Corporate Income Tax
Colorado's corporate income tax rate is a flat 4.63%. It is assessed on Colorado net income, defined as the corporation's federal taxable income, with some modifications. Among states that levy a corporate income tax, Colorado's tax rate is the lowest in the nation.
Colorado also ranks 10th lowest nationally in per capita corporate income tax revenue. Collections in 2004 totaled $52 per capita, compared to a national average of $105 for corporate income tax revenue. Colorado does not assess a franchise tax or inventory tax.
Per Capita State Corporate
Net Income Tax Revenue, 2004
(Selected States)
State |
Per Capita |
National Rank |
California |
$193 |
5 |
Illinois |
$163 |
8 |
Minnesota |
$125 |
10 |
Nebraska |
$96 |
19 |
Arizona |
$92 |
21 |
Oregon |
$89 |
23 |
North Dakota |
$78 |
27 |
New Mexico |
$73 |
30 |
Kansas |
$61 |
35 |
Utah |
$60 |
37 |
U.S. Average |
$105 |
N/A |
Colorado |
$52 |
41 |
Source: Morgan Quitoration, State Rankings-2006
Colorado's Method of Apportioning Income
Colorado is unique among states in that two alternative apportionment formulas have been adopted which allow the taxpayer to choose the method that produces thelesser tax liability. The taxpayer can make a decision annually on whether to use the standard three-factor formula or a special two-factor formula.
- The three-factor formula averages the corporation's wages, property, and sales in Colorado and compares that average to total wages, property, and sales to determine what proportion of its profits will be taxed.
- The two-factor formula averages property and sales in Colorado only, and compares that average to the total property and sales.
The two-factor election is particularly advantageous to corporations with a significant part of their business in Colorado, as it omits the payroll factor and eliminates "throwback sales." For example, the placement of a facility in Colorado, which would be labor intensive, would not unduly increase tax liability. Conversely, placement of such a facility in another state with a formula averaging wages would have the opposite effect. Moreover, under Colorado's two-factor formula, income that is directly attributable to the State of Colorado and is produced by a corporation whose state of domicile is Colorado is still apportionable but may go untaxed since none of such income is apportionable (or allocable) to any state using a three-factor formula.
There are also a number of corporate income tax credits including an investment tax credit, and various enterprise zone tax credits. Information on these and other credits is available elsewhere on this website under "Business Incentives & Financing"
Unitary Taxation
Colorado has a liberal "water's edge" system of unitary taxation rather than a "worldwide" one. Specifically, foreign corporations, as well as "80/20" corporations, i.e., corporations with 80% of their property and payroll outside the U.S., are not included in a Colorado income tax return. Corporations doing business in Colorado, as well as other states, must apportion to Colorado that part of their net income derived from sources within Colorado. These corporations may choose to utilize either the Colorado Income Tax Act or the Multi-State Tax Compact. The Tax Act apportions income according to percentages of property owned and the gross receipts in Colorado versus nationwide. The Tax Compact adds the payroll in Colorado versus nationwide as an additional factor.
A Colorado unitary return can include domestic corporations that meet certain objective criteria to measure an affiliated group or corporation. These include overlapping directorships and corporate officers, use of patents, logos, copyrights, etc., and relationships concerning long-term debt, sales, and administrative services among the group.
Colorado has a statutory provision that allows the filing of a consolidated return in lieu of separate returns for those members of an affiliated group that would otherwise be required to file a separate Colorado tax return.
Colorado's Individual Income Tax System
Colorado's personal income tax system consists of a flat tax of 4.63% on the entirety of an individual's taxable federal income.That top rate ranks 5th lowest among states levying an individual income tax.
Since most small businesses are either S Corporations or partnerships or sole proprietorships, they pay their business taxes at the rates for individuals. Colorado's low individual income tax rate makes the tax environment for small businesses in Colorado extremely competitive compared to other states.
For additional information on Corporate Income Taxes please see Colorado's Department of Revenue web site: http://www.revenue.state.co.us/
Severance Taxes
Colorado levies a tax upon the severance from the earth of metallic minerals and energy resources based upon the gross income of the extraction operation or upon the amount extracted. This is a graduated tax that ranges from 2% for income under $25,000 to 5% for income of $300,000 and over. Very small operations are exempt. A credit is allowed against severance tax equal to 87.5% of all ad valorem taxes paid or assessed during the tax year.