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Taxes on Business Income in Colorado

Filed under State Taxes. Fact checked on February 12, 2013.

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Income tax on corporate income attributable to Colorado is computed at the rate of 4.63 percent of taxable net income. If you operate your business as a sole proprietorship or a pass-through entity, you will report your business income on your personal tax return.

In Colorado, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Regular Corporations Are Subject to Corporate Tax

Domestic corporations (corporations organized in Colorado) and foreign corporations (corporations organized in a state other than Colorado) doing business in Colorado, are subject to a Colorado income tax.The income tax rate is 4.63 percent of Colorado net income.

If your corporation has limited activity in Colorado, you may pay an alternative tax instead of the regular corporate income tax. To qualify:

  • the corporation's activity in Colorado must consist only of sales;
  • your corporation can't own or rent real estate in the state; and
  • your annual gross sales in or into Colorado can not be more than $100,000.

If your corporation qualifies, your tax liability will be 0.5 percent of gross receipts from sales in or into Colorado.

S Corporation Income Taxed At Individual Rates.

If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any federal corporate income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

In Colorado, the law extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax.

Partnership Income Taxed At Individual Rates

If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Colorado taxable adjusted gross income their distributive share of partnership income.

LLC Income Taxed At Individual Rates

Colorado law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Colorado are classified as partnerships for Colorado tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Colorado taxable adjusted gross income their distributive share of LLC income.

However, if the LLC has elected to be taxed as a corporation for federal tax purposes, Colorado will honor that election and tax it as a corporate under Colorado law.

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