Chapter 25 - § 25.4 • STATE INCOME TAX

• Jurisdiction: Colorado

§ 25.4 • STATE INCOME TAX

§ 25.4.1-General Description of the Colorado Income Tax

The state imposes a tax on the taxable income of individuals, trusts, and estates, and on the net income of C corporations doing business in the state.¹¹⁷ The state income tax is imposed at the rate of 4.63 percent and is generally based on the taxpayer's federal taxable income, with certain adjustments. In the case of a taxpayer doing business both within and without Colorado, the tax is imposed on the net income of the taxpayer attributable to sources within Colorado as determined under the rules applicable to the particular type of taxpayer involved (e.g., a C corporation, a partnership, a sole proprietorship, etc.).¹¹⁸

Local government entities are prohibited from imposing income taxes in Colorado.¹¹⁹

§ 25.4.2-Determination of Net Income Derived from Sources Within Colorado

If a taxpayer carries on no business outside of Colorado, the entire net income of the taxpayer is considered to be derived from sources within Colorado.¹²⁰ If the taxpayer derives income from sources within and without Colorado, then the net income derived from Colorado sources must be determined by the application of the appropriate allocation and/or apportionment formula.¹²¹

§ 25.4.3-Affiliated Groups of C Corporations

If a C corporation is part of an "affiliated group" of C corporations, then the C corporation must file a combined report with the other members of the affiliated group of C corporations with which it meets the state's six-part combined reporting requirements.¹²² An affiliated group of C corporations consists of one or more chains of C corporations connected by 50 percent stock ownership.¹²³ In addition, only members of the affiliated group of C corporations that have met at least three of six factual tests during the tax year and the two preceding tax years are included in the combined report.¹²⁴ This means that a new C corporation or a C corporation that is acquired by an affiliated group of C corporations will not be included in the combined report for the first two tax years of the new C corporation's existence or for the first two tax years after the acquisition.¹²⁵

An affiliated group of C corporations (as defined in the federal Internal Revenue Code) may elect to file a consolidated Colorado income tax return.¹²⁶ Only C corporations that would otherwise be required to file Colorado income tax returns (that is, C corporations that are doing business in Colorado) may be...