Colorado HB 24-1134 was signed by Governor Jared Polis into law on May 14, 2024. The bill updates the state’s combined reporting standard for tax years starting on or after January 1, 2026, to adopt the Multistate Tax Commission (MTC) standard. Changes resulting from HB 24-1134 are summarized below:
- The test requiring affiliates to meet unity requirements for the current and preceding two tax years (the unique “three-of-six” test) is eliminated. New section Colo. Rev. Stat. 39-22-303(11.5) requires C corporation members of an affiliated group that are unitary to file a combined report.
- HB 24-1134 defines the terms “combined group” and “unitary business” as the following:
- A unitary business is "a single economic enterprise of an affiliated group of C corporations that, through their activities, are sufficiently interdependent, integrated, and interrelated to provide a sharing, exchange, or significant flow of value to the separate parts."
- A unitary business is any business that is conducted by a member of the group through an interest in a partnership, whether held directly or indirectly through a series of partnerships or pass-through entities.
- Colorado's existing water's edge method is retained by HB 24-1134.
- The combined group tax return is to be filed under the parent corporation's name and federal employer identification number if the parent is a member of the group. If no parent corporation exists, or if the parent corporation is not a member of the combined group, then the members of the group should designate a filing member.
- The net income of each combined group member will be computed as it currently is under prior, existing law but intercompany transactions are eliminated. The legislation applies federal consolidated return rules for determining intercompany eliminations as if the combined group were a consolidated filing group. Dividends between members of the combined group should continue to be eliminated as under prior, existing law.
- The state adopts the Finnigan apportionment rule, whereby the numerator of the sales apportionment factor includes amounts sourced to Colorado regardless of whether the combined group member has nexus in Colorado.
- Intercompany transactions will be generally excluded from the numerator and denominator of the sales apportionment. The Colorado Department of Revenue is authorized to issue additional guidance in this area.
- Specific language on the calculation and inclusion of the flow up of apportionment from a partnership interest is provided.
Insights
The elimination of the “three of six” test is the major result of the legislation passed, and it aligns Colorado’s definition of a unitary business with the model recommended by the MTC and adopted by a number of other states.
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