The March 27, 2020, CARES Act enactment implemented several tax reform relief provisions retroactively applicable to prior tax years. The Department initially advanced the policy that such retroactive relief was not available in Colorado and, therefore, taxpayers were required to adjust their federal taxable income to remove such benefits for state tax purposes. Applicable for the 2021 tax year, Colorado legislation allowed taxpayers a subtraction modification measured by the Section 163(j) and qualified improvement property (QIP) retroactive benefits they would have received had they been applicable in Colorado. In November 2022, a Colorado appellate court ruled that retroactive changes in federal law can affect a taxpayer’s Colorado taxable income. Accordingly, the Department issued guidance in April 2023 reflecting that CARES Act retroactive provisions applied in prior tax years and that taxpayers may have to file amended state returns to correct federal taxable income amounts in prior tax years. The takeaway: Colorado’s path to CARES Act conformity for corporate taxpayers has been a challenging one. Because Colorado statutorily established its own 80% NOL limitation, its CARES Act conformity has little impact on NOLs. However, the state’s Section 163(j) conformity creates complexity because state law decouples from CARES Act changes only starting with tax years ending on or after March 27, 2020. Because of the 2022 appellate court decision, taxpayers follow different Section 163(j) treatment before and after tax years ending on or after March 27, 2020, which may create taxpayer obligations to file amended returns. Similar concerns exist for QIP purposes. Note that the revised Department document also provides guidance for individual taxpayers. [CARES Act Tax Law Changes & Colorado Impact (revised April 2023)]
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.
On November 17, 2022, a Colorado appellate court in Anschutz v. Department of Revenue determined that the regulation was incorrect and that retroactive changes in federal law can affect a taxpayer’s Colorado taxable income. Click here for our Insight summarizing Anschutz.
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.