The Colorado Department of Revenue has adopted rules providing guidance on foreign source income and Internal Revenue Code (IRC) Section 78-deemed dividends in Colorado. The rules are effective on May 30, 2023.
Foreign Source Income
Colo. Rev. Stat. §39-22-303(10) is amended with guidance regarding the definition of foreign source income, its exclusion, and the requirements to report any changes to that amount. “Foreign source income” means taxable income from sources outside the U.S. as used in IRC §862 and includes any such income considered in the federal foreign tax credit limit pursuant to IRC §904(a). The amended rule lists the items that must be excluded from and included in foreign gross income.
If a C corporation has elected to claim foreign taxes paid or accrued as a deduction on its federal income tax return, the portion of the foreign source income to be subtracted and excluded for state purposes is described and takes into consideration:
- Net income
- Foreign taxes added to federal taxable income (FTI)
- Foreign source income otherwise included in FTI for which foreign taxes were paid or accrued
- Total receipts included in the sales denominator for apportionment purposes
If foreign taxes paid are claimed as a federal tax credit, guidance is provided to calculate the state exclusion, including considerations like:
- Calculations for certain categories of income
- Inclusion of a Colo. Rev. Stat. §39-22-303(8)(b) entity in a combined-consolidated return
- The effective federal corporate income tax rate
- Federal tax redetermination under IRC §905(c)
IRC §78-Deemed Dividends
A new rule was created and adopted to provide clarification regarding the exclusion from FTI for amounts treated as dividends pursuant to IRC §78.
In general, under Colo. Rev. Stat. §39-22-304(3)(j), the state subtraction related to IRC §78 is limited to the amount treated as a dividend and included in a C corp’s FTI. Alternatively, no subtraction is allowed for amounts already deducted from FTI. In addition, the subtraction is not allowed for any amount under IRC §78 that is attributable to global intangible low-taxed income pursuant to IRC §951A and IRC §960(d); nor, to the foreign-derived intangible income deduction pursuant to IRC §250(a)(1)(B)(ii) in the calculation of FTI.
The subtraction under this new rule is allowed only to C corps subject to Colorado corporate income tax and excludes individuals, estates, and trusts.
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