In Summary
- The Qualified business income (QBI) deduction addback for Colorado taxable income was made permanent (HB25B-1001) for single filers with income of $500,000 or more and joint filers with income of $1,000,000 or more, starting January 1, 2026.
- The sales tax vendor allowance was eliminated (HB25B-1005) beginning January 1, 2026, meaning businesses will remit the full amount of state sales tax without retaining the prior 4% compensation (up to $1,000 per filing period).
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Governor Jared Polis signed five tax bills into law on August 28, 2025, at the close of a special session of the Colorado General Assembly. Lawmakers convened after the federal One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, reduced state revenue by more than $1.2 billion and created a projected budget gap of $783 million. Colorado’s rolling conformity with federal tax law meant the changes took effect automatically, leaving the state budget out of balance.
The legislation approved in the special session is projected to carry direct implications for businesses by altering the treatment of qualified business income, foreign profits, insurance premium taxes, sales tax administration, and the use of state tax credits. To help clients, prospects, and others, Hanson & Co has summarized the key details below.
Qualified Business Income (QBI) Deduction
The federal qualified business income deduction was created in the 2017 Tax Cuts and Jobs Act (TCJA) and was recently made permanent by the OBBBA. Colorado, however, requires certain taxpayers to add back the deduction when calculating state taxable income. The state addback provision, which has applied since the 2021 tax year, was originally set to expire after 2025.
HB25B-1001 makes the addback permanent. Beginning with tax years starting on or after January 1, 2026, single filers with an income of $500,000 or more and joint filers with income of $1,000,000 or more must continue to add back the deduction. Pass-through businesses below those thresholds will still benefit from the deduction at the state level. State revenue estimates project this change will raise nearly $100 million annually once in effect.
Foreign Income and FDDEI Addback
HB25B-1002 changes how Colorado treats certain foreign income beginning in 2026. The state expanded its list of tax havens to include Hong Kong, Ireland, Liechtenstein, the Netherlands, and Singapore. Corporations organized in those jurisdictions are presumed to be formed for tax avoidance, although the Department of Revenue may determine otherwise based on economic substance.
The law also requires corporations to add back the federal deduction for foreign-derived income. Originally created under the TCJA as the FDII deduction and renamed the FDDEI deduction under the OBBBA, the benefit will no longer reduce Colorado taxable income starting January 1, 2026. These changes may increase state income for multinational businesses with operations in the listed jurisdictions.
Insurance Premium Tax Credit
HB25B-1003 repeals a long-standing incentive for insurers with a home or regional office in Colorado has been repealed. Beginning in 2026, insurance companies will no longer receive the reduced premium tax rate tied to maintaining an office and workforce in the state. This change is expected to increase premium tax liabilities for certain insurers.
Sale of Tax Credit Certificates
HB25B-1004 authorizes the Department of the Treasury to sell tax credit certificates beginning in fiscal year 2025-26. The credits can be used to reduce either C corporation income tax or insurance company premium tax liabilities. Purchasers may apply them to future years, with carryforward allowed through 2033. Because the credits will be sold at a discount of up to 20%, they provide an opportunity for businesses with predictable tax liabilities to prepay at a reduced cost. Guidance is expected on how the sales process will be managed, including how prices are set, how priority for purchasing credits is determined, and what procedures apply to carryforward and use in later years.
Sales Tax Vendor Fee
HB25B-1005 eliminates the sales tax vendor allowance beginning January 1, 2026. Under prior law, retailers could keep 4% of the state portion of sales tax they collected, up to $1,000 per filing period, as compensation for administrative costs. With the repeal, businesses will remit the full amount of state sales tax without retaining any portion. The change is expected to have the greatest impact on smaller retailers, since larger companies were already constrained by the monthly cap.
Other Considerations
Several of the new provisions may be challenged under the state’s Taxpayer Bill of Rights (TABOR), which limits the legislature’s ability to raise revenue. The Department of Revenue will also need to issue guidance on administration, particularly for the foreign income rules and the new tax credit certificates. Most changes take effect in 2026, giving businesses a small window of time to plan but also leaving open the possibility of legal or legislative changes.
Contact Us
The new Colorado tax provisions take effect beginning in 2026 and will change how many calculate state liabilities. Companies are encouraged to review the measures with tax advisors to assess the impact and plan ahead. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.