By Jen Coleson, Esq., Checkpoint News
On June 3, 2026, Governor Jared Polis signed legislation enacting broad changes to Colorado’s state tax code. (L. 2026, H1289, effective upon passage.)
Personal Income Tax
For tax years beginning on or after January 1, 2026, Colorado individual income taxpayers must add back to their Colorado taxable income any amount of overtime compensation that was excluded or deducted from their federal gross income.
For tax years beginning on or after January 1, 2027, Colorado individual income taxpayers must add back any gains excluded from federal gross income on investments in Qualified Opportunity Funds. The addback does not apply to Colorado Qualified Opportunity Funds. A Colorado Qualified Opportunity Fund is an Opportunity Fund that holds at least 90% of its assets in Colorado Opportunity Zones.
Corporate Income Tax
For tax years beginning on or after January 1, 2027, Colorado established a new elective water’s-edge combined reporting structure for unitary groups of C corporations that replaces prior water’s-edge election that was available under the mandatory worldwide combined reporting rules. The new election is binding for 10 years.
Credits and Incentives
The bill makes multiple changes to Colorado’s tax credits and incentives. Under the bill, several environmental and clean energy credits are expanded, extended, or restructured including those for electric bicycles, vehicles, lawn equipment. Credits for residential energy storage systems, heat pumps, geothermal energy, and industrial clean energy projects have also been amended.
Among other changes, the Colorado Earned Income Tax Credit has been expanded with a new tier for lower-income working families, changes have been made to the employee health insurance credit, and the wildfire hazard mitigation credit has been extended through 2040.
Sales and Use Tax
This bill makes changes to three exemptions under Colorado’s sales and use tax. First, the bill creates a new exemption for construction and building materials used for public passenger rail service on existing railroad infrastructure. Next, the existing exemption for wood from salvages trees killed or infested by beetles is extended through 2031. Finally, the existing exemption for space flight property is temporarily suspended for three years before being reinstated for tax years beginning on or after January 1, 2030.
Miscellaneous Taxes
The bill also makes changes to Colorado’s fuel taxes and tobacco taxes, eliminating allowances or deductions that are considered redundant under the tax code, and aligning allowances in Colorado’s excise taxes more closely with the majority of other states.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
