Article

Colorado’s special legislative session includes tax law changes

Sept. 16, 2025 · Authored by Shannon Bonner, Phil Horwitz

Earlier this year, Colorado enacted a balanced state budget. However, the recent federal legislation referred to as the One Big Beautiful Bill Act (OBBBA), passed in July 2025, affected the state’s budget and led to a projected budget gap. As a rolling conformity state, Colorado automatically adopts changes to the federal Internal Revenue Code (IRC) unless legislative action is taken (see Anschutz v. Colorado Dep’t of Revenue, 524 P.3d 1203 (Colo. Ct. App. 2022), a taxpayer win illustrating this issue for which one of the authors was instrumental).

In response, Colorado passed several tax bills during a special legislative session called by Governor Jared Polis at the end of August to raise revenue for the anticipated fiscal 2026 (year ending June 30, 2026) shortfall. The special session included measures to address conformity with specific provisions of OBBBA, among other changes. Collectively, these bills are projected to increase tax revenue by hundreds of millions of dollars in 2026 and subsequent years.

The changes include:

HB25B-1001: Qualified Business Income (QBI) deduction add-back

The federal QBI deduction was originally enacted in 2017 as part of the Tax Cuts and Jobs Act (TCJA), and now OBBBA has extended the QBI deduction permanently.

Colorado requires the QBI deduction that is allowed at the federal level be added back to federal taxable income to arrive at Colorado taxable income. Colorado’s addback provision of QBI was for income tax years commencing on or after Jan. 1, 2021, but before Jan. 1, 2026. However, HB 25B-1001 made the addback provision permanent, meaning the addback will be required for the 2026 tax year and beyond.

HB25B-1002: Foreign jurisdiction changes

Tax havens

Colorado law requires corporations incorporated in specific jurisdictions for purposes of tax avoidance (i.e. tax havens) to be included in a combined report. HB25B-1002, effective Jan. 1, 2026, expands Colorado’s list of tax haven foreign countries to include Hong Kong, Republic of Ireland, Liechtenstein, Netherlands and Singapore. A corporation can rebut the presumption of tax avoidance if the taxpayer proves or it is determined that such corporation is incorporated in a listed jurisdiction for reasons that meet that economic substance doctrine.

FDDEI (formerly FDII) addback

Further, TCJA created the Foreign-Derived Intangible Income (FDII) tax deduction. OBBBA lowered the rate for the FDII deduction and renamed it the Foreign-Derived Deduction Eligible Income (FDDEI) tax deduction for tax years beginning after Dec. 31, 2025. HB25B-1002 decouples Colorado from federal FDDEI provisions and requires an associated addback to arrive at Colorado taxable income for tax years commencing on or after Jan. 1, 2026.

HB25B-1004: Sale of tax credits

Colorado also passed HB25B-1004, which allows the department to issue tax credit certificates in an amount equal to the lesser of $125 million in total certificate face value or total sales proceeds of up to $100 million, plus any reasonable administrative costs associated with the issuance of the credits starting in fiscal year 2025-26.

The bill permits the state to subcontract the credit program, and to consult with a third party to implement the sale of the tax credit certificates.

Eligible taxpayers are both C corporations subject to the state corporate income tax and insurance companies subject to the premiums tax. It is not yet clear how the state will allocate tax credits between the two eligible groups or if both groups will compete for the same pool of tax credits. However, the statute requires that tax credits first be offered to a group of insurance companies that lost a valuable rate reduction benefit during the special session (in HB 25B-1003). If they are made available to C corporations, a C corporation authorized to do business in Colorado seeking to purchase tax credits must apply to the department in a prescribed manner. Specifically, “each C corporation that submits an application shall make a timely and irrevocable offer, contingent only on the Department’s issuance to the C corporation of the tax credit certificates, to make a specified purchase payment amount to the department...”

The offer must include: (a) the requested amount of tax credits, not below the minimum amount established, and (b) the qualified taxpayer’s proposed tax credit purchase amount for each tax credit dollar requested. The minimum proposed tax credit purchase amount must be the greater of either (1) the percentage of the requested dollar amount of tax credits that the department and, if applicable, the independent third party determines to be consistent with market conditions as of the offer date; or (2) 80% of the requested dollar amount of tax credits.

A taxpayer may claim the amount of the tax credit against its income tax liability. If the amount of the tax credit exceeds the tax liability for that tax year, the excess is not refundable. Rather, a taxpayer may carry forward and apply the unused tax credit against the income tax liability for any succeeding tax year through Dec. 31, 2033. Any amount of the tax credit that is not used after this period is not refundable.

In summary, HB25-1004 may provide Colorado businesses the opportunity to prepay their tax liabilities at a discount by purchasing tax credits as described above.

Additional Changes

Additionally, during the special legislative session, Colorado passed HB25B-1003, which repeals the reduced insurance premium tax rate for companies with a home office or regional home office located in Colorado, and HB25B-1005, which eliminates the state sales tax vendor fee beginning Jan. 1, 2026.

What’s next?

The revenue raising bills described above impact certain tax credits and Colorado corporate, individual and sales and use taxes. As such, Colorado taxpayers should consider the potential impact, if any, of the above bills on their Colorado state tax liabilities and if applicable, consider the provisions relating to the purchase of tax credits.

If you have any questions, please reach out to your Baker Tilly state tax advisor.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.