Colorado recently enacted two significant tax bills, HB 26-1289 and HB 26-1223, which have significant impacts on corporate income tax, sales and use tax, and numerous tax credit programs. Most provisions will come into force on January 1, 2027. Taken together, the legislation represents one of the state’s most comprehensive tax reforms in recent years.
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Worldwide combined reporting
HB 26-1289 fundamentally changes Colorado’s corporate tax system by making worldwide combined reporting the standard filing method for uniform business groups beginning with tax years beginning on or after January 1, 2027. Taxpayers can instead opt for reporting based on an original return filed on time. The election is generally binding for ten years and is automatically extended unless it is positively revoked.
The legislation also seeks to reduce double taxation by eliminating multiple inclusion of certain intercompany dividends, Subpart F income and controlled income of foreign corporations within the combined group. At the same time, in order to curb income shifting through related party transactions, the legislation prohibits deductions for certain payments to affiliates excluded from the combined group for services or the use of intangible assets.
Software and Software as a Service (SaaS) are subject to Colorado sales tax
HB 26-1223 significantly expands Colorado’s sales and use tax base by making virtually all retail sales of computer software taxable beginning January 1, 2027, regardless of how it is delivered. The legislation repeals Colorado’s previous exemption for downloaded software and expands tax liability to electronically delivered software, including software accessed remotely over the Internet, mobile applications, and software as a service. In particular, the legislation maintains two important exceptions: custom software developed for a specific customer and software subject to a truly negotiated license agreement.
These changes impact software developers, SaaS providers, software resellers, and companies that purchase cloud-based software. Additionally, out-of-state software providers with sales in Colorado should consider whether the expanded tax base imposes new collection or compliance obligations.
Enterprise Zone and Tax Credit Changes
HB 26-1289 also limits several tax incentives in Colorado beginning in 2027. Among other changes, the enterprise zone health insurance credit is limited to employers with fewer than 50 employees, while the research and experimental activities credit now requires at least $150,000 in qualifying expenses and is calculated using a revised methodology. The legislation further modifies numerous clean energy incentives, expands certain automobile credits, revises wildfire mitigation credits, and creates a new credit for the purchase of sustainable aviation fuel.
I’m looking forward to
Although most provisions will take effect on January 1, 2027, taxpayers have a limited window of time to prepare. Business groups should evaluate the impact of mandatory global combined reporting and carefully consider whether a choice at water’s edge is justified. Businesses benefiting from Colorado’s enterprise zone and other tax credits should consider their continued eligibility under the revised rules, while software providers and buyers should consider how HB 26-1223 may impact the taxability of their transactions and associated compliance obligations. Early planning can help taxpayers identify restructuring, reporting and compliance considerations before the new rules take effect.
If you have any questions about how these upcoming changes to Colorado tax laws will impact you and your business, please contact your CBIZ SALT team member.
https://www.cbiz.com/insights/article/colorado-enacts-worldwide-combined-reporting
