39-22-504–2 Colorado Net Operating Losses for C Corporations. Basis and Purpose. The bases for this rule are sections 39-21-112(1), 39-22-103(5.3),

39-22-304(2)(c), 39-22-304(3)(g), and 39-22-504, C.R.S. The purpose of this rule is to provide guidance regarding the Colorado net operating loss deduction allowed to C corporations. (1) Allocation of Federal Net Operating Loss to Colorado. The Colorado net operating loss of a C corporation is allowed in the same manner as a federal net operating loss, except that the Colorado net operating loss is computed as only that portion of the federal net operating loss that is allocated to Colorado pursuant to article 22 of title 39, C.R.S., and this rule. In accordance with paragraph (1)(a) of this rule, and subject to the limitation described in paragraph (1)(d) of this rule, the portion of the federal net operating loss that is allocated to Colorado shall be determined by modifying the federal net operating loss as prescribed in paragraph (1)(b) of this rule and apportioning and allocating the resulting modified federal net operating loss, if any, as prescribed in paragraph (1)(c) of this rule. The requirements of paragraph (1)(a) of this rule relating to combined, consolidated, combined-consolidated, and separate filing and the modification, allocation, and apportionment provisions of paragraphs (1)(b) and (1)(c) of this rule shall apply in accordance with the law in effect for the tax year in which the loss was sustained, as provided in paragraph (1)(e) of this rule. (a) Combined, Consolidated, Combined-Consolidated, and Separate Filing. In the case of a combined return filed pursuant to section 39-22-303(11), C.R.S., a consolidated return filed pursuant to section 39-22-305, C.R.S., or a combined-consolidated return filed pursuant to sections 39-22- 303(11) and -305, C.R.S., the Colorado net operating loss shall be calculated with respect to only the C corporations that are included in such combined, consolidated, or combined-consolidated return and based upon the federal net operating loss determined with respect to only the group of C corporations included in that combined, consolidated, or combined- consolidated Colorado return. In the case of a separate return filed by a single C corporation, the Colorado net operating loss shall be calculated with respect to only that C corporation and based upon the federal net operating loss determined with respect to only that C corporation. (b) Modification of Federal Net Operating Loss. For the purpose of Colorado income tax, the federal net operating loss of a C corporation computed pursuant to section 172 of the Internal Revenue Code, represented as a negative amount, shall be modified by any addition, subtraction, or other modification required or allowed in the calculation of the net income of the C corporation for the loss year, including, but not limited to: (i) any addition required by section 39-22-304(2), C.R.S.; (ii) any subtraction allowed by section 39-22-304(3), C.R.S.; and (iii) any exclusion of foreign source income pursuant to section 39-22- 303(10), C.R.S. (c) Allocation and Apportionment of Modified Federal Net Operating Loss. For the purpose of Colorado income tax, the modified federal net operating loss of a C corporation computed pursuant to paragraph (1)(b) of this rule shall be allocated and apportioned pursuant to this paragraph (1)(c). (i) Unless the C corporation has made an election pursuant to section 39-22-303.6(8), C.R.S., to treat all income as apportionable income, any nonapportionable income, as defined by section 39- 22-303.6(1)(c), C.R.S., included in a C corporation’s federal taxable income shall be subtracted from the modified federal net operating loss computed pursuant to paragraph (1)(b) of this rule. (A) Example 1. A taxpayer has $110,000 of apportionable income, $90,000 of nonapportionable income, $250,000 of federal deductions, and no Colorado modifications. This results in a modified federal net operating loss of $50,000. To determine the modified federal net operating loss after deduction of nonapportionable income under this paragraph (1)(c)(i), the $90,000 of nonapportionable income is subtracted from negative $50,000. The result is negative $140,000. (B) Example 2. A taxpayer has $95,000 of apportionable income, a $30,000 loss that is nonapportionable income, $150,000 of federal deductions, and no Colorado modifications. This results in a modified federal net operating loss of $85,000. To determine the modified federal net operating loss after deduction of nonapportionable income under this paragraph (1)(c)(i), the negative $30,000 of nonapportionable loss is subtracted from negative $85,000. The result is negative $55,000. (ii) The amount computed pursuant to paragraph (1)(c)(i) of this rule, shall be allocated to Colorado by multiplying it by the fraction determined pursuant to section 39-22-303.6(4)(a), C.R.S., and any applicable special apportionment rules promulgated by the Department, for the C corporation for the loss year. (iii) Any nonapportionable income, as defined by section 39-22- 303.6(1)(c), C.R.S., included in a C corporation’s gross income and allocated to Colorado pursuant to section 39-22-303.6(7), C.R.S., shall be added to the amount computed pursuant to paragraph (1)(c)(ii) of this rule. (iv) For the purpose of paragraphs (1)(c)(i) and (1)(c)(iii) of this rule, nonapportionable income shall be the net of the nonapportionable income and any federal expenses, losses, and other deductions and any Colorado modifications allowed pursuant to paragraph (1)(b) of this rule that are properly apportioned or allocated to such nonapportionable income. (d) If the Colorado net operating loss calculated pursuant to paragraph (1) of this rule exceeds the amount of the federal net operating loss, the Colorado net operating loss is limited to the amount of the federal net operating loss computed in accordance with paragraph (1)(a) of this rule. (i) If a group of C corporations filing a combined, consolidated, or combined-consolidated Colorado return does not collectively have a federal net operating loss for a tax year, as determined with respect to only the group of C corporations included in that combined, consolidated, or combined-consolidated Colorado return, that group does not have a Colorado net operating loss for that tax year. (ii) If a C corporation filing a separate Colorado return does not have a federal net operating loss for a tax year, as determined with respect to only that C corporation, that C corporation does not have a Colorado net operating loss for that year. (e) Determining Colorado Net Operating Loss Under Laws Applicable to the Loss Year. Paragraph (1) of this rule shall be applied in determining the amount of the Colorado net operating loss by reference to the applicable provisions of part 3 of article 22 of title 39, C.R.S., in effect for the tax year in which the loss arose. For tax years commencing prior to January 1, 2019, that includes, but is not limited to: (i) section 39-22-304, C.R.S., for the modification of the federal net operating loss pursuant to paragraph (1)(b) of this rule; and (ii) section 39-22-303, section 39-22-303.5, or Article IV in section 24- 60-1301, C.R.S., as applicable, for the allocation and apportionment of modified federal net operating loss pursuant to paragraph (1)(c) of this rule. (2) Carryforward of Colorado Net Operating Losses. Colorado net operating losses may be carried forward as prescribed in section 39-22-504(3), C.R.S. The entire amount of any Colorado net operating loss shall be first carried forward to the tax year immediately following the tax year in which the loss was sustained. In the event a C corporation has available for deduction Colorado net operating losses originating in multiple tax years, the C corporation must first deduct the loss arising from the earliest tax year. If all or any part of an available net operating loss may not be deducted because of the limitations prescribed in paragraph (3) of this rule, the part that may not be deducted may be carried forward to the next tax year, but in no event may a loss be carried forward beyond the time periods prescribed in section 39-22- 504(3), C.R.S. (3) Limitations on Colorado Net Operating Loss Deduction. (a) The Colorado net operating loss deduction a C corporation may claim for any given tax year is limited to the C corporation’s Colorado taxable income before net operating loss deduction determined pursuant to article 22 of title 39, C.R.S., and paragraph (3)(c) of this rule for that tax year. The Colorado net operating loss deduction is also subject to the limitations described in paragraph (3)(b) of this rule. (b) Except as provided in section 39-22-504(1)(b), C.R.S., and this paragraph (3), the Colorado net operating loss deduction allowed for any taxable year shall be subject to the same limitations that apply with respect to the federal net operating loss deduction allowed pursuant to section 172 of the Internal Revenue Code. (i) Limitations applicable to the Colorado net operating loss deduction include, but are not limited to, the limitations prescribed by: (A) section 172(a)(2) of the Internal Revenue Code, subject to the requirements of section 39-22-504(1)(b), C.R.S., and paragraph (3)(b)(ii) of this rule; (B) sections 381, 382, and 384 of the Internal Revenue Code; (C) section 860E of the Internal Revenue Code; and (D) 26 CFR § 1.1502-21. (ii) Eighty Percent Limitation Pursuant to Section 39-22-504(1)(b), C.R.S. The 80 percent limitation prescribed by section 172(a)(2) of the Internal Revenue Code and section 39-22-504(1)(b), C.R.S., shall apply to Colorado net operating loss deductions, subject to the following requirements: (A) The 80 percent limitation shall apply to Colorado net operating loss deductions claimed for losses arising in taxable years beginning after December 31, 2017, regardless of the tax year for which the deduction is claimed. (B) The 80 percent limitation shall apply with respect to a C corporation’s Colorado taxable income before net operating loss deduction determined pursuant to paragraph (3)(c) of this rule. Pursuant to section 39-22-504(1)(b), C.R.S., and notwithstanding section 172(a)(2)(B)(ii)(I) of the Internal Revenue Code, federal taxable income shall be determined for the purpose of paragraph (3)(c) with regard to any deduction allowed under section 250 of the Internal Revenue Code. (C) The 80 percent limitation shall apply with respect to Colorado taxable income after the deduction of any Colorado net operating loss deduction allowed pursuant to section 39- 22-504, C.R.S., for a loss arising in a taxable year beginning prior to January 1, 2018. (iii) Limitation Established by Section 382 of the Internal Revenue Code. For its application to the Colorado net operating loss deduction, the net operating loss limitation prescribed by section 382 of the Internal Revenue Code shall be apportioned to Colorado using the Colorado apportionment fraction for the old loss corporation for the last full tax year prior to the change in ownership. If the old loss corporation’s Colorado apportionment fraction for the last full tax year prior to the change in ownership does not fairly represent the extent of the old loss corporation's business activity in Colorado, the old loss corporation may petition for, or the executive director may require, an alternative method for apportioning the limitation prescribed by section 382. (iv) Limitation Established by Section 860E of the Internal Revenue Code. Pursuant to section 860E of the Internal Revenue Code, the excess inclusion of any holder of a residual interest in a REMIC may not be offset by a Colorado net operating loss. For the purpose of paragraph (3)(c) of this rule, a C corporation’s federal taxable income shall be reduced, prior to modification, allocation, and apportionment, by any excess inclusion included therein pursuant to section 860E of the Internal Revenue Code. (v) SRLY Limitation Established by 26 CFR § 1.1502-21(c). For the application of the SRLY limitation prescribed by 26 CFR § 1.1502- 21(c) to Colorado net operating losses, the provisions of this paragraph (3)(b)(v) apply. The SRLY limitation applies to a Colorado net operating loss only if it is a portion of a federal net operating loss to which the SRLY limitation applies. For the purpose of this paragraph (3)(b)(v), whether a taxable year is a separate return year or separate return limitation year, as defined in 26 CFR § 1.1502-1(e) and (f), or a consolidated return year, as defined in 26 CFR § 1.1502-1(d), is determined with respect to the filing of the corporation’s federal income tax return, not its Colorado income tax return. (A) The aggregate of the Colorado net operating loss carryforwards of a member (SRLY member) arising (or treated as arising) in SRLYs (SRLY NOLs) that are included in the Colorado net operating loss deductions for all consolidated return years of the group may not exceed the aggregate Colorado taxable income for all consolidated return years of the group determined by reference to only the member's items of income, gain, deduction, and loss (cumulative register) and pursuant to 26 CFR § 1.1502-21(c) and this rule. (B) For the purpose of paragraph (3)(b)(v)(A) of this rule, the aggregate Colorado taxable income for all consolidated return years of the group determined by reference to only the member's items of income, gain, deduction, and loss (cumulative register) is the sum of the consolidated taxable income for each consolidated return year, determined pursuant to 26 CFR § 1.1502-21(c)(1)(i) by reference to only the member's items of income, gain, deduction, and loss, and modified, allocated, and apportioned pursuant to paragraph (3)(b)(v)(C) of this rule. (C) The consolidated taxable income for each consolidated return year, determined pursuant to 26 CFR § 1.1502- 21(c)(1)(i) by reference to only the member's items of income, gain, deduction, and loss shall be, for Colorado income tax purposes: (I) modified by any additions and subtractions required by Colorado law, including, but not limited to, section 39-22-304, C.R.S., determined by reference to only the member; and (II) allocated and apportioned pursuant to section 39-22- 303.6, C.R.S., by reference to only the member’s receipts, income, and loss. (D) If a limitation on the amount of Colorado taxable income that may be offset under section 172(a) of the Internal Revenue Code and section 39-22-504(1)(b), C.R.S., applies in a taxable year to a member whose carryforwards are subject to a SRLY limitation (SRLY member), the amount of net operating loss subject to a SRLY limitation that is available for use by the affiliated group in that year is limited to the percentage of the balance in the cumulative register (determined pursuant to paragraphs (3)(b)(v)(A), (B), and (C) or this rule) that would be available for offset under section 172(a) of the Internal Revenue Code and section 39-22- 504(1)(b), C.R.S., if the SRLY member filed a separate return and reported as Colorado taxable income in that year the amount contained in the cumulative register. For example, assume that an affiliated group has a SRLY member that is a corporation other than a nonlife insurance company, and that the SRLY member has a SRLY NOL that arose in a taxable year beginning after December 31, 2017 (post-2017 NOL). The affiliated group's Colorado taxable income for a consolidated return year is $200, but the cumulative register has a positive balance of only $120 (and no other net operating loss carryforwards are available for the year). Because the SRLY limitation would be $96 ($120 × 80 percent), only $96 of SRLY loss may be used, rather than $160 ($200 × 80 percent). In addition, to the extent that this paragraph (3)(b)(v)(D) applies, the cumulative register is decreased by the full amount of income required under section 172(a) of the Internal Revenue Code to support the amount of SRLY NOL absorption. (E) If a corporation becomes a member of a federal consolidated group as defined in 26 CFR § 1.1502-1(h) (the SRLY event) within six months of the change date of an ownership change giving rise to an IRC section 382(a) limitation with respect to the carryover of a federal net operating loss (the section 382 event) so as to constitute an overlap as defined in 26 CFR § 1.1502-21(g)(2)(ii) and thereby precluding the application of the SRLY limitation to that federal net operating loss carryover, then the SRLY limitation will also not apply to the Colorado net operating loss that is a portion of that federal net operating loss carryover. (vi) Treasury Regulations 26 CFR §§ 1.1502-1, 1.1502-11, and 1.1502- 21, are hereby incorporated by reference. The regulations hereby incorporated are the versions of those regulations in effect as of April 1, 2021 and does not include any later amendments or editions of these regulations. Copies of these regulations are available online at: (A) https://www.govinfo.gov/content/pkg/CFR-2021-title26- vol14/pdf/CFR-2021-title26-vol14-sec1-1502-1.pdf (B) https://www.govinfo.gov/content/pkg/CFR-2021-title26- vol14/pdf/CFR-2021-title26-vol14-sec1-1502-11.pdf and (C) https://www.govinfo.gov/content/pkg/CFR-2021-title26- vol14/pdf/CFR-2021-title26-vol14-sec1-1502-21.pdf. (c) Colorado Taxable Income Before Net Operating Loss Deduction for Determining Colorado Net Operating Loss Deduction and Limits Thereon. For the purpose of determining the allowable Colorado net operating loss deduction pursuant to section 39-22-504, C.R.S., and paragraphs (3)(a), (3)(b)(ii), and (3)(b)(v) of this rule, a C corporation’s Colorado taxable income before net operating loss deduction is its federal taxable income modified, apportioned, and allocated pursuant to article 22 of title 39, C.R.S., computed without regard to the Colorado net operating loss deduction allowed pursuant to sections 39-22-304(3)(g) and 504, C.R.S.