State Tax Day - Current, S.4, Colorado—Multiple Taxes: Changes to Combined Reporting, Tax Credits, Exemptions, and More Enacted, (Jun 10, 2026)

Colorado has enacted tax legislation that makes changes to:

• combined reporting;

• listed tax haven jurisdictions;

• income tax additions and subtractions;

• income tax credits;

• sales and use tax exemptions;

• gasoline and special fuel tax allowances; and

• cigarette, tobacco, and nicotine tax allowances.

Combined reporting

For income tax years commencing on or after January 1, 2027, worldwide combined reporting becomes the default filing method for affiliated C corporations, with an option to elect water’s edge treatment. A water’s edge election is binding for 10 years and renews automatically at the end of that period unless the taxpayer withdraws the election.

Under a water’s-edge election, the combined group must include:

• all domestic members;

• foreign corporations if at least 20% of their property and payroll is attributable to U.S. sources;

• domestic international sales corporations (DISCs) and export trade corporations;

• any member incorporated in a designated tax-haven jurisdiction;

• the apportionable income of any foreign corporation in the affiliated group that is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States; and

• certain income and apportionment factors of corporations resident in countries that do not have a comprehensive income tax treaty with the United States that derive more than 20% of their net income, directly or indirectly, from intangible property or service-related activities that are deductible from the apportionable income of one or more members of the combined group.

Intercompany dividends, subpart F income, and net CFC tested income are eliminated from the combined report.

Tax haven jurisdictions

For income tax years commencing on or after January 1, 2027, Liechtenstein is removed as a listed tax haven jurisdiction.

Income tax additions and subtractions

Wages and salaries.--For income tax years commencing on or after January 1, 2027, Colorado eliminates its corporate income tax subtraction for wages and salaries paid that are not allowed to be deducted at the federal level pursuant to IRC Sec. 280C.

Capital gain reinvested in opportunity funds.--For income tax years commencing on or after January 1, 2027, taxpayers must add back to federal taxable income for Colorado tax purposes any capital gain or appreciation excluded from federal gross income pursuant to the special rules for capital gain reinvested in a qualified opportunity zone fund to the extent it was not from an investment in a Colorado Qualified Opportunity Fund. Taxpayers may subtract from federal taxable income the amount of deferred gain later included in federal gross income to the extent the gain was added back for Colorado purposes for a prior tax year.

Income tax credits

Wildfire hazard mitigation tax credit.—The allowable costs for which a landowner may claim the wildfire hazard mitigation tax credit have been expanded to include costs to thin woody vegetation that is or may be impacted by pine beetle or spruce beetle infestation. Also, for tax years 2027 through 2030, the maximum credit amount is increased from $1,000 to $2,000, the income limit for a landowner to be eligible for the credit is increased to from an inflation-adjusted $120,000 to an inflation-adjusted $300,000, and excess credit is refundable.

Small food business tax credit.--For income tax years commencing on or after January 1, 2027, the tax credit for the purchase of small food business recovery grant program equipment is expanded so it is available to additional food distributors and producers. Taxpayers will be able to claim the credit only if the credit equals $375 or more. The cap on the aggregate amount of small business food tax credits issued changes from $10 million for calendar years commencing before January 1, 2027, to $5 million for the calendar year commencing on January 1, 2027, and a total of $5 million for calendar years commencing on or after January 1, 2028. The time within which the Department of Agriculture must review and approve or disapprove an application for a credit must not exceed 150 days (previously, 90 days) after the filing of the application.

Industrial clean energy and geothermal energy tax credits.—For income tax years commencing on or after January 1, 2027, the industrial clean energy tax credit is expanded to be allowed to certain exempt entities, to allow the credit for expenditures to install equipment used for the utilization of biomethane, and to extend the period within which the Colorado Energy Office must complete its review of applications for the credit.

Also, beginning July 1, 2026, the Colorado Energy Office may carry forward any unused portion of the aggregate credit caps for the industrial clean energy and geothermal energy tax credits and allocate the previously unused portions of the credit caps to later years.

Decarbonization tax credits.--The innovative motor vehicle tax credit, the innovative truck tax credit, the heat pump technology and thermal energy network tax credit, and the electric bicycle tax credit will be available unconditionally in future tax years without regard to state revenues.

For the innovative motor vehicle tax credit, the base credit amount is increased from $1,000 to $2,000 for category 1 vehicles sold in 2027 and from $500 to $1,000 for category 1 vehicles sold in 2028. Also, for qualifying vehicles sold in 2027 and 2028, an additional tax credit of $2,500 is provided if the manufacturer’s suggested retail price (MSRP) is less than $40,000. No credit is allowed for category 1 vehicles sold in 2027 and 2028 that have an MSRP greater than $50,000.

For the electric bicycle tax credit, additional requirements are imposed on retailers that claim the credit in order to ensure compliance, and the Department of Revenue may disqualify retailers for false reporting or other noncompliance. For the electric bicycle and heat pump credits, the Department of Revenue is authorized to share confidential taxpayer information with the Colorado Energy Office pertinent to credit claims.

Sustainable aviation fuel tax credits.--The sustainable aviation fuel production tax credit is repealed after tax year 2026, and a new sustainable aviation fuel purchase tax credit is available for tax years 2027 through 2032.

Electric-powered lawn equipment tax credit.--The tax credit for the purchase of new electric-powered lawn equipment is available for an additional three years, through tax year 2029, and qualified retailers are allowed to receive quarterly advance payments of the credit.

Enterprise zone investment tax credits.—For income tax years commencing on or after January 1, 2027, a taxpayer who places a renewable energy project in an enterprise zone on or after January 1, 2027, and obtains certification to claim an enterprise zone investment tax credit may elect a refund option for the credit. The refund amount equals 80% of the credit amount.

For income tax years commencing on or after January 1, 2027, taxpayers are no longer allowed a tax credit for qualified investment in a commercial truck, truck tractor, tractor, or semitrailer with a gross vehicle rating of at least 54,000 pounds that is used in an enterprise zone.

Enterprise zone employer-sponsored health insurance tax credit.--The enterprise zone employer-sponsored health insurance tax credit is amended so that taxpayers may claim the credit for any two of the first ten full income tax years (previously, simply for the first two full income tax years) while located in an enterprise zone. Also, for income tax years commencing on or after January 1, 2027, businesses with 50 or more employees at any time during an income tax year cannot claim the credit for that tax year.

Enterprise zone research and experimental activities tax credit.--For income tax years commencing on or after January 1, 2027, the enterprise zone research and experimental activities tax credit is modified to require at least $150,000 in expenditures in qualified research and experimental activities.

Enterprise zone vacant building tax credit.--For income tax years commencing on or after January 1, 2027, the enterprise zone vacant building credit is expanded so that the credit applies to qualified buildings that have been unoccupied for any 135 calendar days within the 180 calendar days preceding when a rehabilitation is placed in service (currently, the required period of unoccupancy is at least two years). In addition, the credit will be allowed in an amount equal to 25% of the qualified expenditures per building or $200,000 (currently, $50,000) per building, whichever is less.

Earned income tax credit.--For income tax years commencing on or after January 1, 2028, the Colorado earned income tax credit is expanded to allow taxpayers over age 64 with no qualifying children to claim the credit. The current maximum age for taxpayers with no qualifying children is removed.

Residential energy storage systems tax credit.—The residential energy storage systems tax credit is now available for income tax years commencing before January 1, 2030 (previously, January 1, 2027).

Film festival incentive tax credit.--The film festival incentive tax credit is now effective for tax years commencing on or after January 1, 2026 (previously, January 1, 2027), and before January 1, 2036 (previously, January 1, 2037).

Sales and use tax exemptions

For tax periods beginning on or after July 1, 2027, the storage, use, or consumption of construction and building materials by or on behalf of a common carrier by rail operating in interstate or foreign commerce is exempt from state use tax (as well as state sales tax) when the storage, use, or consumption of the construction and building materials is pursuant to a contract with the state, a political subdivision of the state, or a special district that allows the contracting government to use the railroad's property or tracks for public passenger rail service. Also, a town, city, or county may not impose use tax on these materials.

The sales and use tax exemption for wood from salvaged trees killed or infested by mountain pine beetles and spruce beetles is extended through December 31, 2030.

The sales and use tax exemption for property used in space flight is repealed for property placed in service between January 1, 2027, and December 31, 2029, with the exemption reinstated beginning January 1, 2030.

Gasoline and special fuel tax allowances

For tax periods beginning on or after January 1, 2027, the allowance to cover losses in transit and in unloading gasoline or special fuel is changed from 2% to 1.5% of the total amount of gasoline or special fuel acquired during any calendar month. Further, the 0.5% allowance to cover the expenses of payment of the tax and bad debt losses is eliminated.

Cigarette, tobacco, and nicotine tax allowances

For tax periods beginning on or after January 1, 2027, the vendor allowances for cigarette, tobacco, and nicotine taxes are eliminated.

H.B. 1289, Laws 2026, effective June 3, 2026, and applicable as noted