Fuel Growth Through Colorado Tax Incentives

The state of Colorado offers several state tax incentive programs to reward companies for engaging in various business activities. Mostly the programs focus on job creation, targeted investments, and specific research and development activities. The amount of the incentives awarded often depends on several factors and varies between business to business. However, the savings can be compelling and for those looking to reduce state income tax, these programs offer a compelling opportunity. The most common incentives include the Research & Development Tax Credit, Job Growth Incentive Credit, and the Advanced Industry Investment Tax Credit. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key program details below.

Research & Development Tax Credit

This tax credit is designed to reward companies for investing in research and development (R&D) activities. The amount of the credit is equal to 3% of the R&D expenses compared to what was spent the prior two years. To be eligible a business must be located within an Enterprise Zone (EZ) and must be legally operating under both state and federal law (cannabis companies are ineligible). The business must also operate within the same EZ for three years to claim the credit. This means that if a business moves to a new EZ location, the three-year window resets and the credit can be claimed until the business has been located there for three years.

Eligible research activities need to be technological in nature, to be useful for developing a new or improved product or component for the business and use experimentation. Eligible expenses include wages (excluding fringe benefits) supplies, and payments for the right to use computers. Contract expenses are also eligible and are limited to amounts paid for research done. It is important to note that land or land improvements, depreciable equipment, management surveys, costs to adapt products, and research funded by a government entity are not eligible. Recipients need to claim the credit at 25% for each of the credit years for four years.

Job Growth Incentive Tax Credit

This credit is an eight-year job creation incentive designed to support competitive, multi-state and expansion projects. Eligible recipients can receive a state tax credit equal to 50% of the FICA taxpaid by the business for each job. Since this credit is performance based, if the company does not meet job creation or wage requirements, it may not be able to claim the benefit. It is not a refundable credit, so eligible taxpayers have a carryforward period of 10 years.

To be eligible a Colorado company must create at least 20 net new jobs. These new hires must be paid an average wage of at least 100% of the annual wage in the County where located. The jobs must be maintained for a period of one year, and it must be demonstrated the credit is a major factor in the decision to locate in Colorado.

This is not an automatic tax credit and businesses must apply through the Colorado Economic Development Commission to receive approval. Once approved, businesses have 18 months to begin the project. Ongoing reporting to the Business Funding and Incentives division is required.

Advanced Industry Investment Tax Credit

This tax credit is designed to encourage third parties to invest in Colorado’s advanced industries. The program requires a Colorado business in the advanced industry sectors to be certified by the state and an advanced industry business. Then the company can use the status to attract investors that can earn a state income tax credit. The credit amount is 25% of the investment up to a maximum of a $100,000 credit. The amount increases to 35% when the business is in an EZ or rural county.

For a business to qualify for the program it must be a corporation, partnership, LLC or other business entity, manufacture an advanced technology, be headquartered in Colorado with 50% of all employees located within the state, registered with the Colorado Secretary of State, have received less than 10M from third party investors, and have annual revenues less than 5M or have been generating revenue for less than 5 years.

For an investor to be eligible the investment must be certified, be a third-party unaffiliated investor, hold less than 30% voting power, and invest at least $10,000. A statement must be submitted that obtaining the credit was a significant part of the decisions to invest and the investment would likely not have been without access to the incentive. Finally, an application for the credit must be completed within 90 days of the investment date.

Contact Us

The growth incentives available to Colorado businesses provide a compelling state tax savings opportunity. However, the details can be complex and for this reason it is important to consult with a qualified tax advisor. If you have questions about the information outlined above or need assistance with another tax or accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.