No Match Found
The March 27, 2020, CARES Act enactment implemented several tax reform relief provisions retroactively applicable to prior tax years. The Department initially advanced the policy that such retroactive relief was not available in Colorado and, therefore, taxpayers were required to adjust their federal taxable income to remove such benefits for state tax purposes.
Applicable for the 2021 tax year, Colorado legislation allowed taxpayers a subtraction modification measured by the Section 163(j) and qualified improvement property (QIP) retroactive benefits they would have received had they been applicable in Colorado.
In November 2022, a Colorado appellate court ruled that retroactive changes in federal law can affect a taxpayer’s Colorado taxable income.
Accordingly, the Department issued guidance in April 2023 reflecting that CARES Act retroactive provisions applied in prior tax years and that taxpayers may have to file amended state returns to correct federal taxable income amounts in prior tax years.
The takeaway: Colorado’s path to CARES Act conformity for corporate taxpayers has been a challenging one. Because Colorado statutorily established its own 80% NOL limitation, its CARES Act conformity has little impact on NOLs. However, the state’s Section 163(j) conformity creates complexity because state law decouples from CARES Act changes only starting with tax years ending on or after March 27, 2020. Because of the 2022 appellate court decision, taxpayers follow different Section 163(j) treatment before and after tax years ending on or after March 27, 2020, which may create taxpayer obligations to file amended returns. Similar concerns exist for QIP purposes.
Note that the revised Department document also provides guidance for individual taxpayers.
[CARES Act Tax Law Changes & Colorado Impact (revised April 2023)]
Colorado generally conforms on a rolling basis to the Internal Revenue Code. The CARES Act, enacted on March 27, 2020, impacted the following items retroactively for federal income tax purposes:
Although Colorado is a rolling conformity state, Colorado regulation 39-22-103(5.3) provides that a federal statutory change enacted after the end of a taxable year does not impact Colorado tax liability for that taxable year. Accordingly, prior Department guidance provided that Colorado would not adopt CARES Act changes for tax years ending before March 27, 2020.
On November 17, 2022, a Colorado appellate court in Anschutz v. Department of Revenue determined that the regulation was incorrect and that retroactive changes in federal law can affect a taxpayer’s Colorado taxable income. Click here for our Insight summarizing Anschutz.
Enacted on July 11, 2020, H.B. 1420 permanently applies the 80% limitation in Section 172(a)(2) to losses incurred after December 31, 2017 without regard to amendments made by the CARES Act. In particular, the limit is calculated after the deductions allowed under Section 250. Additionally, Colorado statutorily does not allow NOL carrybacks.
Because Colorado statutorily applies the 80% limitation to 2018 and future tax years and disconnects from the CARES Act change, the regulation and Anschutz decision generally did not impact Colorado NOL treatment. The April 2023 Department guidance repeated Colorado’s NOL treatment providing that NOL carrybacks are not allowed and stated that:
“The Colorado net operating loss deduction a C corporation may claim for losses arising in tax years beginning after December 31, 2017, is limited to 80 percent of the C corporation's Colorado taxable income after the deduction of any Colorado net operating losses arising from tax years beginning prior to January 1, 2018. The 80 percent limitation is determined without regard to the amendments made by section 2303 of the CARES Act. In particular, the limit is calculated after the deductions allowed under section 250 of the Internal Revenue Code.”
The April 2023 guidance adds compliance instructions, noting that Form DR 0112 for tax years 2019 and later includes a specific line for deducting Colorado NOLs arising in tax years beginning after December 31, 2017, that are subject to the 80% limitation. Therefore, “although the CARES Act suspended this limit, C corporations may not amend their returns to claim additional net operating losses despite the recent court ruling.”
Observation: Although revised guidance did not materially impact NOL treatment, please read our Insight that discusses recent regulatory changes impacting NOLs. That Insight acknowledges the observed increased NOL audit activity as well as the importance for taxpayers to maintain adequate supporting documentation. The changes in the revised regulation include items related to apportionment of the Section 382 limitation and a formula for calculating the SRLY limit not specifically addressed by statute.
Enacted on January 21, 2021, H.B. 21 provides taxpayers a subtraction modification for their 2021 tax year generally equal to the cumulative benefit they would have recognized under the “Retroactive Provisions of the CARES Act,” which are (1) the interest expense increase from 30% to 50% for the 2019 and 2020 tax years and (2) QIP retroactively qualifying for full expensing.
Observation: Presumably, the 2021 subtraction was enacted to provide taxpayers relief due to the Department’s position that Colorado did not adopt retroactive IRC changes.
Prior Department guidance stated that CARES Act changes did not apply for Colorado income tax purposes for tax years ending prior to March 27, 2020.
In its April 2023 revised guidance, the Department recognized that such prior guidance regarding these retroactive changes should be disregarded and taxpayers must file amended Colorado returns, if necessary, to correct their federal taxable income to match their federal taxable income determined for federal income tax purposes.
Enacted on July 11, 2020, H.B. 1420 provides that a taxpayer is required to add back an amount equal to the amount in excess of the Section 163(j) limitation on business interest without regard to the CARES Act amendments to Section 163(j). The CARES Act amendments included: (1) increase from 30% to 50% ATI limitation for tax years 2019 and 2020; (2) the option to elect out of the 50% limitation and use 30% of ATI for tax years 2019 or 2020; (3) the election to use 2019 ATI for a taxpayer's 2020 tax year; and (4) special rules for partnerships.
In its April 2023 revised guidance, the Department acknowledged that C corporations must add back to federal taxable income business interest deductions taken on the federal return to the extent they are in excess of the limits imposed under Section 163(j) prior to the CARES Act change.
This addback was not affected by Anschutz decision. Therefore, C corporations must not adjust this addback when amending a return for a tax year beginning or ending between March 27, 2020 and December 31, 2020.
C corporations may claim a subtraction on their Colorado return for their income tax year beginning on or after January 1, 2021, but before January 1, 2022, if they made an addition on their Colorado return for the prior tax year for business interest expenses deducted on their federal return. Note that this “addback” relates only to the above guidance for tax years ending between March 27, 2020, and December 31, 2020.
In the case of a taxpayer that apportions and allocates its net income, the addback amount must be multiplied by the taxpayer’s apportionment factor for the year of the addback to determine the amount of the subtraction. The subtraction a C corporation may claim is subject to limitations discussed in the guidance.
The April 2023 guidance provides that the subtraction modification is not applicable to tax years ending before March 27, 2020, because the retroactive provisions of the CARES Act apply and, therefore, there should be no difference to report as a subtraction.
Observation: The overlap of the Anschutz decision allowing for retroactive CARES Act treatment and H.B. 1420 that legislatively required a CARES Act addback for tax years ending after March 27, 2020, results in taxpayers needing to review their Section 163(j) treatment for both of these periods.
Prior Department guidance stated that retroactive QIP amendments did not apply for Colorado income tax purposes for tax years ending prior to March 27, 2020.
The April 2023 revised guidance provides that such prior guidance regarding these retroactive changes should be disregarded and C corporations must file amended Colorado returns, if necessary, to correct their federal taxable income to match their federal taxable income determined for federal income tax purposes.
Regarding the 2021 subtraction modification, because the retroactive provisions of the CARES Act apply, there should be no difference to report as a subtraction.
Observation: The revised guidance is silent regarding treatment for tax years ending on and after March 27, 2020. Presumably, rolling conformity would apply and CARES Act changes would apply to such years. Consistent with prior Department guidance, “federal taxable income for tax years ending on and after March 27, 2020 will reflect any changes or elections without adjustment.”
Global and US Tax Knowledge Management Leader, PwC US