Tax Expenditure Adjustments

Second Regular Session Seventy-fifth General Assembly STATE OF COLORADO REENGROSSED This Version Includes All Amendments Adopted in the House of Introduction HOUSE BILL 26-1221 LLS NO. 26-0488.03 Pierce Lively x2059 HOUSE SPONSORSHIP Zokaie and Sirota, Bacon, Boesenecker, Brown, Clifford, Lieder, Lindsay, Mabrey, McCormick, Nguyen, Rutinel, Smith, Woodrow SENATE SPONSORSHIP Amabile and Wallace, House Committees Senate Committees Finance Appropriations A BILL FOR AN ACT CONCERNING THE ADJUSTMENT OF CERTAIN TAX EXPENDITURES.

Shading denotes HOUSE amendment. Double underlining denotes SENATE amendment.

Capital letters or bold & italic numbers indicate new material to be added to existing law. Dashes through the words or numbers indicate deletions from existing law.

May 4, 2026 The bill adjusts 3 existing tax expenditures. ! Section 2 of the bill limits the alternative minimum tax credit to income tax years commencing prior to January 1, 2026; ! Section 4 requires a corporation, for purposes of determining their state taxable income for state income tax years commencing on or after January 1, 2027, to add to their federal taxable income the amount, if any, that the HOUSE (Note: This summary applies to this bill as introduced and does not reflect any amendments that may be subsequently adopted. If this bill passes third reading in the house of introduction, a bill summary that applies to the reengrossed version of this bill will be available at http://leg.colorado.gov.) 3rd Reading Unamended Bill Summary HOUSE Amended 2nd Reading May 1, 2026 taxpayer claimed as a deduction on the taxpayer's federal tax return pursuant to the employee remuneration deduction allowed pursuant to section 162 (m) of the internal revenue code; and ! Section 5 limits the period of time that net operating losses generated in income tax years commencing on or after January 1, 2027, can be carried forward from 20 years to 10 years and limits the amount of losses that may be claimed to 70% rather than 80%. Section 3 creates a new tax credit. The new tax credit allows taxpayers to claim a refundable tax credit, in addition to the child tax credit and the family affordability tax credit, in an amount determined by the amount and age of the taxpayer's children and the taxpayer's income. The total amount of the new tax credit is adjusted annually based on legislative council staff projections, such that the total amount of the new tax credit claimed in an income tax year is projected to be the same as the amount of revenue raised in sections 2, 4, and 5.

Be it enacted by the General Assembly of the State of Colorado: SECTION 1. Legislative declaration. (1) The general assembly finds and declares that:

(a) The general assembly has an ongoing responsibility to review, evaluate, and update the state tax code within constitutional limitations to ensure that the state tax code is effective, equitable, and aligned with Colorado's priorities;

(b) (I) (A) The Colorado executive compensation income tax deduction has changed frequently in recent years due to changes in the federal tax code;

(B) A taxpayer can claim the executive compensation income tax deduction regardless of whether the executives earning that compensation reside or work in Colorado; and

(C) To ensure that the state tax code is effective, equitable, and aligned with Colorado's priorities, and insulated from changes in the federal tax code, the executive compensation income tax deduction should be limited to only an income tax deduction for a set amount of executive compensation.

(II) (A) The Colorado net operating loss income tax deduction, like the Colorado executive compensation income tax deduction, has changed frequently in recent years due to changes in the federal tax code;

(B) C corporations that have the majority of their activities and investment outside of Colorado may claim the Colorado net operating loss income tax deduction; and

(C) To ensure that the state tax code is effective, equitable, and aligned with Colorado's priorities, and insulated from changes in the federal tax code, the net operating loss income tax deduction should be limited.

(c) (I) Colorado state income tax is determined based on the amount of a person's federal taxable income; (II) Recent federal law modified the computation of federal taxable income and so impacted Colorado state income tax revenue;

(III) The net impact of the recent federal modification to the computation of federal taxable income was a reduction in state income tax revenue;

(IV) The amount and availability of the family affordability tax credit is determined in part by the amount of state income tax revenue;

(V) Therefore, by modifying the computation of federal taxable income, federal law impacted the amount and availability of the family affordability tax credit; and

(VI) At least in part due to the enactment of recent federal law, the family affordability tax credit will not be available for the 2026 state income tax year and will be available in a reduced amount for income tax years 2027 and 2028;

(d) (I) In establishing the family affordability tax credit, the general assembly found and declared that:

(A) Colorado families struggle to afford many necessary goods and services, such as child care, housing, and health care. Eighty-three percent of Colorado parents worry that their children won't be able to afford to live in the state in the future;

(B) Targeted tax credits are a proven tool to lift families out of poverty. Research has shown that families that claim these types of tax credits, such as the state and federal child tax credit and the state and federal earned income tax credit, have better health, improved schooling outcomes, and increased adult earning potential. As the cost of raising children has increased, a family affordability tax credit is critical for the well-being of many children and families across Colorado.

(C) According to the Institute on Taxation and Economic Policy, "[t]o cut child poverty rates by half, the majority of states would require a base credit value of between three thousand dollars and four thousand five hundred dollars per child plus a twenty percent boost for young children." When coupled with the state and federal earned income tax credit and the state and federal child tax credit, the additional investment provided by the family affordability tax credit would establish Colorado as a national leader in equitable economic policy.

(D) Colorado is dealing with rising costs and funding shortfalls in many areas across our state, and it is necessary to provide tax credits to the people who need it most in a way that will do the most good.

Establishing the family affordability tax credit is a proven way to do that;

and

(E) By prioritizing the state's lowest-income families, expanding the child age eligibility, and including more families, the state can provide research-backed investments for families. Through thoughtful and strategic investment, Colorado can cut child poverty nearly in half.

(II) Therefore, it is a priority of Colorado to provide a tax credit that targets the same taxpayers that the family affordability tax credit targeted, to offset the reduction in the family affordability tax credit.

(e) (I) This House Bill 26-1221 constitutes a single comprehensive tax policy change that better aligns the state tax code with Colorado's decision to prioritize low- and middle-income families with children by, at least partially, mitigating the effect of recent federal law on the family affordability tax credit by creating a tax credit that targets the same population targeted by the family affordability tax credit while also mitigating the reduction to wealthy taxpayers and corporations' tax burdens as a result of recent federal law;

(II) The income tax credit created in this House Bill 26-1221 reduces state tax revenue in an amount equal to or greater than the amount of state revenue gain attributable to the changes made in this House Bill 26-1221;

(III) Any net district revenue gain resulting from the tax policy change in this House Bill 26-1221 is incidental and de minimis; and

(IV) Therefore, consistent with the Colorado Supreme Court's holding in TABOR Found. v. Reg'l Transp. Dist., 2018 CO 29, that a tax policy change that causes either no net district tax revenue gain or a net district tax revenue gain that is only incidental and de minimis does not require voter approval under section 20 (4)(a) of article X of the state constitution, this House Bill 26-1221 is not a tax policy change that requires voter approval.

SECTION 2. In Colorado Revised Statutes, add 39-22-131 as follows: 39-22-131.

Family affordability credit - tax preference performance statement - legislative declaration - definitions.

(1) (a) IN ACCORDANCE WITH SECTION 39-21-304 (1), WHICH REQUIRES EACH BILL THAT CREATES A NEW TAX EXPENDITURE TO INCLUDE A TAX PREFERENCE PERFORMANCE STATEMENT AS PART OF A STATUTORY LEGISLATIVE DECLARATION, THE GENERAL ASSEMBLY HEREBY FINDS AND DECLARES THAT THE PURPOSES OF THE INCOME TAX CREDIT CREATED IN THIS SECTION ARE THE SAME AS THE FAMILY AFFORDABILITY TAX CREDIT:

TO SUBSTANTIALLY REDUCE CHILD POVERTY, MAKE COLORADO MORE AFFORDABLE FOR FAMILIES, AND HELP FAMILIES AFFORD EXPENSES ASSOCIATED WITH HAVING CHILDREN BY PROVIDING TAX RELIEF FOR CERTAIN INDIVIDUALS.

(b) THE GENERAL ASSEMBLY AND THE STATE AUDITOR, IN CONSULTATION EFFECTIVENESS OF THE INCOME TAX CREDIT CREATED IN THIS SECTION IN COMBINATION WITH THE FAMILY AFFORDABILITY TAX CREDIT AND, IN THE SAME MANNER AS THE GENERAL ASSEMBLY AND THE STATE AUDITOR MEASURE THE EFFECTIVENESS OF THE FAMILY AFFORDABILITY TAX CREDIT BY DETERMINING THE NUMBER OF COLORADO FAMILIES THAT, AFTER CLAIMING A CREDIT PURSUANT TO THIS SECTION AND THE FAMILY AFFORDABILITY CREDIT, NO LONGER FALL BELOW THE FEDERAL POVERTY LEVEL IN THE TAX YEAR IN WHICH THEY CLAIMED THE CREDITS.

WITH THE DEPARTMENT, SHALL MEASURE THE

(2) AS USED IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES:

(a) "CREDIT" MEANS THE CREDIT AGAINST INCOME TAX CREATED IN THIS SECTION.

(b) "DEPARTMENT" MEANS THE DEPARTMENT OF REVENUE.

(c) "ELIGIBLE CHILD" MEANS A QUALIFYING CHILD, AS DEFINED IN

SECTION 152 (c) OF THE "INTERNAL REVENUE CODE OF 1986"; EXCEPT THAT THE AGE REQUIREMENTS ARE AS SET FORTH IN SUBSECTIONS (3)(a)(I), (3)(a)(II), (3)(b)(I), AND (3)(b)(II) OF THIS SECTION.

(d) "FEDERAL POVERTY LEVEL" MEANS THE POVERTY LINE THAT IS REQUIRED TO BE UPDATED ANNUALLY WITHIN THE FEDERAL POVERTY GUIDELINES ADOPTED BY THE UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES PURSUANT TO 42 U.S.C. SEC. 9902 (2).

(e) "INFLATION" MEANS THE ANNUAL PERCENTAGE CHANGE IN THE UNITED STATES DEPARTMENT OF LABOR BUREAU OF LABOR STATISTICS CONSUMER PRICE INDEX FOR DENVER-AURORA-LAKEWOOD FOR ALL ITEMS PAID BY ALL URBAN CONSUMERS, OR ITS APPLICABLE SUCCESSOR INDEX.

(f) "JOINT FILER ADJUSTED BASE INCOME" MEANS, FOR INCOME TAX YEARS COMMENCING BEFORE JANUARY 1, 2034, AN AMOUNT OF ADJUSTED GROSS INCOME EQUAL TO THE AMOUNT OF ADJUSTED GROSS INCOME DETERMINED BY THE DEPARTMENT PURSUANT TO SECTION 39-22-130 (7) TO BE NECESSARY FOR TWO RESIDENT INDIVIDUALS WHO FILE A JOINT RETURN TO QUALIFY FOR THE FAMILY AFFORDABILITY TAX CREDIT PURSUANT TO SECTION 39-22-130 FOR THE INCOME TAX YEAR COMMENCING ON JANUARY 1, 2026.

(g) "SINGLE FILER ADJUSTED BASE INCOME" MEANS, FOR INCOME TAX YEARS COMMENCING BEFORE JANUARY 1, 2034, AN AMOUNT OF ADJUSTED GROSS INCOME EQUAL TO THE AMOUNT OF ADJUSTED GROSS INCOME DETERMINED BY THE DEPARTMENT PURSUANT TO SECTION 39-22-130 (7) TO BE NECESSARY FOR A SINGLE RESIDENT INDIVIDUAL WHO FILES A SINGLE RETURN TO QUALIFY FOR THE FAMILY AFFORDABILITY TAX CREDIT PURSUANT TO SECTION 39-22-130 FOR THE INCOME TAX YEAR COMMENCING ON JANUARY 1, 2026.

(3) (a) IN ADDITION TO THE CHILD TAX CREDIT ALLOWED BY SECTION 39-22-129 AND THE FAMILY AFFORDABILITY TAX CREDIT ALLOWED BY SECTION 39-22-130, FOR INCOME TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2027, A RESIDENT INDIVIDUAL WHO FILES A SINGLE RETURN IS ALLOWED A CREDIT AGAINST THE INCOME TAXES IMPOSED PURSUANT TO THIS ARTICLE 22 FOR:

(I) EACH ELIGIBLE CHILD OF THE RESIDENT INDIVIDUAL WHO IS FIVE YEARS OLD OR YOUNGER AT THE CLOSE OF THE INCOME TAX YEAR IN AN AMOUNT DETERMINED BY STAFF OF THE LEGISLATIVE COUNCIL PURSUANT TO SUBSECTION (5)(b) OF THIS SECTION; AND

(II) EACH ELIGIBLE CHILD OF THE RESIDENT INDIVIDUAL WHO IS SIX YEARS OLD OR OLDER BUT LESS THAN SEVENTEEN YEARS OLD AT THE CLOSE OF THE INCOME TAX YEAR IN AN AMOUNT THAT IS SEVENTY-FIVE PERCENT OF THE AMOUNT ALLOWED IN SUBSECTION (3)(a)(I) OF THIS SECTION.

(b) IN ADDITION TO THE CHILD TAX CREDIT ALLOWED BY SECTION 39-22-129 AND THE FAMILY AFFORDABILITY TAX CREDIT ALLOWED BY

SECTION 39-22-130, FOR INCOME TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2027, TWO RESIDENT INDIVIDUALS WHO FILE A JOINT RETURN ARE ALLOWED A FAMILY AFFORDABILITY TAX CREDIT AGAINST THE INCOME TAXES DUE IMPOSED PURSUANT TO THIS ARTICLE 22 FOR:

(I) EACH ELIGIBLE CHILD OF THE RESIDENT INDIVIDUALS WHO IS FIVE YEARS OLD OR YOUNGER AT THE CLOSE OF THE INCOME TAX YEAR IN AN AMOUNT DETERMINED BY STAFF OF THE LEGISLATIVE COUNCIL PURSUANT TO SUBSECTION (5)(b) OF THIS SECTION; AND

(II) EACH ELIGIBLE CHILD OF THE RESIDENT INDIVIDUALS WHO IS SIX YEARS OLD OR OLDER BUT LESS THAN SEVENTEEN YEARS OLD AT THE CLOSE OF THE INCOME TAX YEAR IN AN AMOUNT THAT IS SEVENTY-FIVE PERCENT OF THE AMOUNT ALLOWED IN SUBSECTION (3)(b)(I) OF THIS SECTION.

(4) (a) NOTWITHSTANDING SUBSECTION (3) OF THIS SECTION, FOR INCOME TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2027, THE CREDIT AMOUNTS IN:

(I) SUBSECTION (3)(a)(I) OF THIS SECTION ARE REDUCED, BUT NOT BELOW ZERO, BY AN AMOUNT EQUAL TO SIX AND EIGHT HUNDRED SEVENTY-FIVE ONE-THOUSANDTHS PERCENT FOR EACH FIVE THOUSAND DOLLARS BY WHICH A RESIDENT INDIVIDUAL'S ADJUSTED GROSS INCOME EXCEEDS THE SINGLE FILER ADJUSTED BASE INCOME; AND

(II) SUBSECTION (3)(b)(I) OF THIS SECTION ARE REDUCED, BUT NOT BELOW ZERO, BY AN AMOUNT EQUAL TO SIX AND EIGHT HUNDRED SEVENTY-FIVE ONE-THOUSANDTHS PERCENT FOR EACH FIVE THOUSAND DOLLARS BY WHICH TWO RESIDENT INDIVIDUALS' ADJUSTED GROSS INCOME EXCEEDS THE JOINT FILER ADJUSTED BASE INCOME.

(b) FOR INCOME TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2027, THE DEPARTMENT SHALL ADJUST THE JOINT FILER ADJUSTED BASED INCOME AND SINGLE FILER ADJUSTED BASE INCOME TO REFLECT INFLATION FOR EACH INCOME TAX YEAR IN WHICH THE CREDIT DESCRIBED IN THIS SECTION IS ALLOWED IF CUMULATIVE INFLATION SINCE THE LAST ADJUSTMENT, WHEN APPLIED TO THE CURRENT LIMITS, RESULTS IN AN INCREASE OF AT LEAST ONE THOUSAND DOLLARS WHEN THE ADJUSTED LIMITS ARE ROUNDED TO THE NEAREST ONE THOUSAND DOLLARS.

BEGINNING WITH THE QUARTERLY DECEMBER REVENUE FORECAST THAT LEGISLATIVE COUNCIL STAFF PRESENTS IN DECEMBER OF 2027, AND FOR EACH QUARTERLY DECEMBER REVENUE FORECAST THEREAFTER, AS PART OF THE QUARTERLY FORECAST, LEGISLATIVE COUNCIL STAFF SHALL DETERMINE:

DECEMBER REVENUE

(a) FOR THE CURRENT INCOME TAX YEAR, A PROJECTION OF THE AMOUNT OF REVENUE GAIN DIRECTLY ATTRIBUTABLE TO THE CHANGES MADE IN THIS HOUSE BILL 26-1221, NOTWITHSTANDING THE TAX CREDIT CREATED IN THIS SECTION;

(b) A DOLLAR AMOUNT OF THE CREDIT AVAILABLE PURSUANT TO SUBSECTIONS (3)(a)(I) AND (3)(b)(I) OF THIS SECTION, WHICH DOLLAR AMOUNT MUST BE THE SAME FOR BOTH SUBSECTIONS (3)(a)(I) AND (3)(b)(I) OF THIS SECTION, SUCH THAT THE STAFF OF THE LEGISLATIVE COUNCIL PROJECTS, FOR THE CURRENT STATE INCOME TAX YEAR, THAT THE TOTAL DOLLAR AMOUNT OF CREDITS CLAIMED PURSUANT TO SUBSECTION (3) WILL EQUAL THE DOLLAR AMOUNT OF REVENUE GAIN THAT STAFF OF THE LEGISLATIVE COUNCIL DETERMINES, PURSUANT TO SUBSECTION (5)(a) OF THIS SECTION, IS DIRECTLY ATTRIBUTABLE TO THE CHANGES MADE IN THIS HOUSE BILL 26-1221, NOTWITHSTANDING THE TAX CREDIT CREATED IN THIS SECTION.

NO LATER THAN TWO WEEKS BEFORE THE QUARTERLY DECEMBER REVENUE FORECAST THAT LEGISLATIVE COUNCIL STAFF PRESENTS IN DECEMBER OF 2027, AND EACH DECEMBER REVENUE FORECAST THEREAFTER, THE DEPARTMENT SHALL DELIVER A REPORT TO THE STAFF OF THE LEGISLATIVE COUNCIL THAT DESCRIBES THE REVENUE GAIN DIRECTLY ATTRIBUTABLE TO THE CHANGES MADE IN THIS HOUSE BILL 26-1221 FOR THE PREVIOUS INCOME TAX YEAR, NOTWITHSTANDING THE TAX CREDIT CREATED IN THIS SECTION.

(7) IN THE CASE OF A PART-YEAR RESIDENT, THE CREDIT ALLOWED UNDER THIS SECTION IS APPORTIONED IN THE RATIO DETERMINED UNDER

SECTION 39-22-110 (1).

THE CREDIT ALLOWED UNDER THIS SECTION IS NOT CONSIDERED TO BE INCOME OR RESOURCES FOR THE PURPOSE OF DETERMINING ELIGIBILITY FOR THE PAYMENT OF PUBLIC ASSISTANCE BENEFITS AND MEDICAL ASSISTANCE BENEFITS AUTHORIZED UNDER STATE LAW OR FOR A PAYMENT MADE UNDER ANY OTHER PUBLICLY FUNDED PROGRAM.

(9) THE AMOUNT OF THE CREDIT ALLOWED UNDER THIS SECTION THAT EXCEEDS THE RESIDENT INDIVIDUAL'S INCOME TAXES DUE IS REFUNDED TO THE INDIVIDUAL.

(10) THE DEPARTMENT IS AUTHORIZED AND ENCOURAGED TO DEVELOP A MEANS OF REFUNDING THE CREDITS ALLOWED BY THIS SECTION TO RESIDENT INDIVIDUALS WHO QUALIFY FOR THE CREDITS IN TWELVE EQUAL MONTHLY REFUNDS RATHER THAN ANNUALLY.

(11) NOTWITHSTANDING SECTION 39-21-304 (4), THE CREDIT DOES NOT REPEAL AFTER A SPECIFIED PERIOD OF TAX YEARS.

SECTION 3. In Colorado Revised Statutes, 39-22-304, add (2)(m) as follows: 39-22-304. Net income of corporation - legislative declaration - definitions - repeal.

(2) There shall be added to federal taxable income:

(m) FOR STATE INCOME TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2027, THE AMOUNT, IF ANY, IN EXCESS OF TWO HUNDRED AND FIFTY THOUSAND DOLLARS THAT THE TAXPAYER CLAIMED AS A DEDUCTION ON THE TAXPAYER'S FEDERAL TAX RETURN PURSUANT TO THE EMPLOYEE REMUNERATION DEDUCTION ALLOWED PURSUANT TO SECTION 162 (m) OF THE INTERNAL REVENUE CODE.

SECTION 4. In Colorado Revised Statutes, 39-22-504, amend (1)(b) and (3)(b); and add (1)(c) and (3)(c) as follows:

39-22-504. Net operating losses.

(1) (b) For losses incurred after December 31, 2017, AND ON OR BEFORE DECEMBER 31, 2026, the eighty percent limitation set forth in section 172 (a)(2) of the internal revenue code shall apply without regard to the amendments made in section 2303 of the March 2020 "Coronavirus Aid, Relief, and Economic Security Act", Pub.L. 116-136.

(c) FOR LOSSES INCURRED AFTER DECEMBER 31, 2026, THE EIGHTY PERCENT LIMITATION SET FORTH IN SECTION 172 (a)(2) OF THE INTERNAL REVENUE CODE SHALL BE APPLIED AS A SEVENTY PERCENT LIMITATION BUT SHALL OTHERWISE APPLY WITHOUT REGARD TO THE AMENDMENTS MADE IN SECTION 2303 OF THE MARCH 2020 "CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT", PUB.L. 116-136.

(3) (b) Net operating losses of corporations generated in income tax years commencing on or after January 1, 2021, AND BEFORE JANUARY 1, 2027, may be carried forward for twenty years. Net operating losses of corporations may not be carried back to an earlier tax year.

(c) NET OPERATING LOSSES OF CORPORATIONS GENERATED IN INCOME TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2027, MAY BE CARRIED FORWARD FOR TEN YEARS.

NET OPERATING LOSSES OF CORPORATIONS MAY NOT BE CARRIED BACK TO AN EARLIER TAX YEAR.

SECTION 5. Act subject to petition - effective date. This act takes effect at 12:01 a.m. on the day following the expiration of the ninety-day period after final adjournment of the general assembly (August 12, 2026, if adjournment sine die is on May 13, 2026); except that, if a referendum petition is filed pursuant to section 1 (3) of article V of the state constitution against this act or an item, section, or part of this act within such period, then the act, item, section, or part will not take effect unless approved by the people at the general election to be held in November 2026 and, in such case, will take effect on the date of the official declaration of the vote thereon by the governor.