Colorado SALT Cap Workaround: Pass-Through Entity Tax Election for S Corps and Partnerships

If your S corporation or partnership does business in Colorado, the state's pass-through entity tax election may let the business pay Colorado income tax at the entity level instead of passing that tax through to each owner. The election comes from the SALT Parity Act, C.R.S. 39-22-343, and it is often described as a workaround for the federal limit on state and local tax (SALT) deductions for individuals. This guide covers how the Colorado pass-through entity tax works, which years and owners it affects, how to make the election, and what to confirm before you file.

Informational content only. This article is not legal or tax advice. Federal and Colorado tax rules change, and whether this election helps a particular business depends on current federal law and each owner's personal situation. Talk with a qualified CPA or tax attorney before you make the election.

How the Colorado pass-through entity tax works

Normally, an S corporation or partnership reports its income on its return, and the profit flows through to the owners. Each owner then pays Colorado income tax on their share on their own personal return. Under the SALT Parity Act, an S corporation or partnership may instead elect to pay the Colorado income tax itself, at the entity level. The entity pays the tax, and each owner claims a credit for their share of it.

The election is available only in an income tax year when federal law limits individuals' deduction of state taxes under section 164 of the Internal Revenue Code, which is the federal SALT cap. In a year when that limit does not apply, the election is not available. Whether the cap applies to a given year depends on federal law, so confirm the current federal rules with your tax professional before you assume the election is open to you.

The election is designed to work around the SALT cap, but Colorado law alone does not decide whether it saves money. Whether it pays off depends on current federal treatment of state tax deductions and on each owner's personal tax picture. Nothing in this guide promises that the federal cap will stay in place or go away.

Which years and entities qualify

Tax years from 2018 forward

The election covers tax years from 2018 forward, subject to the SALT cap condition described above. The Colorado Department of Revenue's Income Tax Topics guide, revised October 2025, now states no end date for the election. An earlier version of the guide, from February 2024, said the election applied to years before January 1, 2026. Do not rely on older guidance you find online. Confirm with the Department of Revenue whether the election applies to the year you are filing.

The 2018 to 2021 composite amended return window

For tax years 2018 to 2021, the state offered a one-time window for composite amended returns that ran from September 1, 2023 to July 1, 2024. That window has closed, so it cannot be used now. For those years, the current election methods described below do not replace it, so confirm your options with a CPA if your entity has open returns from that period.

Which owners are affected

The election binds all owners of the entity, not just the ones who asked for it. It does not apply to a partner that is a unitary C corporation. If one of your partners is a unitary C corporation, the election does not cover that partner, and you should ask your CPA how that owner's share is treated before you make the decision.

How to make the election for 2022 and later

For tax year 2022 and later, the entity can make the election in one of two ways:

• Check the box on the Colorado Partnership and S Corporation Income Tax Return, Form DR 0106, for the year.
• File the SALT Parity Act Election Form, Form DR 1705, separately. Check the form instructions and the Department of Revenue for when it must be filed.

The election is irrevocable. Once it is made for a year, it cannot be withdrawn, and it binds every owner. Before the return is filed, walk each owner through the decision in writing so no one is surprised by the entity tax, the estimated payments, or their own filing changes.

What the entity pays

The entity pays tax at the applicable Colorado rate. The statutory rate is 4.40%, but you should check with the Department of Revenue for the rate that applies to the tax year you are filing before you run any calculations. Do not assume a rate from an older article.

If the entity's tax is more than $5,000, it must make quarterly estimated payments, the same way a C corporation does. That means cash leaves the business during the year, not only when the return is filed. Plan your cash flow before you elect, and set aside money for those payments from the start of the year.

What owners do

Each owner has their own filing steps. The main ones are:

• Claim a credit on their own Colorado return for their share of the entity tax.
• File their own Colorado income tax return. There is no composite return for this election, so each owner's return carries the credit and related changes.
• Add back the qualified business income deduction and the state tax the entity deducted, as the Colorado return instructions require.

Because each owner files separately, make sure every owner has the entity's tax figures and the election documentation before their own deadlines arrive. Missing information is one of the most common reasons an owner's return gets delayed.

Weighing whether the election makes sense

There is no universal answer. The election can change who pays the Colorado income tax, when cash leaves the business, and how each owner's Colorado return looks. Whether it lowers total tax depends on several factors:

• Whether the federal SALT cap limits the owners' deductions in the year at issue, and how current federal law treats those deductions.
• Each owner's personal federal and Colorado tax position, which can differ widely among owners of the same entity.
• Whether any partner is a unitary C corporation, since the election does not apply to that partner.
• The cash cost of quarterly estimated payments, and the fact that the election is irrevocable and binds all owners.

Ask a CPA to model the year both ways, with and without the election, before you commit. Do not rely on a rule of thumb from a blog post, including this one. For complex ownership structures, consider an attorney as well.

Steps to take before you file

1. Confirm your entity is formed and in good standing. An LLC taxed as a partnership or S corporation, or a corporation, is formed with the Colorado Secretary of State. The filing fee is $50 for an LLC or corporation. A new LLC or corporation owes no periodic report in its first year, and the first periodic report, at $25, is due in the second year.
2. Confirm that the tax year qualifies. Check that federal law limits the owners' SALT deduction for that year, and confirm the current Department of Revenue guidance on the election.
3. Check each owner's status. Identify any partner that is a unitary C corporation, because the election does not cover that partner.
4. Set up a Department of Revenue account if you need one. Colorado has no general state business license. If your business collects or withholds tax, open an account with the Department of Revenue. Then check whether your city or county requires its own licenses for your activity.
5. Model the entity tax and estimated payment schedule. Confirm the rate with the Department of Revenue and plan the quarterly payments if the tax exceeds $5,000.
6. Make the election on time. Check the box on Form DR 0106 or file Form DR 1705 as its instructions require, and keep proof in your records.
7. Have each owner file a Colorado return. Each owner claims the credit and makes the required add-backs on their own return.

Official resources

Start with these official sources. Forms and instructions change from year to year, so download the current version for the tax year you are filing.

• Colorado Department of Revenue, Taxation Division: https://tax.colorado.gov/
• Colorado Secretary of State, Business Organizations Division: https://www.coloradosos.gov/pubs/business/businessHome.html
• Colorado Small Business Development Center Network: https://sbdc.colorado.gov/
• U.S. Small Business Administration, Colorado district: https://www.sba.gov/district/colorado

The Small Business Development Center network offers free or low-cost advising for business owners, but it does not replace a CPA's review of your tax position.

Frequently asked questions

Does the election automatically lower my taxes?

No. It changes who pays the Colorado income tax and how each owner's credit and add-backs work. Whether total tax goes down depends on the federal rules for that year and on each owner's situation.

Can I undo the election after I make it?

No. The election is irrevocable for the year it covers and binds all owners.

Do I file a composite return for the entity?

No. The election does not use a composite return. Each owner files their own Colorado return and claims the credit.

Can I use the election for 2018 to 2021 now?

Only if your entity used the one-time composite amended return window, which ran from September 1, 2023 to July 1, 2024. That window has closed, so talk with a CPA about any open returns from those years.

Next steps

The Colorado pass-through entity tax is a useful option for some S corporations and partnerships and a poor fit for others. Gather your owner list, your prior returns, and your estimated tax figures, then bring them to a CPA who works with Colorado pass-through returns. Confirm the rate, the forms, and the filing timing with the Department of Revenue before you act, and make the decision only after every owner understands what it means for them.