Colorado allows state tax deduction for denied CARES Act benefits

Denial of retroactive CARES Act benefits

In June 2020, the Colorado Department of Revenue (DOR) released emergency and proposed regulations that provided a new interpretation of Section 39-22-103, providing that only those federal amendments enacted prior to the end of the tax year to which they apply are applicable for Colorado state tax purposes. This interpretation meant that Colorado tax law would not apply the following retroactive CARES Act provisions to tax years beginning before Jan. 1, 2020:

• Changes that allow taxpayers to use of 50% (as opposed to 30%) of adjusted income for calculation of the interest limitation under IRC Section 163(j)
• The ability for taxpayers to offset 100% of taxable income with net operating loss carryforwards
• Increased deduction for business losses of individuals under IRC Section 461(l)
• Technical correction to allow 100% bonus depreciation for qualified improvement property (QIP) under IRC Section 168(k)

In late June 2020, the Colorado legislature passed House Bill (HB) 20-1420, which generally codified the DOR’s treatment of the first three items for 2018 through 2020. HB 20-1420 is silent on the treatment of QIP, which means the Tax Cuts and Jobs Act of 2017 QIP error would apply to pre-March 27, 2020, tax years.

Legislature change of heart

On Jan. 21, 2021, HB 21-1002 was signed into law to allow Colorado taxpayers to benefit from the CARES Act changes. The bill provides a deduction beginning with the 2021 tax year related to the CARES Act changes originally disallowed by the DOR and HB 20-1420. Generally, the deduction is equal to the excess of the Colorado income as reported for 2018 through 2020 tax years over the amount that would have been reported had the CARES Act retroactive benefits been allowed.

The deduction must be claimed on a taxpayer’s return filed for tax years beginning on or after Jan. 1, 2021, but before Jan. 1, 2022. The deduction allowed in any given year is limited, and any remainder is carried forward to the following year. The deduction limits are as follows:

• Tax year 2021: The lesser of Colorado taxable income or $300,000
• Tax years 2022-2025: The lesser of Colorado taxable income or $150,000
• Beginning with tax year 2026: Any deduction not claimed between 2021 and 2025 can be carried forward indefinitely and used with no cap