Colorado’s Department of Revenue (CDOR) is now allowing Denver partnerships and S corporations to make an election into the SALT Parity Act for the 2022 tax year when filing their 2022 income tax return. Quarterly estimated tax payments beginning in 2023. Although Colorado businesses can still make the election for 2022 on the annual state tax return filed in 2023, doing it now can simplify and streamline tax planning. To help clients, prospects, and others, Hanson & Co has summarized the key details below.
Refresher: Colorado SALT Parity Act
The Colorado SALT Parity Act allows pass-through entities (PTEs) to pay taxes at the entity level rather than individual owners, partners, or shareholders (Owners) paying their own tax based on prorated entity income. The SALT Parity Act shifts state tax liability to the PTE itself, which isn’t limited to the $10,000 itemized deduction that individuals still must follow. This was Colorado’s solution to the Tax Cuts and Jobs Act (TCJA) rule. Colorado’s 2021 legislation originally included an Owner-level deduction according to their share of PTE income, but the final 2022 law instead features a refundable tax credit at the individual level. The SALT Parity Act’s purpose is to avoid double taxation of PTE income on Owners.
When a PTE makes an election under the SALT Parity Act, all Owners are included. It’s an annual election, so PTEs can choose whether to opt-in each year versus a permanent election. All credits are passed through to the owners of the entity.
These changes are effective as of January 1, 2022. They are also retroactive to January 1, 2018. PTEs can file amended returns for 2018 through 2021 between September 1, 2023, and July 1, 2024, giving them plenty of time to plan and compare calculations. PTEs will not be assessed late filing penalties or interest if they choose to make a retroactive election.
Calculating and Paying Colorado Estimated Taxes
If the PTEs state tax liability exceeds $5,000 per year, it must pay quarterly estimated taxes beginning April 15, 2023. Calculating the total tax due is a complex process specific to each client’s circumstances and tax plan.
As a reminder, once a PTE makes an election under the Colorado SALT Parity Act, its Owners do not remit their own separate estimated taxes for their proportionate share of PTE taxable income.
Factors That May Affect Colorado Tax Planning
Even though the SALT Parity Act can save on taxes, some considerations may affect a PTE’s tax planning.
First, once the election is made, it applies to all resident and non-resident Owners. This can benefit nonresidents since the state tax liability would be taken care of at the PTE level. Thus, they wouldn’t be required to file a state tax return if the only source of Colorado income is through the PTE.
Second, paying the tax at the PTE level will reduce the profits flowing to Owners for federal income tax. The benefit is that Owners’ federal tax liability would be lower.
Third, PTEs may not wish to make the election due to Owners’ unique circumstances or tax liabilities. Careful planning in consultation with all Owners and PTE managers is necessary to ensure maximum benefit to Owners. PTEs with multiple Owners may also find it too labor-intensive and costly to remit the tax due and prepare amended returns for the PTE and Owners for past years. And the Colorado tax rates in 2018 and 2019 were higher, which may impact planning.
There is also a consideration for federal taxable income. Even with the SALT Parity Act, state income tax paid by the PTE and the Section 199A pass-through business deduction must still be added back to the PTE’s state taxable income for the federal return. Sole proprietors may still include their Sec. 199A deduction on the federal return.
If the federal TCJA $10,000 SALT cap expires at the end of 2025, Colorado’s SALT Parity Act will be disallowed, and Owners will resume paying tax as profits flow through from the PTE. There are still several tax years were making the SALT Parity Act election could be extremely beneficial and help Owners manage their state tax liability. It’s also possible the $10,000 SALT cap could be extended, in which case, the SALT Parity Act could significantly help Colorado PTEs.
The SALT Parity Act presents a tax savings opportunity for Colorado PTEs. However, several considerations must be made when determining whether it makes sense to elect. For this reason, it is important to consult with a qualified tax advisor to review your situation before taking action. If you have questions about the information outlined above or need assistance with an accounting or tax 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.