On May 14, 2024, Colorado Gov. Jared Polis approved legislation which significantly amends the state’s combined reporting provisions to adopt the Multistate Tax Commission’s standard and to make them more consistent with the unitary business principle.1 For the 2026 and subsequent tax years, all members of an affiliated group that are members of a unitary business must file a combined report. Under existing law, a combined report is required to include only the affiliates that satisfy at least three of six specific unitary tests over three successive tax periods. Also, the legislation changes the way that the income or loss of affiliates is combined in the unitary business and apportioned to Colorado. Finally, for individual income tax purposes, the legislation increases the earned income tax credit and merges the existing child and dependent care expense tax credits into a single credit.
Combined reporting
Historically, the statutory requirements to determine the composition of the Colorado corporation income tax filing group has been inconsistent with the standards used in many other states that require unitary businesses to file a combined report. Per the Colorado legislature in its own legislative findings accompanying this bill, the historic combined filing rules are characterized as consisting of “arbitrary tests that have been difficult for taxpayers and the [Colorado] Department of Revenue to apply.”2 The legislature explains that including all amounts sourced to Colorado for the combined group best achieves unitary combined reporting, regardless of the separate entity to which those factors may be attributed. This legislation is intended to implement combined reporting standards that are more consistent with the standards used in other states.
Members included in combined group; computation of net income
Beginning with the 2026 tax year, all the members of an affiliated group of C corporations, wherever incorporated or domiciled, which are members of a unitary business3 must file a combined report as a combined group.4 The net income of each member of the group is combined, eliminating items of income, expense, gain and loss from transactions between members of the combined group.5 The income is determined by applying the consolidated filing rules under the Internal Revenue Code (IRC) and associated regulations as if the combined group were a consolidated filing group. Dividends received from another C corporation in the combined group are excluded from taxable income.6
Under existing law, in the case of an affiliated group of C corporations, the Department may require, or the taxpayer may file, a combined report, but the report must only include those members of the affiliated group if at least three of six specified tests of unity have been in existence in the current tax year and the two preceding tax years.7 The net income of the affiliated C corporations which are to be included in a combined report is determined by the rules and regulations under IRC Sec. 1502, as modified by Colorado law.8
Apportionment
The recent legislation includes apportionment provisions that begin with the 2026 tax year. Similar to existing law, the new subsection provides that the allocation and apportionment statute9 is used to determine how a combined group’s income or loss, or items making up income or loss, are allocated and apportioned to Colorado.10 Similar to current law, the numerator of the apportionment factor includes amounts sourced to Colorado for the combined group’s unitary business, regardless of the separate entity to which those factors may be attributed. The denominator includes amounts associated with the combined group’s unitary business wherever located.11 However, the new subsection adds the “unitary business” language to the statute. The new subsection also parallels existing law by providing that intercompany transactions among members of the combined group are excluded from the numerator and denominator of the apportionment calculation.12
Group members holding partnership interest
The legislation adds apportionment provisions if a member of the combined group holds a partnership interest from which it derives apportionable income.13 In this situation, the share of the partnership’s apportionment factor to be included in the combined group’s apportionment factor is determined by multiplying the partnership’s factor by a ratio. The numerator of the ratio is the amount of the partnership’s apportionable income properly included in the member’s income, whether received directly or indirectly, and including any guaranteed payments. The denominator of the ratio is the amount of the partnership’s total apportionable income.
In the case of a partnership that is unitary with the partner, receipts from intercompany transactions between the partnership and the partner, or any other members of the combined group, are excluded from the numerator and denominator as follows: (i) receipts from sales by the partner, or any member of the partner’s combined group, to the partnership to the extent of the partner’s interest in the partnership; and (ii) receipts from sales by the partnership to the partner, or any member of the partner’s combined group, not to exceed the partner’s interest in all partnership sales.14
Filing of combined report
The combined report must be filed under the name of the parent corporation if the parent is a member of the combined group.15 If there is no parent corporation, or if the parent is not a group member, the members of the group must choose a member to file the return. The filing member must remain the same in subsequent years, unless the filing member is no longer the parent corporation or is no longer a member of the combined group.16 Finally, members of the combined group are jointly and severally liable for the combined group tax liability included on the return.17
Earned income tax credit
Colorado provides an earned income tax credit (EITC) for residents who claim the corresponding federal income tax credit.18 Under existing law, the Colorado credit equals 25% of the federal credit claimed for the 2023 tax year, with such percentage changing to 38% for the 2024 tax year, 25% for the 2025 tax year, and 20% for the 2026 and subsequent tax years.19 The legislation increases the above percentages to 50% for the 2024 tax year, 35% for the 2025 tax year, and 25% for the 2026 and subsequent tax years.20 Beginning with the 2025 tax year, the percentage, and hence the credit, may be further increased if certain state annual revenue growth is achieved.21
Child and dependent care expense tax credits
For the 2026 and subsequent tax years, the legislation merges the existing child care expense income tax credits22 into one tax credit, the child and dependent care tax credit (CDCTC), with an adjusted gross income cap of $60,000.23 The amount of the state credit is increased from 50% to 70% of the corresponding federal credit provided by IRC Sec. 21.24 Beginning with the 2027 tax year, the adjusted gross income cap is adjusted for inflation.25
Commentary
The combined reporting provisions are significant and by adopting the Multistate Tax Commission’s combined reporting and unitary business provisions that are followed by other states, could make it somewhat easier for some multistate taxpayers to determine what members should be in the combined group. As acknowledged by the legislature, Colorado’s combined reporting statutes that were enacted in 1985 require satisfaction of three of six unity tests that require a close review of a variety of statistical tests that would not normally be tracked, creating compliance difficulties. Given that the new legislation may substantially change the composition of the members included in a combined group, taxpayers will need to thoroughly analyze these new provisions. However, as the provisions are not effective until the 2026 tax year, taxpayers have a lengthy opportunity to examine the provisions prior to their implementation. The Department is expected to provide administrative guidance concerning how the new unitary provisions will be applied.
The legislation also should be considered by taxpayers to the extent it amends the net income computation and apportionment provisions for combined groups to reflect the adoption of the unitary business language. Income sourced to Colorado is included in the combined group’s apportionment factor regardless of the location of the separate entity generating the income. Furthermore, the legislation addresses the apportionment of income in situations where group members receive apportionable income from partnership interests and excludes intercompany transactions if the partnership is unitary with the partner.
1 H.B. 24-1134, Laws 2024; Revised Fiscal Note for H.B. 24-1134, Colorado Legislative Council Staff, May 1, 2024.
2 COLO. REV. STAT. § 39-22-303(11.5)(a).
3 “Unitary business” is defined as a single economic enterprise made up either of separate parts of a single C corporation or of an affiliated group of C corporations that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. A unitary business includes that part of the business that is conducted by a taxpayer through the taxpayer’s interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities. COLO. REV. STAT. § 39-22-303(12)(e).
4 COLO. REV. STAT. § 39-22-303(11.5)(b)(I).
5 COLO. REV. STAT. § 39-22-303(11.5)(b)(II).
6 Id., see COLO. REV. STAT. § 39-22-303(9).
7 COLO. REV. STAT. § 39-22-303(11)(a). Note that the existing law continues to apply to tax years beginning prior to 2026. The six specific unitary tests include the following: (i) at least 50% of the affiliated C corporation’s gross receipts are from another affiliated C corporation; (ii) the affiliated C corporation receives at least 50% of certain services from affiliated C corporations without an arm’s-length charge; (iii) at least 20% of the affiliated C corporation’s long-term debt is owed to another C corporation; (iv) the affiliated C corporation uses intangible property owned by another affiliated C corporation or owns intangible property used by another affiliated C corporation; (v) at least 50% of the members of the affiliated C corporation’s board of directors are board members or corporate officers of another affiliated C corporation; and (vi) at least 25% of the 20 highest ranking officers of the affiliated C corporation are members of the board of directors or are corporate officers of an affiliated C corporation.
8 COLO. REV. STAT. § 39-22-303(11)(b).
9 COLO. REV. STAT. § 39-22-303.6.
10 COLO. REV. STAT. § 39-22-303(11.5)(b)(III)(A). The existing apportionment provisions are contained in COLO. REV. STAT. § 39-22-303(11)(c)(II)(B).
11 COLO. REV. STAT. § 39-22-303(11.5)(b)(III)(B).
12 COLO. REV. STAT. § 39-22-303(11.5)(b)(III)(C). The existing provision is contained in COLO. REV. STAT. § 39-22-303(11)(c)(I).
13 COLO. REV. STAT. § 39-22-303(11.5)(b)(III)(D).
14 Id. If a member of the combined group directly or indirectly receives an allocation of a partnership tax item, such as an item of loss or expense, so that it is not possible to determine the member’s share of apportionable income, the Department may promulgate rules for inclusion of particular partnership factors, or portions of factors, in the combined group’s factors. Id.
15 COLO. REV. STAT. § 39-22-303(11.5)(b)(IV).
16 Id.
17 COLO. REV. STAT. § 39-22-303(11.5)(b)(V).
18 COLO. REV. STAT. § 39-22-123.5; Revised Fiscal Note for H.B. 24-1134, Colorado Legislative Council Staff, May 1, 2024.
19 COLO. REV. STAT. § 39-22-123.5(2), (2.5), (2.7). The Colorado credit also may be claimed by taxpayers who would otherwise be able to claim the federal EITC but who are ineligible because they do not have a valid social security number. COLO. REV. STAT. § 39-22-123.5(2.5).
20 COLO. REV. STAT. § 39-22-123.5(2.5)(e)(2)(A)-(C).
21 COLO. REV. STAT. § 39-22-123.5(3.5).
22 COLO. REV. STAT. §§ 39-22-119; 39-22-119.5 (as amended, limited to tax years prior to 2026).
23 COLO. REV. STAT. § 39-22-119(1.7)(b); Revised Fiscal Note for H.B. 24-1134, Colorado Legislative Council Staff, May 1, 2024.
24 COLO. REV. STAT. § 39-22-119(1.7)(a)(I), (b).
25 COLO. REV. STAT. § 39-22-119(1.7)(c).
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