Enacted on May 14 and applicable to tax years beginning on or after Jan. 1, 2026, House Bill (H.B.) 24-1134 repeals the state-specific unitary tests and replaces them with a standard that is consistent with several other states that require combined reporting. The new treatment generally requires combined reporting for a group of C corporations that are “sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them.”
Colorado’s prior law requires a unique method to determine which members of an affiliated group of companies are required to report corporate income tax on a combined basis. This method requires companies to analyze whether six Colorado-specific statutory tests are satisfied based on relationships between members of an affiliated group. A combined report is required for all members of the group that satisfy at least three of the tests in the reporting year and in the preceding two tax periods.
As a result of the Colorado-specific tests, combined reporting groups in the state often vary from combined groups in other states. These unique Colorado tests require additional analysis beyond what is required under unitary principles employed by other states and, as a result, create additional compliance burdens for Colorado taxpayers.
Crowe observation
As described in the bill, the state-specific tests under prior law were “arbitrary” and “difficult for taxpayers and the Department of Revenue to apply” and created “unnecessary tax compliance challenges because Colorado’s approach diverges from other states.”
The new law retains Colorado’s existing apportionment factor rules, treating all unitary group receipts as includable in the Colorado apportionment factor regardless of whether the entity with the receipts has Colorado nexus (referred to as the Finnigan rule).
The new law also addresses the treatment of partnership receipts when a member of the combined group holds an interest in a partnership that generates apportionable income to the owner. Such receipts are treated consistently with the Department of Revenue’s long-standing practice of flowing up unitary partnership receipts to a corporate owner in proportion to the partner’s share of total partnership apportionable income.
Starting with the 2026 tax year, taxpayers no longer will be required to complete a separate and potentially time-consuming analysis of their Colorado filing group. H.B. 24-1134 should result in more uniformity with other states’ unitary filing requirements and, therefore, reduce complexity for Colorado companies. However, the new law includes a number of nuances that require a careful analysis of a unitary group. For example, the state’s existing definition of an affiliated group requiring a common parent C corporation remains in the new law. Additionally, a Colorado combined group excludes 80/20 corporations (generally, corporations with 80% or more property and payroll outside the U.S.) and includes affiliated corporations incorporated in a specified foreign jurisdiction for the purpose of tax avoidance.
Looking ahead
Starting with the 2026 tax year, taxpayers might see a significant change in their Colorado tax liability due to members joining and leaving their combined reporting group. The change could be beneficial or detrimental depending on a taxpayer’s organizational structure and operations. Colorado taxpayers should consult with their state tax advisers to review the new law’s effect and to implement appropriate changes. Should a review of the new law’s implications indicate a material change in Colorado tax, taxpayers should consider the need to account for the change to deferred accounts on their financial statements.
