Colorado’s Small Businesses See Benefits in Tax Reform, QSBS Exclusion Could Take a Hit

Colorado Capital Gains QSBS

The Most Significant Change to Colorado’s Tax Code in Over a Decade

Colorado’s proposed tax reform has officially become a reality. On June 23rd, Governor Jared Polis signed into law the most significant changes to the tax code that the state has seen in over a decade. Since none of the laws actually changed tax rates, they went through the state legislature and did not need voter approval. 

Colorado is expecting to gain an additional $415 million in annual revenue, more than half of which will go toward tax credits for small businesses and lower income residents. For instance, the new legislation will provide many businesses with an exemption from business personal property tax, which applies to items like furniture and computers. With the updated law, businesses with less than $50,000 in personal property will be exempt from this tax—a dramatic increase from the previous $7,900 threshold. 

Companies That Will be Affected 

On the flip side, the revised tax code targets larger businesses who may have previously benefited from major tax breaks. Business owners who make more than $500,000 a year in individual income (or $1 million household) will no longer be eligible for the “pass-through” deduction. Pass-through entities include businesses that are structured as S corporations, partnerships, and sole proprietorships, which pass their income through to the owners, avoiding corporate tax rates. Eliminating this deduction for wealthier business owners is expected to bring in almost $80 million in annual revenue. 

Insurance companies, large retailers, and oil/gas companies will also see higher taxes as a result of the tax reform. 

The Role QSBS Tax Exemption Has in the New Colorado Tax Reform

A notable change to Colorado state law is the elimination of most capital gains tax deductions. Publicly available information states that the new legislation repeals state income tax deductions for all federally taxable capital gains. The only listed exception is for certain agricultural properties, which will be allowed a deduction of up to $100,000 a year for any sales. 

What Questions are Left to be Asked?

This framework still leaves ambiguity for capital gains that are not currently subject to federal taxation, including qualified small business stock (QSBS). Federal tax law currently allows an exclusion of up to 100% on capital gains tax for QSBS. The question remains: will Colorado opt to remove a considerable incentive for investors to fund small businesses, or will they protect this exemption, given the trend toward tax code changes in favor of small businesses? 

QSBS Expert provides regular updates on national and state-level tax laws to help stockholders and aspiring investors assess available opportunities. Check out our QSBS News page to learn more.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.