By: Matthew Laney | 10/13/25
Colorado’s 2025 special legislative session brought sweeping updates to its tax code, marking one of the most significant overhauls in recent years. The changes, signed into law by Governor Jared Polis on August 28, 2025, were largely motivated by budget shortfalls tied to the federal OBBBA and increased state-level spending obligations, including Medicaid and SNAP administration costs.
Under Colorado’s rolling conformity policy, the state automatically aligns with federal tax law unless it chooses to “decouple” specific provisions. While this approach simplifies compliance, it can also trigger unexpected revenue fluctuations when federal reforms expand deductions. To stabilize revenues, Colorado enacted several measures through House Bills 25B-1001 through 25B-1005.
These new provisions permanently modify the state’s approach to income taxation, international reporting, and corporate compliance. In particular, the legislation continues the partial decoupling from the federal QBI deduction, expands the list of recognized tax haven jurisdictions, and introduces an addback for FDDEI income. Together, these changes are expected to generate several hundred million dollars in additional revenue over the next two fiscal years.
Federal tax reforms under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, created ripple effects for every state that conforms to the Internal Revenue Code. By making the Section 199A qualified business income (QBI) deduction and several international tax provisions permanent, the federal government effectively reduced the amount of gross income subject to state taxation.
Because Colorado conforms on a rolling basis, these federal changes would have automatically lowered the state’s taxable income base. To prevent this erosion, the General Assembly enacted targeted decoupling rules. House Bill 25B-1001 continues the addback of the Section 199A deduction for taxpayers with adjusted gross income above $500,000 for single filers or $1 million for joint filers, while House Bill 25B-1002 establishes a similar addback for the new foreign-derived deduction eligible income (FDDEI) under IRC Section 250.
In addition, updates to international reporting requirements under the OBBBA prompted Colorado to broaden its list oftax haven jurisdictions. This move helps preserve state revenue by ensuring that corporations cannot shift profits abroad to escape Colorado taxation.
The 2025 legislation introduces several new income tax provisions that individuals and corporations alike need to understand before filing future returns.
Colorado taxpayers who benefit from the federal qualified business income (QBI) deduction must now permanently add back that deduction when computing Colorado taxable income. The rule applies to taxpayers with adjusted gross income exceeding $1 million (joint filers) or $500,000 (single filers), except for those reporting farm income on Schedule F.
This measure ensures high-income earners contribute fairly to the state’s tax base while maintaining exemptions for agricultural taxpayers, a key constituency in rural Colorado.
For tax years beginning in 2026, corporations must add back the amount deducted federally for foreign-derived deduction eligible income (FDDEI) under IRC Section 250. The FDDEI deduction replaced the prior foreign-derived intangible income (FDII) regime under the OBBBA. By requiring an addback, Colorado prevents multinational corporations from receiving a double tax benefit, first at the federal level and again at the state level.
Colorado has long presumed that corporations incorporated in designated “tax haven” countries are engaging in tax avoidance. Effective for tax years beginning in 2026, House Bill 25B-1002 expands this list to include Hong Kong, Ireland, Liechtenstein, the Netherlands, and Singapore. Corporations operating in these jurisdictions must include their income in Colorado’s combined reporting group unless they can prove the incorporation meets federal economic substance standards.
Colorado’s insurance premium tax rate, previously set at 1% for companies maintaining a home or regional office in the state, will now be standardized at 2% beginning in 2026. The change removes a long-standing preference that aimed to attract insurers to establish local offices.
A notable innovation is Colorado’s new tax credit sale program, which allows the state to sell corporate income tax and insurance premium tax credits to taxpayers. The credits will be offered through a bidding process, with proceeds going directly to the state’s general fund.
Credits can be sold for up to $125 million in face value or $100 million in sales proceeds, whichever is lower. Taxpayers may purchase credits at a discount typically at least 80% of face value and apply them to future tax liabilities through 2033. This program gives Colorado immediate cash flow while providing businesses with a cost-effective way to prepay taxes.
Finally, beginning January 1, 2026, the state repeals the long-standing vendor allowance that permitted small retailers to retain 4% of collected sales tax (up to $1,000 per period) to cover administrative costs. Policymakers argue that eliminating this allowance creates a fairer, more uniform system and increases state revenue.
The latest Colorado tax changes require proactive tax planning for both businesses and individuals. Here are several strategies to consider:
Taxpayers in Denver and across the state may also need to confirm how these state changes interact with Denver state tax obligations, especially where city-level business and occupation taxes apply.
Colorado’s actions in 2025 make it one of the first states to legislatively address the ripple effects of the OBBBA. However, these reforms are likely only the beginning. State officials have already indicated that additional guidance will be released in early 2026 to clarify filing procedures, credit sale mechanics, and reporting standards for multinational corporations.
The combination of new revenue-generating measures and decoupling provisions is expected to stabilize Colorado’s general fund in the short term. Still, longer-term impacts remain uncertain. While the tax credit sale program delivers immediate revenue, it may also defer tax collections that would otherwise bolster future budgets. Similarly, the elimination of the vendor fee may prompt compliance challenges for smaller retailers who rely on it to offset administrative costs.
Looking forward, businesses should anticipate continued scrutiny of cross-border transactions and potential adjustments to the Colorado standard deduction or other personal income tax provisions if revenue projections fall short.
In short, Colorado’s tax policy is entering a new era, one characterized by a stronger linkage between fiscal sustainability and tax equity, and an increased focus on compliance and transparency.
Colorado continues to offer many traditional credits and deductions, including those related to Section 174 research and experimental expenses, child care, renewable energy, and enterprise zone investments. However, high-income taxpayers must now add back their federal QBI deduction, and corporations must add back FDDEI deductions beginning in 2026.
While no new deductions were created, businesses may benefit from purchasing discounted corporate income or insurance premium tax credits under the state’s new credit sale program. This can reduce future tax liability while helping Colorado generate near-term revenue.
The new tax laws were designed to offset revenue shortfalls from increased Medicaid and SNAP costs shifted to the state. By strengthening its revenue base, Colorado aims to preserve funding for education, transportation, and health services.
Businesses should review their entity structures, confirm income sourcing, and update compliance systems. Individuals should verify whether the new QBI addback applies to them and adjust estimated tax payments accordingly. Consulting with a tax advisor, particularly regarding the implications of the latest Trump tariffs and related federal changes, is strongly recommended.
The recent legislation does not directly alter property tax rates. However, the elimination of the sales tax vendor fee affects how retailers remit sales tax and may indirectly influence pricing or administrative costs for consumers and small businesses.
Matthew Laney
Bennett Thrasher LLP
Phone: (770) 396-2200
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