Colorado legislation enacts combined reporting rule change

The Colorado governor signed legislation on May 14, 2024 (the Legislation), which changed the standards for filing a unitary combined return for tax years beginning on or after Jan. 1, 2026. (See HB 24-1134).

Historically, Colorado has employed a “three of six unitary test” to determine if a combined return is permitted. Specifically, members of an affiliated group of C corporations may be included in a combined return when at least three of the six-part intercompany business relationship test is met for the current year and the two preceding years. This test is generally unique to Colorado and is often difficult to apply for taxpayers.

The Legislation enacted a new combined reporting standard which simplifies the preparation of corporate income tax returns in Colorado and allows for uniformity with other states with similar combined reporting standards.

The Legislation defines a unitary business as:

• A single economic enterprise made up either of separate parts of a single C corporation or of an affiliated group of C corporations that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.
• Further, a unitary business includes that part of the business that is conducted by a taxpayer through the taxpayer's interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities.

The Legislation also contains requirements for unitary combined reporting including, but not limited to, the following:

• The members of an affiliated group of C corporations, wherever incorporated or domiciled, that are members of a unitary business are required to file a combined report as a combined group. The combined report must be filed by the parent corporation if the parent is a member of the combined group. If there is no parent or the parent is not a group member, the members of the combined group must choose a member to file the return.
• The net income of each member of the combined group is combined, eliminating items of income, expense, gain and loss from transactions between members of the combined group. Further, the Legislation applies federal consolidated filing rules under the Internal Revenue Code and dividends are eliminated between members.
• For apportionment purposes, the combined group apportionment factor numerator includes amounts sourced to the state for the combined group’s unitary business, regardless of the separate entity to which those factors may be attributed and the denominator of the factor includes amounts associated with the combined group’s unitary business wherever located. Further, intercompany transactions among members of the combined group are excluded from the numerator and denominator of the apportionment factor.
• The legislation also includes guidance relating to apportionment of partnership income.

What’s next?

The Legislation states the changes take effect on the day following the expiration of the 90-day period after the final adjournment of the general assembly, except if a referendum petition is filed against the legislation within the 90-day period. Then, the Legislation will not take effect unless approved in the general election held in November 2024.

Please reach out to your state tax advisor to discuss the potential impact of the combined reporting changes to your Colorado combined return, including whether any affiliated entities should be included based on the Legislation.

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