On May 16, 2022, Colorado Gov. Jared Polis signed Senate Bill 124 in to law, which provides for retroactive applicability of the state’s previously enacted pass-through entity (PTE) tax election. House Bill 1327, enacted in June 2021, established an elective PTE tax regime for certain Colorado partnerships and S corporations, effective for tax years beginning on or after Jan. 1, 2022. For more information on these original provisions, see our article Colorado enacts numerous tax-related bills.
Retroactive applicability
The new law allows eligible partnerships and S corporations to amend prior filings and retroactively elect to pay tax at the PTE level for tax years beginning on or after Jan. 1, 2018. The entity-level tax will be imposed at the corporate income tax rate applicable to each of the tax years covered by the retroactive election—4.63% for 2018 and 2019 and 4.55% for 2020 and 2021.
The election to participate in the PTE level tax regime on a retroactive basis must be made on or after Sept. 1, 2023, and before July 1, 2024, by filing a composite amended tax return on behalf of all the PTE’s owners. Taxpayers making the retroactive election will not be subject to any penalties or interest associated with late filing, late payment or failure to make estimated payments that might normally apply to typical amended return filing situations. Further, the law provides that the state will be limited to one year from the date of the filing of the amended return to make additional assessments related to the PTE level tax.
Changes to the credit for taxes paid
The original provisions of the PTE tax statute provided for an exclusion from Colorado income for the PTE owners’ share of income taxed at the entity level. Senate Bill 124 replaces the exclusion with a refundable credit at the PTE-owner level for their share of tax paid under the elective PTE tax regime.
Takeaways
Colorado’s new law creates the potential for partnerships and S corporations to make a retroactive PTE tax election and mitigate the owner-level impacts of the federal SALT deduction cap for all tax years to which it has been applicable. Depending on specific taxpayer fact patterns, this could represent a significant benefit for owners of PTEs with Colorado operations and activity. However, it is important to also consider the many ‘hidden’ costs of making a retroactive election. For example, a decision to amend prior year PTE returns to elect into the regime would also require the filing of amended returns by every owner of the PTE—this could create considerable compliance burdens for certain affected taxpayers. Specifically, large, multi-state, PTEs should carefully model and understand the administrative costs before electing.
As with all elective PTE level tax regimes, it is vital to carefully consider all applicable facts, cost considerations and tax impacts. Not all owners may benefit from such an election. Please contact a qualifying state and local tax adviser for questions about Colorado’s PTE election or other state workarounds.
