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.

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.

Total QREs
Total QREs

You can read more about this Colorado case study here.

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

Technological in Nature
Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

Permitted Purpose
Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

Eliminate Uncertainty
Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.

Research and Development Tax Insights

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