Colorado Enacts Significant Tax Changes

On Aug. 28, Colorado enacted several bills that impact many areas of Colorado taxation. Following is a highlight of key provisions.

Selling tax credits for prepayment of tax

H.B. 25B-1004 authorizes the Colorado Department of the Treasury to sell up to $125 million of nonrefundable corporate income tax credits and insurance premium tax credits to companies authorized to do business in Colorado, with the proceeds of such sales going to the state’s general fund.

These credits will be sold through a bidding process. Treasury can contract or consult with an independent third party to manage the bidding process. The tax credit purchase amount will be the greater of 80% of the face value of the credits or a percentage Treasury or an independent third party determines to be consistent with current market conditions.

Credits first must be offered to taxpayers that are liable for the insurance premium tax and that have a qualified home office or regional home office in Colorado.

At the time of a successful bid and purchase of the tax credits, Treasury will issue a certificate that specifies the amount of tax credits available to offset the insurance premiums tax or corporate income tax in subsequent periods. If a credit is not fully used in a year, it can be carried forward to the next tax period. However, no purchased credit will be permitted to be used to offset tax in any taxable year beginning after Dec. 31, 2033.

The new law does not set a date for conducting the credit sales.

Crowe observation

The sale of tax credits is an attempt by Colorado to close current budget gaps by accelerating future tax payments at a discount of up to 20%.

Permanent Section 199A decoupling

Section 199A of the IRC provides a qualified business income (QBI) deduction allowing noncorporate businesses to deduct up to 20% of their qualified business income, subject to limitations. The deduction was set to expire after 2025 but was made permanent by the One Big Beautiful Bill Act (OBBBA).

Colorado enacted legislation to temporarily decouple state tax law from IRC Section 199A, which means that taxpayers are required to add back their Section 199A deduction when calculating Colorado taxable income. The addback applies for taxpayers filing singly with adjusted gross income over $500,000, and taxpayers filing jointly with adjusted gross income over $1 million. The most recent legislation applied to 2023 through 2025 tax years.

In response to the OBBBA making Section 199A permanent, H.B. 25B-1001 permanently decouples state tax law from IRC Section 199A.

Foreign-derived intangible income (FDII), now foreign-derived deduction eligible income (FDDEI) addback

The OBBBA renamed the Section 250 deduction for FDII the FDDEI deduction, with some key modifications.

Colorado historically conformed to the Section 250 FDII deduction. H.B. 25B-1002 creates an addition to corporate taxable income equal to the Section 250 FDDEI deduction applicable beginning with the 2026 tax year.

Tax haven expansion

Beginning with the 2022 tax year, Colorado required combined filing groups to include affiliates incorporated in certain foreign jurisdictions in its group for state tax purposes.

Beginning with the 2026 tax year, H.B. 25B-1002 adds Hong Kong, Ireland, Liechtenstein, Netherlands, and Singapore to the list of foreign jurisdictions required to be included in Colorado combined filing groups.

Sales tax vendor allowance repealed

Prior to Jan. 1, 2026, Colorado generally allows retailers to retain 4% of the state sales tax they collect (up to $1,000 each reporting period) as a credit for their expenses in collecting and remitting the tax (vendor allowance).

Applicable Jan. 1, 2026, H.B. 25B-1005 repeals the vendor allowance.

Insurance premium tax

Colorado’s insurance premium tax generally imposes a 2% tax on the gross amount of all premiums collected by insurance companies licensed in the state. Insurance companies with a home office in Colorado are taxed at a reduced rate of 1%.

Beginning with the 2026 tax year, H.B. 25B-1003 repeals the reduced insurance premium tax rate for insurance companies that qualify as having a regional home office in Colorado.

Looking ahead

States are looking for ways to raise revenue and are analyzing how best to respond to federal tax changes under the OBBBA. Colorado has approached these issues by tightening certain tax rules, decoupling from federal tax benefits, and authorizing state tax credit auctions.

Taxpayers should consult their tax advisers to model how these Colorado changes will impact them and to keep abreast of the latest developments.