Colorado SALT Parity Act Election

Beginning with 2022 tax return filings, Colorado businesses that file taxes as an S corporation or Partnership have the opportunity to  make a new tax election with their Colorado S corporation/Partnership tax return filing called the Colorado SALT Parity Act election.  Making this election can generate a federal tax deduction and save you federal income tax.

Background:

  • Businesses that file taxes as S corporations or partnerships are passthrough entities for tax purposes.  
  • These businesses are required to file a separate annual S corporation/Partnership tax return detailing their business revenue and expenses.  
  • Despite having a separate business tax return filing requirement, ultimately the net profit from the business gets “passed through” to the owners’ personal income tax returns and taxed there.  Typically no income tax is paid with the owners’ annual S corporation/Partnership tax return, and all of the tax on the business income is paid via the owners’ personal income tax returns.

The Colorado SALT Parity Act election is a choice business owners can make to pay the Colorado income tax associated with the business income directly with the S corporation/Partnership income tax return.

The reason Colorado is providing this new state tax election is related to the 2017 Tax Cuts and Jobs Act (TCJA).  The TCJA put limitations in place on the amount of state and local taxes individuals can deduct on their personal federal tax returns each year.

Many states were not happy with this limitation therefore they implemented a “work around” to allow business owners to pay the state tax at the business level and get a full federal tax deduction for the state tax paid at the business level.

Making the SALT Parity Act election and paying the state tax with the S corporation/Partnership tax return generates a business tax deduction (without limitation) for the state tax paid by the business.

Mechanics:

If you would like to take advantage of the Colorado PTE election, when you file your 2022 S-Corporation/Partnership income tax return – you will have a payment due (unless you already made a business quarterly estimated tax payments during 2022).

The net profit from your business is still reported and taxed on your personal income tax return.  To avoid double taxation on this net profit, you get to report a Colorado income tax credit on your personal income tax return equal to the amount of Colorado tax you paid with your S corporation/Partnership tax return filing.

If you file your business taxes as a cash basis taxpayer, the state tax payment you make at the business level is deductible in the year paid i.e. 2023.  You will get to claim it as a business tax deduction in 2023.  

Example:

Kyle’s business “RHOBH Inc.” files taxes as an S corporation.  For 2022, the net profit from the business was $100,000.  

  • Kyle makes the SALT Parity Act election on her 2022 Colorado S corporation tax return.  She makes a $4,400 ($100,000 x 4.4% Colorado tax rate) with her Colorado S corporation tax return when she files in February 2023.  
  • The $100,000 net profit still gets taxed on her 2022 Colorado personal income tax return.  Her personal Colorado tax liability on the net profit is $4,400 ($100,000 x 4.4%) She gets to claim a $4,400 Colorado tax credit  against her personal Colorado tax liability for the tax that was already paid by the S corporation.  Kyle’s net personal Colorado tax liability is $0.
  • The $4,400 Colorado tax payment made by the business is deductible on the 2023 S corporation tax return.  This reduces the business’ 2023 taxable net profit.  If we assume a 24% federal tax rate, this saves Kyle about $1,000 on her 2023 federal tax return ($4,400 x 24%).

Summary

The details of how the Colorado SALT Parity Election work can be confusing.  Whether the election is the right choice for you and your business depends on the facts and circumstances of your tax situation.  Please reach out to me if you would like help in determining if the Colorado SALT Parity Election is right for you and your business.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.