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State and Local Tax

Colorado Modifies and Creates Income Tax Credits to Advance Decarbonization

· 16 minute read

· 16 minute read

by Tyna Mikulec

On May 11, 2023, Colorado Governor Jared Polis signed legislation that enacted tax policy to advance decarbonization by modifying existing income tax credits; creating several new income tax credits; and allowing advance payments of certain credits. (L. 2023, H1272 (c. 167), effective 05/11/2023.)

Modifications to existing credits.  

Innovative motor vehicles: A purchaser or lessee or a motor vehicle dealer or financing entity is allowed this credit for the sale and purchase or lease of electric motor vehicles. The credit is extended to tax years prior to January 1, 2029. Previously, it was allowed for tax years commencing on or after January 1, 2013, but prior to January 1, 2026.

A “purchaser” means the buyer or lessee of a category 1 vehicle. For income tax years commencing on or after January 1, 2024, “purchaser” includes a person or political subdivision of Colorado that is exempt from taxation under Colo. Rev. Stat. § 39-22-112(1).

For the purchase or lease of a category 1 vehicle completed on or after January 1, 2024, additional requirements and guidance are imposed with respect to how the tax credit assignment is completed from a purchaser to a financing entity or to a dealer. Additionally, the financing entity or the dealer must electronically submit a report contained in the election statement to the Colorado Department of Revenue (CDOR) on a quarterly basis.

For income tax years commencing on or after January 1, 2025, the financing entity or dealer can elect to receive advance payments of assigned credits.

The amount of the credit ranges from $500 to $5,000, depending on when the transaction takes place. For credits assigned in a tax year that commences on or after January 1, 2024, but before January 1, 2026, an additional $600 may be claimed by a financing entity or a dealer when the purchaser assigns the credit. No credit is allowed for a purchase or lease made on or after July 1, 2023, but before January 1, 2029 that exceeds a manufacturer’s suggested retail price of $80,000. However, an additional credit of $2,500 is allowed for a purchase or lease in tax years commencing on or after January 1, 2024, but prior to January 1, 2029, with a manufacturer’s suggested retail price below $25,000.

A purchaser who claims this credit is still entitled to additionally receive any rebate that is part of an electric vehicle program under state law.

Innovative trucks: Similarly, this credit is for the purchaser or lessee or to a financing entity in connection with the sale and purchase or lease of an electric light-duty, medium-duty, or heavy-duty truck.

A “purchaser” means the buyer or lessee of a category 4, 4 A, 4 B, 4 C, 7, 7 A, or 9 vehicle. For income tax years commencing on or after January 1, 2024, “purchaser” includes a person or political subdivision of Colorado that is exempt from taxation.

The period for current credit amounts applicable to transactions that take place on January 1, 2021 but before January 1, 2026 is now shortened to before January 1, 2024. New credit amounts are specified for each vehicle category for income tax years commencing on or after January 1, 2024, but before January 1, 2029. The credit amounts range from $500 to $12,000, depending on the year within that range and vehicle category.

For the purchase or lease of a category 7 vehicle completed on or after January 1, 2024, additional requirements and guidance are imposed with respect to how the tax credit assignment is completed from a purchaser to a financing entity or to a dealer. Additionally, the financing entity or the dealer must electronically submit a report contained in the election statement to the CDOR on a quarterly basis.

For income tax years commencing on or after January 1, 2025, the financing entity or dealer can elect to receive advance payments of assigned credits.

Heat pump systems: The availability of the income tax credit for any purchaser that installs a residential or commercial heat pump system into real property is now shortened to income tax years commencing on or after January 1, 2023, but before January 1, 2024. Previously, the credit was available until before January 1, 2025.

New income tax credits.

Unless otherwise noted, for income tax years commencing on or after January 1, 2024, but prior to January 1, 2033, the following six newly-created and refundable income tax credits are allowed. Each credit is repealed, effective December 1, 2038.

Industrial clean energy: The owner of a qualified industrial facility is allowed a credit for the costs associated with conducting industrial studies or for implementing a plan to put into service greenhouse gas emissions reduction improvements. The credit amount is the applicable percentage of the: costs paid and approved by the Colorado Energy Office for completing an industrial study during the tax year in which the credit is claimed, except that the credit cannot be claimed in an amount exceeding $1 million; or capital costs paid by the owner, not including the cost for design, and approved by the Office for certified greenhouse gas emissions reduction improvements that are placed in service during the tax year in which the credit is claimed, except that the credit must be claimed in an amount that is not less than $75,000 and does not exceed $5 million.

The “applicable percentage” means 30%, except the Office may, on a case-by-case basis, determine that the applicable percentage may be increased to an amount not to exceed 50% upon request by an owner for improvements that have significant potential to significantly advance reductions in greenhouse gas emissions but may not be in the commercial stage of development.

An owner that claims this credit cannot claim the enterprise zone investment tax credit allowed by Colo. Rev. Stat. § 39-30-104 with respect to the greenhouse gas emissions reduction improvements or receive grant money under the industrial and manufacturing operations clean air grant program.

To claim the credit, the owner must submit an application to the Office with the required documentation and information. The Office is accepting applications through June 30 2024, and semi-annually through each December 31 and June 30 thereafter, through June 30, 2032. Applications are reviewed on the basis of merit, and the owner is notified if any credits are reserved after all approved applications in the evaluation pool are evaluated. The reservation of tax credits does not entitle the owner to an issuance of any tax credit certificates until the owner complies with all requirements. Once issued, the owner must file the certificate, which states the amount of credit that can be claimed, with the owner’s state income tax return.

The aggregate amount of tax credits available to be reserved are limited between $8 million to $12 million, depending on the application period. The Office may increase the periodic aggregate amount of credits available for certain application periods, but then must subsequently decrease accordingly the amount available for the application periods commencing on or after July 1, 2028, but before July 1, 2032.

After receipt of the credit, there are annual reporting requirements by the owner for three years. The credit may be recaptured if the owner fails to demonstrate that the improvements are in use in any of the three taxable years immediately following the taxable year in which the improvements were placed in service. The owner must add the amount of the disallowed credit to its return as a recaptured credit for the tax year in which the credit is disallowed.

Geothermal energy projects: A credit is allowed to an eligible taxpayer that makes a “qualified expenditure,” which means the total monetary cost approved by the Office and expended on or after January 1, 2024, but before January 1, 2033 by an eligible taxpayer in connection with an approved geothermal energy project in the tax year for which the credit is claimed.

“Geothermal energy project” means a project in the state that is intended to evaluate and develop a geothermal resource for the purpose of electricity production that meets the statutory standards and involves any of the following: exploration and development of wells; drilling exploration and confirmation wells; certain usage of any heat extracted with produced fluids in an oil and gas operation to reduce emissions; drilling injection wells; flow testing; reservoir engineering; geothermal energy storage; coproduction of geothermal energy; or power generation equipment.

“Eligible taxpayer” means a person engaged in a trade or business subject to Colorado income tax, or a person or political subdivision of Colorado that is exempt from tax pursuant to Colo. Rev. Stat. § 39-22-112(1), that makes a qualified expenditure.

The credit is limited to an aggregate amount of $5 million per eligible taxpayer for all tax years. An application must be submitted to the Office for a tax credit certificate. The Office is accepting applications through June 30, 2024, and semi-annually through each December 31 and June 30 thereafter, through June 30, 2032.  Applications are reviewed on the basis of merit, and the taxpayer is notified if any credits are reserved after all approved applications in the evaluation pool are evaluated. The reservation of tax credits does not entitle the taxpayer to an issuance of any tax credit certificates until the taxpayer provides the Office with any documentation required and a cost certification of the qualified expenditure. The taxpayer must file the certificate, which states the amount of credit that can be claimed, with the taxpayer’s state income tax return. If the eligible taxpayer is a tax-exempt entity, such taxpayer must file an income tax return, which is now subject to the electronic filing mandate.

Lastly, a person that claims this credit is not entitled to claim the enterprise zone investment tax credit for the same project.

Geothermal electricity generation production: A qualified entity is allowed a credit in an amount equal to $0.003 per kilowatt hour of geothermal electricity that is produced by the qualified entity in the state in the tax year. “Qualified entity” means a person engaged in a trade or business that is subject to Colorado income tax or person or political subdivision of Colorado that is exempt from tax, either of which produces electricity derived from geothermal energy for sale or for the person’s or political subdivision’s own use.

A qualified entity must submit an application to the Office for a tax credit certificate. The qualified entity must file the certificate with its state income tax return in order to claim the credit. A tax-exempt entity must also electronically file an income tax return, with the certificate, in order to claim the credit.

Lastly, a person that claims this credit is not entitled to claim the enterprise zone investment tax credit for the same project.

Heat pump technology and thermal energy network: An eligible taxpayer that installs heat pump technology in a building in the state, on a campus in the state, or develops, through purchase and installation of necessary equipment, a thermal energy network in the state is allowed a credit in the tax year that the heat pump technology or thermal energy network is placed into service.

The amount of the credit ranges from $250 to $3,000 depending on the type of heat pump technology installed and the tax year of the installation. A multifamily property can multiple the credit amount by the number of units in the property that utilizes the technology. For a nonresidential building, the amount of the credit is multiplied by the number of increments of four tons of heating capacity up to a maximum of 100 tons. Lastly, for a thermal energy network or for a campus, the amount of the credit is multiplied by the number of residential buildings and multifamily property units networked in a single system, plus the credit determined for each nonresidential building networked in the system based on the credit amount allowed for nonresidential buildings.

Electric bicycles: A qualified retailer is allowed a credit in an amount equal to $500 for each retail sale of new qualified electric bicycles sold in the state during the income tax year, except that for the income tax year commencing on January 1, 2024, the credit is allowed only for retail sales made on or after April 1, 2024, but on or before December 31, 2024.

“Electric bicycle” has the same meaning as “electrical assisted bicycle” as set forth in Colo. Rev. Stat. § 42-1-102(28.5). It includes an electric adaptive bicycle. “Qualified electric bicycle” means an electric bicycle that satisfies the standards for approval developed by the Office.

“Qualified retailer” means a retailer that sells qualified electric bicycles and: (1) holds a state sales tax license; (2) has timely filed a monthly sales tax return showing a tax liability for at least 12 months; (3) has paid the taxes due on the monthly sales tax return; and (4) has registered with the CDOR.

“Qualified purchaser” means a person who is a resident of the state and who has not previously purchased a qualified electric bicycle that was discounted by a qualified retailer claiming the credit in the same income tax year.

In order to qualify for the credit, the qualified retailer must provide to the qualified purchaser at the time of the retail sale a discount equal to the lesser of $450 or the purchase price and must show the discount as a separate item on the receipt. The retailer may retain from the credit allowed an administrative fee not to exceed $50 for providing the discount.

The retailer must electronically submit a report to the CDOR on a quarterly basis that details the number of new qualified electric bicycles sold in the reporting period for which a discount is provided. Prior to selling a qualified electric bicycle, the retailer must register as a qualified retailer with the CDOR.

Additionally, at the time of the retail sale, the qualified retailer must collect from a purchaser an affidavit affirming that the purchaser is a qualified purchaser. Subsequently, the collected affidavits must be submitted with the quarterly report required to be filed by the retailer. However, if on or before June 30, 2025, the Office determines that a registration process is needed and would be cost effective in curtailing fraud or abuse, the Office must develop a process in lieu of the affidavits for purchasers to register as qualified purchasers prior to purchasing a bicycle. The process must allow for a retailer to access the registration information in order to confirm a purchaser is a qualified purchaser.

For income tax years commencing on or after January 1, 2025, the qualified retailer can elect to receive advance payments of this credit.

Sustainable aviation fuel production: A qualified taxpayer is allowed a credit for an amount of the actual cost paid to construct, reconstruct, or erect a sustainable aviation fuel production facility equal to: 30% for a facility for which construction begins on or after January 1, 2024, but before January 2027; 24% if construction begins on or after January 1, 2025, but before January 1, 2028; 18% if construction begins on or after January 1, 2018, but before January 2029; and 12% if construction begins on or after January 1, 2029, but before January 1, 2033. A “qualified taxpayer” means a taxpayer that is an aviation business, a sustainable aviation fuel producer, or an airport.

The credit is allowed for the tax year in which the facility is placed in service. A qualified taxpayer must submit an application to the Office for a tax credit certificate. The aggregate amount of all certificates is limited from $1 million to $3 million, depending on the tax year.

After receipt of the credit, there are annual reporting requirements for three years. If the sustainable aviation fuel production comprises less than 60% of the total fuel production of the facility in any of the three taxable years immediately following the taxable year in which the facility is placed in service, the Office must notify the CDOR in writing that the credit must be disallowed. The taxpayer must add the amount of the disallowed credit to its return as a recaptured credit for the tax year in which the credit is disallowed.

Advance payments of certain credits.

A taxpayer may elect to receive advance payments for an “applicable credit,” which means the credits allowed for innovative motor vehicles; innovative trucks; and electric bicycles.

The taxpayer must annually register with the CDOR for advance payments of one or more applicable credits no later than 30 days before the due date of the first quarterly report. The taxpayer must electronically file the report in a form and manner prescribed by the CDOR no later than April 15, June 15, September 15, and December 15 of each tax year for which the taxpayer registers for advance payments. For a taxpayer with a taxable year beginning on any date other than January 1, the corresponding months are substituted for the previously specified months. If a taxable year is less than 12 months, the due dates are determined in accordance with rules prescribed by the CDOR.

The quarterly report must include the cumulative total of applicable credit that the taxpayer is seeking advanced payment for in the quarter and any information required to be included in the report as specified in the statute that governs the applicable credit. After receipt of a completed quarterly report, the CDOR must make an advance payment in the form of an income tax refund, except that the payment does not accrue interest, and it is subject to interception for the taxpayer’s unpaid balance or unpaid debts, if any.

The taxpayer must reduce the amount of any applicable credit claimed for any taxable by the aggregate amount of advance payments claimed during the taxable year. If the aggregate amount of payments claimed exceeds the amount of the credit allowed, the excess is subject to recapture. If the aggregate amount is less than the credit allowed, the difference may be claimed as a credit in the taxable year in the same manner as the applicable credit.

In the case of a partnership or S corporation electing advance payments, the entity must make the election and the CDOR must make the advance payments. In the event of an excess aggregate amount of advance payment, the entity must pay the amount of the excess on behalf of the partners or shareholders. In the event of the aggregate amount that is less than the credit allowed, the CDOR must refund the amount of the difference to the filing entity.

 

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