On Jan. 21, 2021, Colorado Gov. Jared Polis signed House Bill 1002, reinstating various deductions related the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The new law restores deductions related to net operating losses, excess business losses, section 163(j) and qualified improvement property.
In July 2020, Colorado enacted legislation decoupling from certain CARES Act provisions, requiring both individual and corporate taxpayers to make modifications to federal taxable income. Specifically, for tax years ending before Jan. 1, 2021, individuals, trusts and estates were required to add back to federal taxable income CARES Act adjustments to the net operating loss deduction, the excess business loss limitation and the section 163(j) limitation on business interest. Similarly, corporations were required to add back to federal taxable income CARES Act adjustments to the section 163(j) limitation on business interest.
House Bill 1002 does not eliminate those required adjustments to federal taxable income. Instead, the law allows both individual and corporate taxpayers in Colorado to subtract from federal taxable income the cumulative net effect of these add-backs for tax years beginning on or after Jan. 1, 2021 but before Jan. 1, 2022. The subtraction modification will be equal to the sum of the amount by which taxable income for “the specified years” exceeds taxable income for “the modified specified years.” Taxable income for “specified years” is defined as a taxpayer’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. In contrast, taxable income for “modified specified years” means a taxpayer's Colorado taxable income for tax years ending before March 27, 2020, as calculated under the internal revenue code and Colorado law applicable to the taxpayer's return as of the date the return was due, as modified by the application of the retroactive provisions of the CARES Act applied to the calculation of the taxpayer's federal taxable income.
For both individuals and corporations, the subtraction modification is applied after all other deductions and is limited to the lesser of $300,000 or the amount of Colorado taxable income. Any amount that cannot be deducted because of these limitations can be carried forward to subsequent tax years until exhausted, subject to certain restrictions.
All pass-through entities and C corporations doing business in Colorado should be aware of these changes. Colorado’s readjustments to the CARES Act NOL, interest expense and qualified business income deduction provisions can significantly affect current and future tax liabilities. Taxpayers should consult with their state and local tax professional for more information.