by Tyna Mikulec
On June 1, 2023, Colorado Governor Jared Polis signed legislation changing the following reporting requirements for business entities: consolidating and clarifying composite return requirements for pass-through entities; reporting the Internal Revenue Service (IRS) adjustments to federal taxable income (FTI); and extending the due date for income tax returns by C corporations. (L. 2023, H1277 (c. 290), effective as stated.)
S corporation and partnership reporting.
Effective August 7, 2023 for income tax years beginning on and after January 1, 2024, the following requirements apply to S corporations and partnerships (i.e., collectively, pass-through entities (PTEs)) that engage in activities in the state that would subject a C corporation to state income tax filing requirements.
Tax return: The PTE must file a tax return reporting FTI and the state tax modifications and credits required or allowed under state income tax law. The return must contain a written declaration made under penalties of perjury and be signed by an officer of the PTE. The return must report: (1) certain information for each shareholder or partner; (2) each shareholder’s pro rata share or partner’s distributive share of the PTE’s income, gain, loss, or deduction; (3) income attributable to the state, with respect to each nonresident shareholder or partner; (4) required state tax modifications with respect to each shareholder or partner; (5) each shareholder’s share of any income tax credits allowed that is not applied to the composite payment by the PTE; and (6) each shareholder’s or partner’s share, if any, of any composite payment. On or before the day on which the return is filed, but no later than the due date, including any extensions, the PTE must furnish each person, who was a shareholder or partner during the year, a copy of the information reported to the Colorado Department of Revenue (CDOR), with respect to each person.
Composite return: Every PTE required to file a tax return must also file a composite return and make a composite payment of tax on behalf of all of its nonresident shareholders or partners, with some exceptions. For S corporations, the composite return must not include: (1) any resident shareholder, including one who is a resident of Colorado for only part of the taxable year; (2) any nonresident shareholder exempt from tax under Colo. Rev. Stat. § 39-22-112(1); or (3) any nonresident shareholder who timely files a nonresident filing agreement. Similarly for partnerships, the composite return must not include the same parties with respect to partners. Additionally, it cannot include any nonresident partner that is a corporation or a partnership.
The amount of the composite payment is the aggregate income derived from sources in the state multiplied by the highest marginal tax rate in effect. For S corporations, the aggregate income attributable to the state is the sum of the income attributable to the state that each nonresident shareholder included in the composite return, including the required state tax modifications. For partnerships, the aggregate income attributable to the state is the sum of the distributive share of partnership income, gain, loss, or deduction derived from sources in Colorado for each nonresident partner included in the composite return, including the required state tax modifications. If the income computed for any nonresident shareholder or partner is a negative amount, that income is excluded from the calculation of aggregate income derived from sources in the state.
Clarification is provided on when the PTE can claim a nonresident shareholder’s or partner’s share of a credit; the PTE is the taxpayer responsible for the tax liability and is the recipient of any refunds of estimated tax; and other general filing issues and obligations for the PTE and its shareholders or partners for composite return purposes.
Composite return exceptions: Composite return requirements do not apply to a PTE who elects to be taxed at the entity-level; a publicly-traded partnership; or a PTE consisting only of shareholders or partners that are to be excluded from a composite return. To properly exclude a nonresident shareholder or partner from a composite return, the nonresident must agree to timely file its own tax return and make tax payments with respect to its income and provide that the PTE is subject to personal jurisdiction for the nonresident’s liability. The PTE must obtain the agreement from the nonresident and file it with its tax return. A timely filed agreement for a taxable period is considered timely filed for each subsequent taxable period.
Mandatory electronic filing: Effective January 1, 2024, PTEs must electronically file and pay tax due related to information reports; composite returns filed on behalf of nonresident shareholders or partners; and non-resident filing agreements.
IRS adjustments.
Effective August 7, 2023, the requirements for reporting IRS adjustments to the CDOR apply to any federal adjustments to a taxpayer’s FTI with a final determination date occurring on and after January 1, 2024. “Federal adjustment” means any change to an item or amount determined under the Internal Revenue Code (IRC) that is used by a taxpayer to compute the income tax due for state tax purposes, whether that change results from action by the IRS, including a partnership level audit; or the filing of an amended federal return, federal refund claim, or administrative adjustment request by the taxpayer. General requirements are discussed such as the definitions of “federal adjustments report” and “final federal adjustment”; what a “final determination date” means under different circumstances; and the state reporting requirements and deadlines with respect to those components, depending on the circumstances.
Partnership level audit: Additionally, terms are defined and requirements are specifically addressed for federal adjustments related to an IRS partnership level audit, including the appointment of a state partnership representative. State reporting requirements, deadlines, and statute of limitations issues for federal adjustments are discussed for the following partnership scenarios: composite return implications; direct partners not included in a composite return; for partnerships who elected to be taxed at the entity level; and tiered partnerships. Requirements and deadlines are also discussed for refund claims related to federal adjustments for the partnership. A taxpayer may make estimated payments of the state tax expected to result from a pending IRS audit prior to the due date of the federal adjustments report without having to file the report with the CDOR. If the estimated tax payments exceed the final tax liability and statutory interest, the taxpayer is entitled to a refund or credit for the excess if the taxpayer files a federal adjustments report or claim for refund or credit of tax no later than one year following the final determination date.
C corporation due date.
Effective August 7, 2023 for income tax years beginning on and after January 1, 2024, every C corporation subject to Colorado income tax must file its state tax return by the 15th day of the fifth month following the close of the taxable year (i.e., May 15 for calendar-year taxpayers). Previously, the original due date was the 15th day of the fourth month (i.e., April 15). The CDOR may grant a reasonable extension of time for filing returns and for paying the tax.
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