Colorado amends tax law in response to federal CARES Act

On July 11, 2020, Colorado Governor Jared Polis signed into law, House Bill 20-1420, known as the “Tax Fairness Act,” (the Act). Additionally, on June 26, 2020, the Governor signed House Bill 20-1024 into law, which relates to the state’s net operating loss (NOL) deduction.

Discussed in further detail below are the key tax provisions in the Act and the impact of HB 20-1024. The Act is in response to the federal CARES Act impact to Colorado, including impacts to the:

• Net operating loss (NOL) deduction
• Excess business loss deduction under I.R.C. Section 461(I)
• Deduction for business interest expense under I.R.C. Section 163(j)
• Deduction for qualified business income under I.R.C. Section 199A provided by the CARES Act

House Bill 20-1420: Tax Fairness Act

Effective for income tax years ending on and after March 27, 2020, and before Jan. 1, 2021, the Act requires individual, estate, and trust taxpayers to add the following to federal taxable income:

• An amount equal to the difference between the NOL deduction under I.R.C. Sec. 172(a) prior to the CARES Act and the taxpayer’s NOL deduction after the CARES Act. Therefore, Colorado taxpayers are limited to the 80% NOL deduction in existence prior to the passage of the CARES Act, and must add back any additional NOL taken on the 2020 federal income tax return.
• An amount equal to the taxpayer’s excess business loss deduction under I.R.C. Sec. 461(I) without regard to Section 2304 of the CARES Act. Therefore, a taxpayer with 2020 losses in excess of $250,000 ($500,000 for married taxpayers filing jointly), must add back any additional business loss deduction taken on the 2020 federal income tax return.
• An amount equal to the amount in excess of the limitation on business interest under I.R.C. Sec. 163(j) without regard to Section 2306 of the CARES Act. Therefore, a taxpayer must add back any additional business interest expense deducted on the 2020 federal income tax return that’s above the 30% adjusted taxable income limitation. This addback applies to corporations as well.

Effective for income tax years beginning on or after Jan. 1, 2021, and before Jan. 1, 2023, the Act requires individual, estate, and trust taxpayers to add to federal taxable income, an amount equal to the qualified business income (QBI) deduction under I.R.C. Sec. 199A for taxpayers filing a single return with an adjusted gross income greater than $500,000, ($1,000,000 for married taxpayers filing jointly). This addback doesn’t apply to taxpayers filing a Schedule F (farmers and other agricultural activity), as an attachment to the federal income tax return, regardless of whether the Schedule F activity generates the QBI deduction. Therefore, qualifying taxpayers are required to add back the portion of the allowable 20% qualified business income deduction taken on the federal income tax return.

Additionally, for losses incurred after Dec. 31, 2017, the Act amends Colorado’s NOL deduction to apply the 80% limitation under I.R.C. Sec. 172(a)(2) without regard to Section 2303 of the CARES Act. This limitation provided by the Act shall apply to all taxpayers and for all tax periods beginning after Dec. 31, 2017. Therefore, all Colorado taxpayers are limited to an 80% NOL deduction for tax periods beginning on or after Jan. 1, 2018. The 2020 addback provision applies to individual, trust, and estate taxpayers only; corporate taxpayers aren’t required to add back any excess NOL taken on the 2020 federal income tax return and can carryforward the excess NOL. 

HB 20-1024: Net operating loss deduction modifications

House Bill 20-1024 requires corporations generating NOLs in income tax years beginning prior to Jan. 1, 2021, to carry forward the loss for the same number of years as allowed for a federal NOL; NOLs of corporations cannot be carried back to an earlier year. NOLs of corporations generated in tax years beginning on or after Jan. 1, 2021, can be carried forward for 20 years and cannot be carried back to an earlier year. Therefore, corporate taxpayers generating an NOL in 2019 or 2020 can carry forward the NOL indefinitely, but are limited to a 20-year carryforward for NOLs generated in 2021 or after, and NOL carrybacks aren’t allowed.

Financial institutions to which I.R.C. §§ 585 or 593 apply, suffering an NOL for any tax year beginning on or after Jan. 1, 1984, and before Jan. 1, 2021, may carry forward any unused NOL to each of the 15 years following the taxable year of such loss.