Colorado’s updated CARES Act guidance may require amended returns

In detail

Background of Colorado’s CARES Act treatment 

Colorado generally conforms on a rolling basis to the Internal Revenue Code. The CARES Act, enacted on March 27, 2020, impacted the following items retroactively for federal income tax purposes:  

• The 80% NOL limitation was suspended for the 2018 to 2020 tax years and a five-year NOL carryback for losses arising in the 2018 to 2020 tax years was allowed 
• The allowable interest expense deduction under Section 163(j) was increased from 30% to 50% of ATI for the 2019 and 2020 tax years. 
• Qualified improvement property (QIP) retroactively qualifies for full expensing.

Although Colorado is a rolling conformity state, Colorado regulation 39-22-103(5.3) provides that a federal statutory change enacted after the end of a taxable year does not impact Colorado tax liability for that taxable year. Accordingly, prior Department guidance provided that Colorado would not adopt CARES Act changes for tax years ending before March 27, 2020.

Revised guidance – NOLs  

Enacted on July 11, 2020, H.B. 1420 permanently applies the 80% limitation in Section 172(a)(2) to losses incurred after December 31, 2017 without regard to amendments made by the CARES Act. In particular, the limit is calculated after the deductions allowed under Section 250. Additionally, Colorado statutorily does not allow NOL carrybacks.  

Because Colorado statutorily applies the 80% limitation to 2018 and future tax years and disconnects from the CARES Act change, the regulation and Anschutz decision generally did not impact Colorado NOL treatment. The April 2023 Department guidance repeated Colorado’s NOL treatment providing that NOL carrybacks are not allowed and stated that:  

“The Colorado net operating loss deduction a C corporation may claim for losses arising in tax years beginning after December 31, 2017, is limited to 80 percent of the C corporation's Colorado taxable income after the deduction of any Colorado net operating losses arising from tax years beginning prior to January 1, 2018. The 80 percent limitation is determined without regard to the amendments made by section 2303 of the CARES Act. In particular, the limit is calculated after the deductions allowed under section 250 of the Internal Revenue Code.”  

The April 2023 guidance adds compliance instructions, noting that Form DR 0112 for tax years 2019 and later includes a specific line for deducting Colorado NOLs arising in tax years beginning after December 31, 2017, that are subject to the 80% limitation. Therefore, “although the CARES Act suspended this limit, C corporations may not amend their returns to claim additional net operating losses despite the recent court ruling.”  

Observation: Although revised guidance did not materially impact NOL treatment, please read our Insight that discusses recent regulatory changes impacting NOLs. That Insight acknowledges the observed increased NOL audit activity as well as the importance for taxpayers to maintain adequate supporting documentation. The changes in the revised regulation include items related to apportionment of the Section 382 limitation and a formula for calculating the SRLY limit not specifically addressed by statute.  

Revised guidance – Section 163(j) business interest expense limitation 

Tax years ending prior to March 27, 2020 

Prior Department guidance stated that CARES Act changes did not apply for Colorado income tax purposes for tax years ending prior to March 27, 2020.

In its April 2023 revised guidance, the Department recognized that such prior guidance regarding these retroactive changes should be disregarded and taxpayers must file amended Colorado returns, if necessary, to correct their federal taxable income to match their federal taxable income determined for federal income tax purposes.  

Tax years ending between March 27, 2020, and December 31, 2020  

Enacted on July 11, 2020, H.B. 1420 provides that a taxpayer is required to add back an amount equal to the amount in excess of the Section 163(j) limitation on business interest without regard to the CARES Act amendments to Section 163(j). The CARES Act amendments included: (1) increase from 30% to 50% ATI limitation for tax years 2019 and 2020; (2) the option to elect out of the 50% limitation and use 30% of ATI for tax years 2019 or 2020; (3) the election to use 2019 ATI for a taxpayer's 2020 tax year; and (4) special rules for partnerships.   

In its April 2023 revised guidance, the Department acknowledged that C corporations must add back to federal taxable income business interest deductions taken on the federal return to the extent they are in excess of the limits imposed under Section 163(j) prior to the CARES Act change.  

This addback was not affected by Anschutz decision. Therefore, C corporations must not adjust this addback when amending a return for a tax year beginning or ending between March 27, 2020 and December 31, 2020.

2021 tax year and the subtraction modification  

C corporations may claim a subtraction on their Colorado return for their income tax year beginning on or after January 1, 2021, but before January 1, 2022, if they made an addition on their Colorado return for the prior tax year for business interest expenses deducted on their federal return. Note that this “addback” relates only to the above guidance for tax years ending between March 27, 2020, and December 31, 2020.  

In the case of a taxpayer that apportions and allocates its net income, the addback amount must be multiplied by the taxpayer’s apportionment factor for the year of the addback to determine the amount of the subtraction. The subtraction a C corporation may claim is subject to limitations discussed in the guidance.

The April 2023 guidance provides that the subtraction modification is not applicable to tax years ending before March 27, 2020, because the retroactive provisions of the CARES Act apply and, therefore, there should be no difference to report as a subtraction.

Observation: The overlap of the Anschutz decision allowing for retroactive CARES Act treatment and H.B. 1420 that legislatively required a CARES Act addback for tax years ending after March 27, 2020, results in taxpayers needing to review their Section 163(j) treatment for both of these periods.  

• For tax years ending prior to March 27, 2020, Colorado conforms to CARES Act Section 163(j) changes and, as a result, there is no difference that would create a 2021 subtraction. 
• For tax years between March 27, 2020, and December 31, 2020, Colorado requires an addback to the extent of differences caused by CARES Act Section 163(j) changes. Such an addback would trigger a taxpayer qualifying for a 2021 subtraction modification. The Department issued supplemental instructions to Form DR0112 for additional information regarding the subtraction.