Colorado joins the throng of states enacting state and local tax (SALT) cap work-arounds with pass-through entity elections, with its own retroactive election twist. On May 16, 2022, Gov. Jared Polis signed Senate Bill 22-214 enacting the changes. This election is permitted for tax years starting on January 1, 2018, and S corporations or partnerships may benefit from the election. 1However, once the election is made, all the entity owners are bound by that choice for that tax year.2
To make the elections for tax years January 1, 2018 up to January 1, 2022, the Department of Revenue (DOR) will be issuing a single composite amended tax return, which will include all of the tax years the election is being made for but will only include changes directly related to the election.3 This return must be filed after September 1, 2023 but before July 1, 2024.4
The DOR has assured taxpayers that no interest or penalties will be incurred regarding the retroactive elections by either the taxpayer or the DOR.5 Entities will make this pass-through entity election on their yearly tax returns going forward.
Any credits for tax paid to other states will be unaffected by the calculations of the retroactive pass-through entity tax.6
The owners are given a refundable credit against their income tax liabilities based on their share of the entity’s income.7 The credit itself is determined by the owner’s allocated share of the tax as reported to the owner by the entity for the given tax year.8
To claim the credit, the entity must have paid the tax originally imposed and the owner must have given enough information to identify themselves as an owner.9 Entities not making the election are still subject to applicable laws and return requirements.10 The DOR will have one year from the filing date to make any adjustments to the returns and one year from a final determination to make any assessment on taxes owed.11
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- 1 Colo. Rev. Stat. 39-22-343(1)(a)
- 2 Colo. Rev. Stat. 39-22-343(1)(b)
- 3 Colo. Rev. Stat. 39-22-343(1)(c)(I)
- 4 Colo. Rev. Stat. 39-22-343(1)(c)(I)
- 5 Colo. Rev. Stat. 39-22-343(1)(c)(II)
- 6 Colo. Rev. Stat. 39-22-364
- 7 Colo. Rev. Stat. 39-22-347(1)(b)(II)(4)
- 8 Colo. Rev. Stat. 39-22-347(1)(b)(II)(2)
- 9 Colo. Rev. Stat. 39-22-347(1)(b)(II)(3)
- 10 Colo. Rev. Stat. 39-22-601(2.5)(e)
- 11 Colo. Rev. Stat. 39-22-343(1)(c)(II)