AT THE COLORADO GENERAL ASSEMBLY
Fix Passed for NOL Carry Forward Treatment and Expansion of EIC
O
n Jan. 15, 2021, the Colorado General Assembly passed House Bill 21-1002 (HB21-1002). It will restore, over time, certain business deductions contained in the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 that were disallowed for Colorado tax purposes by passage of Colorado House Bill 20-1420 (HB20-1420) in June 2020 and final adoption of Colorado Department of Revenue (CDOR or Department) rule 1 CCR 201-2 - Rule 39-22-103(5.3). Internal Revenue Code Definition - Prospective. The only change HB211002 made which affects 2020 income tax returns being filed in 2021 is the expanded earned income credit discussed here. The CARES Act retroactively provided favorable tax treatment to individuals, trusts, and estates as follows: 1. Net operating losses incurred in 2018, 2019, and 2020 could be carried back five years. 2. The excess business loss limitation under I.R.C. Section 461(l) was suspended for 2018, 2019, and 2020 for non-corporate taxpayers with losses exceeding $250,000 ($500,000 for Married Filing Jointly taxpayers).
BY DAVID TAYLOR, CPA, AND LAURA ASBELL, CPA, MT, MBA in 2018 and 2019, and for the first three items for tax years beginning in 2020. HB21-1002 clarifies that differences between the CARES Act provisions and Colorado law are intended to be timing differences and provides the mechanism for reversing them. The differences are defined as the sum of the taxpayer’s Colorado taxable income for affected years, compared to what the taxpayer’s Colorado taxable income would have been for those years if Sections 2303, 2304, 2306, and 2307 of the CARES Act had been available to the taxpayer. Under HB21-1002, any difference caused by Colorado’s decoupling from the federal law for the four items noted will be treated as a temporary difference in tax years beginning after Dec. 31, 2020. Affected taxpayers will be allowed a subtraction in computing their Colorado taxable income of up to $300,000 for their first tax year beginning after Dec. 31, 2020, and up to $150,000 per year for the next four years with any remaining timing difference allowed in full, not to exceed Colorado taxable income for any years thereafter.
3. The limitation for excess business interest expense under I.R.C. Section 163(j) was increased from 30% to 50% of adjusted taxable income for 2019 and 2020.
Any subtraction computed under the provisions of HB21-1002 may reduce Colorado taxable income to zero but cannot reduce Colorado taxable income below zero. The deductions related to the timing differences are spread over several years to remove pressure on the state’s budget.
4. A technical correction was made to the federal Tax Cuts and Jobs Act of 2017 definition of qualified improvement property thereby allowing such property to be eligible for bonus depreciation.
Qualified improvement property placed in service during 2018 or 2019 is depreciated over 39 years for Colorado tax purposes. Taxpayers may not circumvent this by filing a federal accounting method change to adopt the CARES Act depreciation provisions.
HB20-1420 and the CDOR rule prevent taxpayers from availing themselves of the first three of these favorable provisions for Colorado tax purposes. Due to an unintentional oversight in drafting HB20-1420, both it and the rule created permanent differences between federal law and Colorado law for each of these items for tax years beginning 10
NewsAccount | March/April 2021
Individuals, estates, and trusts which have a Colorado timing difference caused by qualified improvement property must reduce the Colorado tax basis of the property to equal the federal basis so that the Colorado gain or loss from the disposition of the property is the same as the federal gain or loss. This provision applies even if the qualified
improvement property is disposed of before the Colorado timing difference is fully recovered. Note that the Colorado tax treatment of qualified improvement property is the same as the federal treatment for tax years beginning in 2020. Similar provisions apply to C corporations. HB21-1002 clarifies that C corporations which allocate or apportion income to Colorado will compute the timing differences by applying the Colorado apportionment percentage used in the year the timing difference originated. EARNED INCOME CREDIT HB20-1420 expanded the earned income credit to those residents who wouldn’t otherwise qualify for a federal earned income credit because the taxpayer, spouse, or a dependent did not have a work-eligible social security number. This expanded credit was scheduled to become effective in 2021. HB21-1002 accelerated the effective date to years beginning in 2020. The Colorado earned income tax credit is equal to 10% of the federal credit the individual was allowed, or would have been allowed, on the federal return if the taxpayer, spouse, or dependent had a valid social security number. NOL CARRY FORWARD EXAMPLE Mom and Pop are the shareholders of an S corporation, Mom’s Drycleaners, Inc. For calendar 2018, Mom and Pop had a federal net operating loss of $50,000 which could not be carried back, and only 80% of the loss could reduce federal taxable income under I.R.C. Section 172 prior to enactment of the CARES Act. After enactment of the CARES Act, Mom and Pop carried their federal net operating loss back five years to 2013, fully utilizing it. In accordance with the CDOR rule, Mom and Pop did not carry their net operating loss back to offset prior Colorado taxable income. In April 2019, Mom’s Drycleaners, Inc. placed $5,000 of qualified improvement property into
