Are R&D Tax Credits Available in Colorado?

Yes. The state of Colorado provides Research and Development (R&D) Tax Credit for activities conducted within a Colorado Enterprise Zone (EZ). The R&D credit is administered by the Colorado Enterprise Zone Program, in accordance with Colorado Code of Regulations § 39-30-105.5, Enterprise zone research and experimental expenditures credit. Some highlights of the Colorado R&D tax credit include:

  • The credit is equal to 3% of the amount by which qualified research expenditures (QREs) in the enterprise zone exceed the taxpayer's average QREs from the preceding two years from the same enterprise zone.
  • In each tax year, the taxpayer may claim no more than 25% of the total credit (the remainder being carried forward) plus any applicable carryover amount from a prior year up to 25% of the original credit.
  • To the extent that the credit for any year exceeds the tax liability for such a year after other credits have been claimed, the excess may be carried forward and claimed until it is used.

Example: A Taxpayer claimed Colorado R&D tax credits in 2018 and 2019 of $10,000, respectively. Limited to 25% of the credit per year, it claimed $2,500 in 2018 and carried forward $2,500 to 2019, 2020, and 2021, respectively. For 2019, Taxpayer claimed 25% of its $10,000 credit PLUS the $2,500 carried forward from 2018 for a total credit of $5,000 in 2019. If the facts stay the same for 2020, Taxpayer's credit would include $2,500 each from 2018, 2019, and 2020 for a total R&D credit of $7,500 in 2020.

  • Beginning January 1, 2012, taxpayers must annually pre-certify with their local EZ Administrator to be eligible to claim the credits by electronically filing form DR on the Colorado Department of Economic Development’s Enterprise Zone Web page.
  • Pre-certified taxpayers who intend to claim EZ R&D credits must complete a certification application (form DR 0077) and receive approval from the local EZ Administrator. Certification documents must be submitted with the Colorado income tax filing.

What are the Potential Benefits of this Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

Colorado R&D Tax Credit Case Study

A Denver-based engineering firm had never claimed the R&D Tax Credits before. This project involved the tax year 2021.

The Company qualified for the federal R&D credit of $130,000 and an additional $15,750 in Colorado State R&D Tax Credits, of which $3,938 could be claimed in 2021.

FEDERAL
COLORADO
Year
Total QREs
Credit
Total QREs
Credit
2021
$1,300,000
$130,00
$1,300,000
$110,000
2020
$900,000
$900,000
2019
$650,000
$650,000
2018
$450,000
$450,000
Total $3,300,000 $130,000 $3,300,000 $15,750


You can read more about this Colorado case study here.