Colorado amends unitary combined reporting law effective in 2026

In detail 

The legislation provides, effective for tax years beginning on or after January 1, 2026: 

• The historic “3 of 6” unitary test is repealed. This test provided that members of an affiliated group of C corporations may be included in a combined report only when any three of six unitary indicators have been satisfied for the tax year and the two preceding tax years. 
• Instead, “unitary business” is defined as a single economic enterprise made up either of separate parts of a single C corporation or of an affiliated group of C corporations that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.   
• A unitary business includes that part of the business that is conducted by a taxpayer through the taxpayer’s interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities. The legislation provides apportionment rules for partnership income, intercompany transactions, and allocation of a partnership tax item.  

Observation: The legislation replaced a concrete set of tests (although sometimes hard to apply to large groups) with more amorphous and subjective unitary tests. This change could be helpful to taxpayers because the Colorado combined group more likely would constitute the same members as the combined groups in traditional unitary combined states. Taxpayers also should consider the impact of new provisions providing for the apportionment of partnership income. 

The legislation also provides revised rules for unitary combined reporting: 

• All of the members of an affiliated group of C corporations, wherever incorporated or domiciled, that are members of a unitary business are required to file a combined report as a combined group. The net income of each member of the combined group is combined, eliminating items of income, expense, gain, and loss from transactions between members of the combined group, applying the consolidated filing rules under the IRC and the regulations thereunder, as if the combined group was a consolidated filing group. 
• The combined group apportionment factor numerator includes amounts sourced to the state for the combined group’s unitary business, regardless of the separate entity to which those factors may be attributed, and the denominator of the factor includes amounts associated with the combined group’s unitary business wherever located. Intercompany transactions among members of the combined group are excluded from both the apportionment numerator and denominator. 

Observation: In general, the legislation leaves in place some key features of Colorado unitary combined reporting, including the Finnigan rule and tax haven law adopted in 2021, application of the federal consolidated reporting rules, the consolidated filing election, and the 80/20 company exclusion (applies to both foreign and domestic entities).