HB26-1221 adjusts three existing Colorado tax expenditures and creates a refundable family affordability tax credit sized to offset the revenue changes. It narrows an existing individual alternative minimum tax (AMT) credit, requires corporations to add back certain executive-pay deductions to state taxable income, and tightens net operating loss (NOL) treatment for corporations.
The bill directs the revenue from those changes to a new refundable tax credit targeted to families with children.
The bill is structured to be revenue‑neutral in aggregate: Legislative Council staff will project the revenue gain from the tax base changes and set a per-child credit amount so that total credits claimed are expected to equal the revenue gain. The package therefore changes who pays and who receives tax relief rather than increasing or reducing overall state revenue in the projection model.
At a Glance
What It Does
The bill: (1) effectively ends the state AMT credit for tax years beginning on or after January 1, 2026; (2) requires corporate taxpayers to add back deductions taken under IRC §162(m) (employee remuneration) for state taxable income for years beginning on or after January 1, 2027; (3) reduces NOL carryforward duration from 20 years to 10 years and lowers the allowable NOL offset from 80% to 70% for losses from tax years beginning on or after January 1, 2027; and (4) creates a refundable family affordability credit, with per-child amounts set annually by Legislative Council staff to match projected revenue gains.
Who It Affects
Directly affected parties include high‑income individuals who benefitted from the AMT credit, C corporations (especially those with significant out‑of‑state activities or high executive compensation), and families with children who qualify for the new refundable credit. The Department of Revenue and Legislative Council staff also face new administrative and forecasting responsibilities.
Why It Matters
The bill reverses several recent federal-driven tax advantages at the state level and redeploys the resulting revenue into a targeted, refundable child credit. That shifts tax burden toward wealthy individuals and corporations and introduces an annually adjusted benefit for families — a notable state-level decision about redistribution and tax design that creates ongoing forecasting and administrative obligations.
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What This Bill Actually Does
HB26-1221 is a package of tax changes intended to pull back several state tax advantages that emerged after federal tax-law changes and to redirect those dollars into a refundable child-focused credit. The bill sharply limits Colorado’s AMT credit by capping its applicability to tax years beginning before January 1, 2026 and includes a statutory sunset mechanism tied to that provision; in effect, Colorado reduces a benefit that recently flowed to higher‑income taxpayers.
For corporations, the bill makes a specific conformity divergence: starting with state income tax years beginning January 1, 2027, corporations must add back to state taxable income any amount deducted on the federal return under IRC §162(m) for employee remuneration. That reverses the state’s alignment with certain federal executive‑compensation deductions and increases taxable income for affected corporations.The bill also tightens net operating loss treatment for corporations: NOLs generated in tax years beginning on or after January 1, 2027, can be carried forward for only ten years (down from twenty) and may offset only up to 70% of taxable income (down from 80%).
Together, the corporate addback and the NOL limits accelerate and increase state revenue collections from corporate taxpayers relative to current law.Instead of keeping those additional revenues, HB26-1221 requires Legislative Council staff to annually project the revenue gain attributable to the changes and set a uniform per-child credit amount so that the total credits claimed are expected to equal that revenue gain. The new credit is refundable, may be paid monthly if the Department builds a mechanism to do so, and includes phase-outs tied to adjusted gross income thresholds with inflation adjustments beginning in 2027.
The statute also requires reporting from the Department to Legislative Council staff to support the calibration of the credit.
The Five Things You Need to Know
The bill limits the state’s AMT credit to income tax years beginning before January 1, 2026 and adds a statutory repeal provision tied to December 31, 2031 for the subsection that created the credit.
For state tax years beginning January 1, 2027, corporations must add back to state taxable income deductions claimed under IRC §162(m) for employee remuneration.
Net operating losses generated in tax years beginning on or after January 1, 2027, may be carried forward for only ten years and can offset at most 70% of taxable income.
The bill creates a refundable family affordability credit (separate from the existing child tax credit and the family affordability tax credit) whose per‑child dollar amount is set annually by Legislative Council staff to equal the projected revenue gain from the bill’s tax base changes.
The credit is refundable and transferable into monthly refunds if the Department implements a monthly distribution mechanism; the credit is explicitly excluded from being counted as income for public benefits eligibility and is apportioned for part‑year residents.
Section-by-Section Breakdown
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Legislative declaration and policy goals
Section 1 lays out the policy rationale: the General Assembly frames these changes as restoring equity and insulating Colorado’s tax base from federal changes that expanded benefits for wealthy individuals and some corporations. Practically, the declaration signals legislative intent to treat the package as a revenue‑neutral swap — reclaiming revenue at the top end to fund refundable credits targeted at families with children. The declaration also cites TABOR considerations and asserts the bill does not create a net district revenue gain requiring voter approval.
Limit and phased repeal of the AMT credit
Section 2 amends the AMT statute to constrain the 12% credit tied to the federal AMT credit to taxable years prior to January 1, 2026 and inserts a repeal clause for the subsection. The mechanical effect is to stop the application of that state credit for subsequent tax years, removing a tax preference that benefitted higher‑income filers. The section includes an apportionment rule for nonresidents that continues to apply for the period when the credit was allowed.
Creates a refundable family affordability credit with performance statement
Section 3 creates a new, refundable income tax credit keyed to the number and ages of children and subject to income‑based phase‑outs. The unique operational feature is the automatic sizing mechanism: Legislative Council staff must, as part of each December revenue forecast, project the revenue gain from the bill’s base‑broadening provisions and choose a uniform per‑child amount so projected total credits equal projected additional revenue. The section requires Department reporting and a statutory performance statement tying evaluation metrics to reductions in child poverty when combined with the existing family affordability credit.
Corporate addback of IRC §162(m) employee remuneration deductions
Section 4 inserts a state‑specific addback: for state income tax years on or after January 1, 2027, corporations must add back to federal taxable income any deduction taken for employee remuneration under IRC §162(m). That creates a divergence from federal taxable income by disallowing the federal deduction at the state level, thereby increasing taxable income and state tax liability for corporations that claimed those deductions. The change is targeted at executive compensation that previously reduced federal — and thus state — taxable income.
Shortens NOL carryforwards and reduces percentage offset
Section 5 modifies state NOL rules for losses originating in tax years beginning on or after January 1, 2027: shorten carryforward life from twenty years to ten and cap annual usage at 70% of taxable income (down from 80%). These changes accelerate the timing of NOL utilization and reduce the present value of the NOL benefit, particularly affecting corporations with long‑lived or cyclical losses.
Effective date and referendum language
Section 6 sets the general effective date tied to the traditional post‑adjournment timing, and preserves the usual referendum pathway: if a referendum petition is filed, the act (or parts of it) would not take effect absent voter approval. The timing matters because several provisions use tax‑year commencement dates (January 1, 2026 and January 1, 2027) rather than the act’s effective date, which affects transitional planning for taxpayers and administrators.
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Who Benefits
- Low- and middle-income families with children — the new refundable credit increases after‑tax household resources, especially for families with children age five and under who receive the largest per‑child amount, and the refundability makes the benefit accessible to families with little or no income tax liability.
- Advocacy organizations and service providers focused on child poverty — having a statutorily refundable, targeted credit creates a predictable program to link to anti‑poverty initiatives and eligibility outreach.
- State fiscal planners and policymakers — the package provides a policy tool to reallocate tax relief from high-income filers and corporations to households with children, aligning tax policy with legislative equity goals.
Who Bears the Cost
- High‑income individuals who claimed the state AMT credit — they lose a tax preference tied to federal AMT changes and may face higher state liabilities or reduced credits in practice.
- C corporations with significant executive compensation or with major activities outside Colorado — the §162(m) addback and tighter NOL rules increase state taxable income and reduce the value and timing of loss relief, raising effective state tax bills for some firms.
- Department of Revenue and legislative forecasting staff — new processes for calibrating and administering an annually adjusted refundable credit, reporting requirements, and potential monthly refund operations create implementation costs and systems work that are not explicitly funded in the bill.
- Professional tax advisers and payroll/benefits administrators — they must redesign withholding, tax planning, and compensation packages to reflect state‑level addbacks and shorter NOL windows, increasing compliance costs.
Key Issues
The Core Tension
The bill balances two legitimate priorities—recapturing tax benefits that flowed to wealthy individuals and corporations after federal changes, and directing those dollars into a refundable, child‑focused tax credit—but does so by making the child benefit contingent on annual revenue projections and by introducing state‑federal tax base divergence; the result is a trade‑off between equity (targeted redistribution) and predictability/simplicity (stable tax rules and predictable benefits).
The bill’s central design — reclaiming revenue from higher earners and corporations and immediately reallocating it to a refundable child credit — creates practical and policy pressures. The credit’s dollar amount is not a fixed schedule in statute but an annually calibrated figure derived from revenue projections; that ties crucial family benefits to forecasting accuracy.
If Legislative Council projections are off, the per‑child amount could be set too high or too low relative to realized revenues, producing mismatch between intended revenue neutrality and actual fiscal outcomes. That forecasting dependence also complicates households’ ability to plan around a benefit whose size may change year‑to‑year.
From the corporate side, the §162(m) addback and shortened, reduced NOLs create a nontrivial divergence between federal and state tax bases. That divergence can encourage tax planning (changes to compensation structure, use of pass‑through entities, or timing of recognition of losses) and may affect investment and hiring decisions.
It also increases administrative complexity for multistate corporations that must reconcile different rules across jurisdictions. Finally, the Department of Revenue faces operational questions: building an optional monthly refund mechanism, integrating the new credit with existing credits and withholding systems, and producing reliable reports to Legislative Council staff.
The statute requires these functions but does not appropriate implementation funding or spell out timelines for operational readiness, which could delay benefit delivery or create one‑time costs.
There are also distributional and legal wrinkles. The bill’s declaration argues it avoids TABOR voter‑approval issues by keeping net district revenue gain incidental, but that assessment depends on forecasting and may be litigated if outcomes diverge.
And because the credit is excluded from income for public benefit eligibility, careful coordination is required so families receive benefits without unintended impacts on other assistance programs.
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