendments made to Section 163(j) by Section 2306 of the CARES Act.
H.B. 1420 clarifies that for Colorado tax purposes, the 80% limitation on NOLs set forth in IRC Section 172(a)(2) remains applicable. The state does not adopt the amendments made by Section 2303 of the CARES act, which temporarily removed the 80% NOL limitation for federal income tax purposes. In addition, Colorado has not adopted the changes made by Section 2303 of the CARES Act relating to the carryback of NOLs.
House Bill 1024
With H.B. 1024, Colorado decoupled from unlimited carryforward of NOLs. Thus, corporation NOLs generated in income tax years commencing on or after Jan. 1, 2021 may be carried forward for 20 years. NOL carrybacks are still disallowed.
H.B. 1024 also eliminates the specific 15-year carryforward for financial institution NOLs for years before Jan. 1, 2021. Financial institution NOLs are treated as other taxpayers beginning on Jan. 1, 2021. Colorado had conformed with the federal carryforward of 20 years until the TCJA extended the carryforward indefinitely. The reversion to the pre-TCJA carryforward is not expected to significantly affect Colorado income tax revenues.
Sales and Use Tax Update? Sales and Use Tax Simplification Task Force
Lawmakers pushed legislation to delay the meeting of the Colorado Sales and Use Tax Task Force until next year while they focused on their coronavirus response. The Task Force’s purpose is to simplify compliance for e-commerce and other businesses in Colorado’s complex sales and use tax regime. Colorado’s system of state and local taxation is considered to be one of the most complicated for remote sellers and marketplace facilitators.
But 2020 did see progress on two important projects — a statewide filing portal and a geographic information system for tax rates. The statewide portal is “ready-to-go” according to lawmakers and a handful of home-rule cities have already signed up for testing. The geographical information system was launched and replaces the “hold-harmless” databases for tax rate searches. The new system also allows users to pinpoint a location on a map — without an address — and access tax rates. Since Colorado went to “destination-sourcing” for all state collected taxes last year, this was an important and needed development.
For More Information
For more information about how Colorado’s state and local tax updates affect you and your business, please contact Marshall Ferris.
Published on September 30, 2020