Colorado pass-through businesses could be in for another tax windfall with new bill

By Ed Sealover – Senior Reporter, Denver Business Journal Feb 24, 2022, 9:42am EST One year after passing a law that backers said could lead to federal tax-return boosts of as much as $500 million for small businesses, the Colorado Legislature is back with a proposal to make the law retroactive to 2018 — and possibly generate a windfall for state firms. Senate Bill 124 is sponsored by the same bipartisan duo behind the 2021 law — Republican Sen. Rob Woodward of Loveland and Democratic Sen. Chris Kolker of Centennial. And it passed its first test with flying colors on Wednesday, advancing out of the Senate Finance Committee with an unanimous vote. Its origins stretch to the 2017 federal Tax Cuts and Jobs Act, which added tax breaks for pass-through entities like limited liability companies (LLCs), sole proprietorships and S corporations but limited to $10,000 the deduction they can take on the state and local taxes they’ve paid. No such limits were placed on C Corporations, and those typically larger firms began to accrue more benefits in typically higher-tax states. The 2021 law from Woodward and Kolker allowed Colorado-based pass-through entities to re-register as C Corps and be able to take what is known as the SALT (state and local tax) deduction this year — a move they argued would be appealing to any company that pays more than $10,000 in local taxes. The Colorado Department of Revenue estimated that in 2018, 138,000 individual Coloradans — as pass-through entities pay taxes through owners’ individual filings — had a combined $2 billion in SALT deductions they could not take, averaging $14,000 per person, Woodward said.

Because of questions about the impact of making the law retroactive last year, the sponsors scrubbed that portion of the bill. However, as more states go the extra mile and allow companies to refile taxes going back to 2018 — Woodward said that more than 20 have passed such laws — it’s time for Colorado to step up and do the same, they said. If SB 124 were to be signed into law by Gov. Jared Polis, who celebrated the tax breaks allowed by last year’s bill at several public appearances, and all eligible filers were to take advantage of the law, that could generate a cumulative $1.75 billion for local companies, Woodward said. However, after working with the nonpartisan Legislative Council to estimate the fiscal impact of the proposal, he said that its more likely that only about 18% of pass-through entities will seek the benefits — a push that still would dump an extra $316 million into the economy. “We should pass this bill to put small businesses on an equal footing with giant corporations,” Woodward implored the committee members. “We should pass this bill to stimulate small businesses and head toward economic recovery.” None of the money flowing back to the businesses would come from the state budget, eliminating what likely would be the largest objection from any legislator. However, the amount of work that the bill would require from the revenue department to process the resubmitted claims could be a stumbling block for the proposal. The Legislative Council estimated that it would require 22 new full time employees at a cost of $2.1 million in next year’s budget to put the new tax benefits into effect — a total that could led to hiccups as legislators look to sculpt the budget for the fiscal year beginning July 1. Still, that number was minuscule compared to the 143 new employees that the revenue department told the legislative council it would need to make the changes.

Amber Egbert, legislative and implementation services manager at the Colorado Department of Revenue, said officials there were uncomfortable with the estimate that only 18% of potential beneficiaries would seek to re-file taxes and felt the workload would be greater. Because the department is understaffed and because its computer system will not allow for an easy adjustment of prior filings, she said she is concerned that work on these tax-filing revisions will delay certification of other applied-for tax credits and create a backlog. But Phil Horowitz, the state and local tax director for Moss Adams and a former director of tax policy analysis for the Revenue Department, told the committee that the requested employee appropriations was “a little bit preposterous” and that less manpower is needed to implement the law. And Kolker and Woodward both committed to trying to work with the department to bring down even the $2.1 million fiscal note on the bill, though they insisted that even at that level, the benefits to companies battered by the pandemic outweigh the costs. “This could be a large return on investment. We need to be sure we can bring down that cost,” Kolker said just before the committee advanced the bill to the Senate Appropriations Committee, which will scrutinize its costs more carefully. “The investment on this when you look at the upside in return is too great to overlook.”