On July 11, 2020, Colorado Gov. Jared Polis signed House Bill 1420, addressing several conformity issues related to the federal Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Specifically, the legislation will require modifications for both individual and corporate taxpayers in Colorado.
Addbacks to federal taxable income
Individual income tax
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
- 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 net operating loss deduction as determined under federal law after the amendments made by section 2303 of the CARES Ac
- an amount equal to a taxpayer's excess business loss as determined under section 461(l) of the 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 capital losses or 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 section 163(j) of the internal revenue code 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)
Corporate income tax
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 an amount equal to the amount in excess of the limitation on business interest under section 163(j) of the internal revenue code without regard to the amendments made to section 163(j) by section 2306 of the CARES Act.
For more information on the federal tax changes implemented by the CARES Act, please see RSM’s CARES Act portal.
NOL limitations and carry back provisions
House Bill 1420 clarifies that for Colorado tax purposes, the 80% limitation on NOLs set forth in section 172(a)(2) of the internal revenue code 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 carry back of NOLs.
Other net operating loss modifications
On June 26, Gov. Polis signed House Bill 1024, decoupling from the federal unlimited carryforward for net operating losses. Accordingly, net operating losses of corporations generated in income tax years commending on or after Jan. 1, 2021 may be carried forward for 20 years. Net operating losses carry-backs continue to be prohibited.
House Bill 1024 also eliminates the specific 15-year carryforward for financial institution net operating losses for years before Jan. 1, 2021. Financial institution net operating losses are treated as other taxpayers beginning on Jan. 1, 2021. Colorado had conformed with the federal carryforward of 20 years until the Tax Cuts and Jobs Act extended the carryforward indefinitely. The reversion to the pre-TCJA carryforward is not expected to significantly impact Colorado income tax revenues.
Takeaways
All pass through entities and C corporations doing business in Colorado should be aware of these changes. Colorado’s decoupling from CARES Act NOL, interest expense and qualified business income deduction provisions can significantly affect current and future tax liabilities. Taxpayers that may be impacted by the Colorado changes are encouraged to speak to their state and local tax advisers.
For more information on the coronavirus, please see RSM’s Coronavirus Resource Center which includes related and frequently updated developments.
