On May 16, 2022, Colorado Governor Jared Polis signed Senate Bill 22-124 (SB 22-124) expanding and clarifying the originally enacted elective pass-through entity (PTE) tax regime. As explained below, these changes may allow taxpayer owners of partnerships and S corporations to recoup the Federal benefits of certain state and local taxes paid in excess of current tax limits.
Background and Retroactive Application
The SALT Parity Act (the "Act") passed in 2021 was intended to enable Colorado business owners to deduct, for federal income tax purposes, state and local taxes exceeding the annual federal $10,000 deduction limitation. The original legislation passed by Colorado made this change available for tax years beginning on or after January 1, 2022.
SB 22-124 amends the Act to allow PTEs and their owners access to the elective PTE tax regime retroactively for tax years beginning on or after January 1, 2018 through December 31, 2021. To make the election on a previously filed return, taxpayers need to file an amended composite tax return on or after September 1, 2023, but before July 1, 2024. For tax years beginning on or after January 1, 2022, the procedure for making the election is unchanged by SB 22-124, i.e., the PTE tax election must be made on the return filed by the electing PTE and is binding on all the electing PTE's owners. Note that the PTE tax is assessed using the corporate income tax rate applicable to the particular year (4.63% for 2018 and 2019 and 4.55% for 2020, 2021 and 2022).
The Colorado Department of Revenue will not assess any late-filing interest or penalty for filing amended composite returns. In addition, they must make any assessments within one year after a final determination is issued. These final determinations may be enforced at any time within six years of the date of the determination.
Electing PTE Owner Credits
The Act originally allowed electing PTE owners’ share of income taxed at the entity level to be excluded from their Colorado taxable income. Under SB-22-124, this exclusion is replaced by a refundable credit at the owner level for their share of elective PTE tax paid.
Individualized Planning Opportunity
Prospective and retroactive PTE election benefits will need to be assessed on a case-by-case basis, weighing tax attributes, individual income thresholds and administrative costs. The timing for the deduction of PTE taxes will also depend on the overall accounting method of the PTE.
If you have any questions regarding PTE, please contact your trusted advisor at Reese Henry.