Updated: Jul 9
By Ed Sealover – Senior Reporter, Denver Business Journal
Jun 2, 2021
Colorado small businesses may yet a major income-tax break in the years ahead after legislative leaders reversed course and introduced a measure late Monday concerning the federal State and Local Tax deduction, just days after sponsors had given it up for dead.
House Bill 1327, which has bipartisan sponsorship in both the House and the Senate, would allow pass-through companies such as LLCs and S corporations to reregister as C corporations for tax purposes and take a SALT deduction denied to them since the 2017 federal tax reform. A similar bill passed last year in Michigan was estimated to save companies in that state $500 million a year, and co-sponsoring Sen. Rob Woodward, R-Loveland, said he believes the benefits could be similar in Colorado.
Woodward and Democratic Sen. Chris Kolker of Centennial had worked for months with Democratic Rep. David Ortiz of Centennial and GOP Rep. Kevin Van Winkle of Highlands Ranch on the proposal, writing it to ensure money going back to businesses would come only from federal revenues and wouldn’t short the state budget. Still, House Speaker Alec Garnett, D-Denver, expressed concern with the constitutionality and potential costs of the bill, which would have allowed firms to refile taxes for each year going back to 2018 in order to recover tax breaks lost in each year, and the quartet told Denver Business Journal in a story published Friday that they disappointingly would have to put off the effort until 2022.
But Garnett said Monday that he had a change of heart after reading more about the bill and speaking to people, and he got Ortiz and Van Winkle to agree to one major concession — making the bill prospective beginning in the 2022 tax year rather than retrospective, a move whose constitutionality he still questions. Early Tuesday evening, he read the bill across his desk and assigned it to House Finance Committee, where it could get its first committee hearing as early as today.
“Every policymaker has the opportunity to look at things differently when provided with new information,” Garnett said in an interview. “I get it that there are some who have concerns with it. I think it’s fair that every lawmaker has the opportunity to vote up or down on it.” The decision comes with less than two weeks remaining in a legislative session that has to end no later than June 12 — a timeframe that will give the sponsors a short window to explain complex tax law to fellow lawmakers.
And it comes as the General Assembly also is considering a pair of bills that would roll back some $375 million in existing tax exemptions — partly to fund other tax breaks such as increased business personal property tax exemptions and an expanded earned income tax credit but also partly to put more money into the state’s coffers. Thus, there is no guarantee that the Legislature is in the mood to make another major tax-policy change right now.
But this also is the rare potential tax break that not only could come at no cost to the state but could end up generating revenue for both the state and the tax-break recipients. In the 2017 federal Tax Cuts and Jobs Act, businesses received a number of increased tax breaks but lost one that particularly was used by companies in higher-tax states — the SALT deduction. Where they previously could deduct all of the state and local taxes they owed from their federal tax bill, the 2017 law capped the deduction specifically for pass-through companies at $10,000 a year, even though it imposed no such cap on typically larger C corporations.
HB 1327 would allow companies to reregister as C corporations moving forward — a potential boon for any LLC, S corporation or sole proprietorship that pays more than $10,000 per year in state and local taxes. Woodward, who got the idea from a Larimer County accountant who had been reading up on federal and state tax changes, said the measure could impact tens of thousands of companies — so much so that some of the sponsors believe that it could create a surge in new tax revenue for the state because companies’ net income per year could grow.
Kolker in particular said last week that he had been unwilling to eliminate the look-back provision because he wanted small businesses hurting from the pandemic to be able to get an immediate infusion of back-tax revenues. But Woodward said Tuesday that they could come back next year with the look-back provision as a separate bill — an idea that he and Kolker already have discussed — and move forward with this opportunity to make a permanent change to the tax code that could help many firms in years to come.
“Thank goodness we have leadership taking a look at one of the most common-sense bills I’ve run across. It’s definitely good for businesses and specifically, it’s good for small businesses and regular Coloradans,” said Woodward when reached late Tuesday. “It would be better, of course, if we were taking it all the way back. But at this late stage, that’s probably too much to explain to the other 96 members. And this will still help a lot.”