Colorado R&D Tax Credit

Colorado’s research and development tax credit is a way to incentivize companies to bring their business not only to Colorado, but to marginalized or economically depressed areas of the state. Most states offer the R&D credit to businesses all through the state, but the Colorado credit is limited to businesses in specific Enterprise Zones that need an economic boost throughout the state.

The Colorado R&D tax credit is:

• Available only to taxpayers in Enterprise Zones (EZ). Companies who wish to claim the credit must pre-register with the EZ Administrator.

• Valued at up to 3% of qualified research expenditures above the base level of the last two years.

• A permanent part of the tax code so can be relied on for business tax planning

• Unlimited – there is no annual limit on the amount of funds that can be claimed for the credit

Unused amounts of credit for the year are not refundable, but can be carried forward for up to four years. The credit must be divided evenly between each of the four years. In any given year, the company may claim 25% of the current year’s credit, plus 25% of a previous year’s credit that had been carried forward. If, in a certain year, the tax credit exceeds tax liability for the year, the excess credit may be carried forward. To learn more about the Colorado research credit, click here.

Does your business qualify for the Colorado research and development tax credit?

• Do you do business in an Enterprise Zone in Colorado? Find out if your business is in an EZ.

• Is your business a partnership, LLC, C corporation, or S corporation? Sole proprietorships do not qualify for the credit.

• Do the company’s R&D activities qualify for the credit? In order to qualify, the expenditures must meet the federal four-part test laid out in IRS 41.

  • Qualified purpose –Business expenditures must be for creating a new product or updating a current one. Research and development for catching up with a competitor also counts. It doesn’t have to be unique to the industry, but merely to the individual company.

  • Elimination of uncertainty – The company must have an end goal and then go through an iterative process to achieve that goal. (I deleted the previous paragraph here and added this sentence above.)

  • Process of experimentation – the company must be able to prove that it is following a scientific process. This could look like alpha and beta versions, failed experiments, or testing various alternatives to find the ultimate solution to the problem.

  • Technological in nature – the research in question must be based on one of the hard sciences, such as biology, chemistry, physics, or a branch of engineering.

If your business R&D expenses meet all four of these criteria, and you are in an Enterprise Zone, you can submit proof of the expenditures and their purpose to the Colorado Department of Revenue to claim the credit.

The Colorado Department of Revenue requires records of two years of qualified research expenditures (QRE’s) as proof for the credit. This proof can consist of any business records that show that the company’s expenses meet the four-part test, including:

• general ledger detail

• payroll records

• project notes

• lab results

• emails or other business communications.

Ready to claim your research and development tax credit? Reach out to Endeavor Advisors today to get started with the process.