your one-stop resource for everything related to starting a small business in colorado.
This section outlines the general income tax laws that you will encounter when you own your own business. For more specific information, you should contact the Internal Revenue Service at 800-829-1040 or www.irs.gov and the Colorado Department of Revenue at 303-238-SERV or www.taxcolorado.com.
If your business is a corporation located or “doing business” in Colorado, it is subject to state and federal corporate income taxes. In general, a corporation will be considered to be “doing business” when it has employees or business property in Colorado. If you will be filing as an S Corporation, your business income will be taxed as a partnership and will be exempt from corporate income taxes, although a corporate income tax return must still be filed. Working corporate officers are still treated as employees, even in an S Corporation, and must be paid a reasonable wage which is subject to all payroll taxes. At the end of your corporation’s fiscal year, you must figure its net taxable income or net loss. To do this, you subtract the operating expenses and “allowable deductions” from the gross income.
The laws governing federal tax rates, allowable deductions and losses change frequently. Annually, you should obtain a summary of the current applicable federal tax laws from the IRS. The IRS Publication #542, “Corporations,” is a useful guide in determining your federal tax liability. Every corporation, including S Corporations, “doing business” in Colorado or deriving income from Colorado sources must file a corporate income tax return with Colorado. Colorado taxable income is determined by adding and/or subtracting various adjustments to your federal taxable income. If your corporation is “doing business” in Colorado as well as other states, you must apportion to Colorado the share of your income derived from sources within Colorado. Contact the Colorado Department of Revenue for more information.
If you expect your federal tax liability to be $500 or more and/or your state tax liability to be $5,000 or more, you are required to file and pay estimated taxes during the year. Use Form 1120W, “Estimated Tax for Corporations,” to figure federal estimated taxes due. The state form for making estimated tax returns is the 112 EP. Report your federal corporate income annually on Form 1120, “U.S. Corporation Income Tax Return,” or Form 1120S,” U.S. Income Tax Return for an S Corporation.” At the end of the year, you will file your corporate state tax on Form 112 or for S Corporations on Form 106. A corporation that owes more than $500 (and no estimated tax payments equal to the smaller of current year’s or prior year’s taxes) in federal income tax or $5,000 in state income tax may be subject to penalties and interest. If you receive dividends from your corporation, you must report them as income on your personal income tax return and pay the appropriate income taxes.
If your business is a general partnership, limited partnership, limited liability company, limited liability partnership, limited liability limited partnership or a limited partnership association, you must file state and federal partnership income tax returns. The partnership business is not required to pay income tax. The state and federal partnership income tax returns are used to report your business’ income and expenses, changes in your balance sheet and how the partners share profits and losses.
First, complete your federal return of income, Form 1065, “U.S. Return of Partnership Income” or Form 1120S, “U.S. Income Tax Return for an S Corporation.” You will need this information to complete your Colorado return, Form 106. Each partner in the partnership is then responsible for his/her own income and self-employment taxes as an individual. If you expect to owe the IRS more than $1,000 in individual federal taxes, you must make federal estimated tax payments using Form 1040-ES (Estimated Taxes for Individuals). If you expect to owe Colorado more than $1,000 in individual state taxes, you must pay state estimated tax payments. Estimated payments are made using the Colorado Form 104-EP.
If you and your spouse run your business together and share in the profits, your business may be considered a partnership. You should record your respective shares of partnership income or loss separately for self-employment taxes. Doing this will usually not increase your total tax, but will give each spouse credit for social security earnings on which retirement benefits are based. IRS Publication #541, “Partnerships,” is a useful guide regarding partnership filing requirements and the allocation of income to the partners.
If you are a sole proprietor, a partner in any form of partnership or a member in a limited liability company, you must file your own estimated self-employment taxes. When you work for others as an employee, your employer withholds your taxes from your paycheck. As an employee, your employer pays half of your social security taxes and you pay half. When you are self-employed, you must pay the entire amount.
Estimated taxes are normally paid quarterly on actual income. If you do not have taxable income, you do not have to pay estimated taxes. If you expect to owe the IRS more than $1,000 in federal taxes, you must make federal estimated tax payments using Form 1040-ES. The IRS prints a number of useful publications regarding your income tax rights and responsibilities including Publication #334, “Tax Guide for Small Business,” Publication #505, “Tax Withholding and Estimated Tax,” Publication #533, “Self-Employment Tax” and Publication #587, “Business Use of Your Home.” Contact the IRS directly for these publications and any additional information on calculating your taxable income and federal tax payments.
Colorado income tax is a flat 4.63% of your adjusted federal taxable income. If you expect to owe Colorado more than $1,000 in state taxes, you must pay state estimated tax payments. Estimated payments are made using the Colorado Form 104-EP.
Property taxes are assessed on any real and/or personal property (land, buildings, furniture, equipment, etc.), which directly or indirectly produce income within your business. The County Assessor determines the value of property using a market, cost or income approach. Property taxes are assessed on a percentage of actual value. To determine your property tax bill, multiply the assessed value by the local tax rate. The county assessor will mail a declaration schedule for property taxes after January 1. Taxes must be paid by April 15 unless an extension has been obtained. The County Treasurer is responsible for mailing and collecting the actual property tax bill. Agricultural and natural resources are treated somewhat differently. You should contact your local county assessor regarding property taxes, personal and real estate, whenever you start a new business.
When you are an employee, your employer must withhold and submit to the IRS your federal income tax withheld and your portion of Social Security (FICA) and Medicare taxes withheld. Your employer is also responsible for paying state and federal unemployment taxes (SUTA and FUTA).
Your employer must give you a Form W-2, Wage and Tax Statement, showing your salary and any payroll deductions for the year (examples: Federal Income Tax, health insurance, etc.).
You may only deduct work-related expenses when they exceed two percent of your adjusted gross income, and you itemize your deductions on Schedule A.
The Colorado Enterprise Zone (EZ) Program is designed to promote a business-friendly environment in economically distressed areas by offering state income tax credits that incentivize businesses to locate and develop in, and non-profit organizations to assist with the needs of these communities.
Enterprise zones are economically depressed areas designated by the Colorado Economic Development Commission based upon unemployment rate, population growth rate, and/or per capita income. Enterprise zones may include both urban and rural areas. There are currently 16 designated enterprise zones in Colorado. Maps and additional information about designated enterprises zones can be found online at choosecolorado.com/doing-business/incentivesfinancing/ez/.
Colorado has established many tax incentives for private enterprises to start new businesses and to expand existing businesses in enterprise zones. These incentives come primarily in the form of credits that can be applied toward a taxpayer’s Colorado income tax liability. These credits are generally based upon investments made or employees hired by the taxpayer in an enterprise zone.
Private-sector business activity encouraged by these income tax incentives brings job opportunities and capital investment to economically distressed areas. The private investment results in tax revenue for school districts, cities, counties and the state, outweighing the costs of the tax credits granted.
Businesses investing in Enterprise Zones through business personal property can earn a 3 percent tax credit. Special rules for renewable energy equipment apply.
Companies that implement a qualified job-training program for their enterprise zone employees may earn an income tax credit of 12 percent of their eligible training costs.
Businesses increasing their workforce may earn a state income tax credit $1,100 per net new employee.
An additional tax credit of $500 per net new employee may be claimed by businesses adding value to agricultural commodities through manufacturing or processing.
An additional tax credit of $2,000 per net new employee may be claimed for businesses in Enhanced Rural EZs – these are re-established every two years. EREZ designated counties are highlighted on the map at choosecolorado.com.
An additional tax credit of $500 per net new employee may be claimed if the business is an agricultural manufacturing or processing business in an Enhanced Rural EZ.
Offers businesses $1,000 per net new employee insured under a qualified health plan for which the employer pays at least 50 percent of the cost. This credit is available for the first two years the business is located in an enterprise zone.
Businesses conducting research and development may earn a 3 percent tax credit on the increase in such expenditures as compared to that of the prior two years.
Encourages redevelopment of vacant commercial property with a 25 percent credit for the cost of rehabilitation of a building that is at least 20 years old and has been completely vacant for at least two years. The credit is limited to $50,000 per building. *When certifying for the EZ Vacant Commercial Building Rehabilitation tax credit, the applicant is required to provide evidence of the building’s age and vacancy condition prior the start of the remodel.
Investment in commercial trucks, truck tractors, tractors, or semitrailers, and associated parts registered in Colorado and based and used in an EZ may earn the taxpayer a 1.5 percent credit.
Enterprise Zone (EZ) Contribution Projects encourage community participation and public-private partnerships to revitalize EZs. EZ Administrators may propose projects for EZ Project status to implement the economic development plan of that specific EZ. EZ Administrators work with their communities to bring forward proposals that support local economic improvements, result in job creation/retention and business expansion, and have the support of the community. Colorado taxpayers may earn a 25 percent state income tax credit by contributing to targeted efforts.
Speak with your local Enterprise Zone Administrator to learn more about the EZ Program, local conditions and other local incentives.
Businesses wanting to claim any of the Colorado Enterprise Zone (EZ) income tax credits (excluding the Contribution Project credit for which pre-certification is not required), must annually pre-certify with their local EZ Administrator to be eligible to claim EZ tax credits. Pre-certification can be completed up to three months in advance of the business’ tax year start date. Pre-certification is approved by the Local EZ Administrator. Pre-certify each business location as credits are only available for business activity in an Enterprise Zone.
A business having pre-certified, and then conducted activities that are eligible for EZ credits, must then complete a certification application and receive approval from the local EZ Administrator. Certification documents must be submitted with your Colorado income tax filing. The Certification document from the online application system takes the place of DOR forms DR0074, DR0076 and DR0077.
If your business is a corporation located or “doing business” in Colorado, it is subject to state and federal corporate income taxes.
If your business is a general partnership, limited partnership, limited liability company, limited liability partnership, limited liability limited partnership or a limited partnership association, you must file state and federal partnership income tax returns.
Franchising offers a unique opportunity for individuals interested in operating a business. It allows you to both own and operate a business while drawing from the resources of the parent company.
Property taxes are assessed on any real and/ or personal property (land, buildings, furniture, equipment, etc.), which directly or indirectly produce income within your business.
Your employer must withhold and submit to the IRS your federal income tax withheld and your portion of Social Security (FICA) and Medicare taxes withheld. Your employer is also responsible for paying state and federal unemployment taxes (SUTA and FUTA).
The businesses you work for do NOT withhold or pay taxes on your behalf.
An Enterprise Zone is defined as an economically lagging area of Colorado in which special tax incentives are offered to businesses that expand or locate in the zone.
Colorado Business Development Foundation
info@coloradobdf.org
www.coloradobdf.org
Small Business Navigator Hotline: 303-592-5920
© 2022 Colorado Business Development Foundation. All rights reserved.
All information within this resource book and website is for informational purposes only and is not intended to be legal, tax, business or other professional advice. It is current to the best of our knowledge as of the date of publication. You should contact an appropriate professional to discuss any issue particular to you or your business and only rely upon your own research into those issues. Use of and access to this resource book or the associated website does not create any relationship between the publisher, authors, and the reader, or any other individual or entity. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAWS, THE MATERIALS AND INFORMATION IN THIS RESOURCE BOOK AND WEBSITE ARE DISTRIBUTED ON AN "AS IS" BASIS WITHOUT WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.