The Colorado SALT Parity Act election lets an S corporation or partnership pay Colorado income tax at the entity level instead of pushing the full tax down to each owner’s personal return. The point is federal: the entity’s tax payment counts as a business expense on the federal return, which sidesteps the cap on individual state and local tax deductions. Owners then claim a refundable Colorado credit for their share of what the entity paid.1Colorado Department of Revenue – Taxation. Income Tax Topics: SALT Parity Act
Who Can Elect
S corporations and partnerships are the eligible entities.2Justia Law. Colorado Revised Statutes 39-22-343 – Election LLCs treated as partnerships for federal tax purposes qualify, since Colorado follows the federal classification. Both resident and nonresident owners can be in the entity when the election is made.1Colorado Department of Revenue – Taxation. Income Tax Topics: SALT Parity Act
A single-member LLC that is disregarded for federal tax purposes cannot elect, because the act only applies to entities that file as partnerships or S corporations. If a partner in the entity is a C corporation filing as part of a unitary group with the partnership, the election does not apply to that partner’s share of income, though every other partner or shareholder remains bound.3Colorado Department of Revenue – Taxation. SALT Parity Act Election
How to Make the Election
The entity makes the election, not the individual owners. Two options: check the box on the Colorado Partnership and S Corporation Income Tax Return (DR 0106), or file a separate SALT Parity Act Election Form (DR 1705).4Colorado Department of Revenue – Taxation. DR 1705 – SALT Parity Act Election Form
Two features trip people up. The election must be made every year; it does not roll over. And once made for a given tax year, it is irrevocable and binding on every partner and shareholder.5Colorado Department of Revenue. Income Tax Topics: SALT Parity Act Colorado statutes don’t require any specific percentage of owner approval before the entity elects, but because the decision cannot be undone, most tax advisors recommend written agreement from all owners before filing.
How the Entity-Level Tax Is Calculated
The entity totals two categories of income across qualifying owners and multiplies by Colorado’s individual income tax rate for that year.1Colorado Department of Revenue – Taxation. Income Tax Topics: SALT Parity Act
- Each owner’s share of the entity’s Colorado-source income, whether the owner is a resident or a nonresident.
- For resident owners only, their share of the entity’s income from sources outside Colorado.6Justia Law. Colorado Revised Statutes 39-22-344
If a resident owner’s net income from the entity is negative, that owner is excluded from the calculation rather than reducing the taxable base.1Colorado Department of Revenue – Taxation. Income Tax Topics: SALT Parity Act A loss year for one partner won’t offset income allocated to the others at the entity level.
The rate matches Colorado’s individual income tax rate for the relevant year. It was 4.40% for tax years 2022, 2023, and 2025, and 4.25% for 2024. Confirm the current rate each year before running the numbers.
Estimated Payments and Deadlines
Starting with tax year 2023, electing entities follow the estimated payment rules for C corporations rather than individuals.1Colorado Department of Revenue – Taxation. Income Tax Topics: SALT Parity Act Quarterly estimated payments are required when net Colorado tax liability for the year exceeds $5,000, generally due on the 15th of April, June, September, and January.
Forms and payments run through Revenue Online on the Colorado Department of Revenue website. Underpayment penalties and interest apply, so entities with uneven income across the year need to watch their quarterly liability rather than settle up at year end.
How Owners Claim the Credit on Their Own Returns
The entity-level payment doesn’t erase the owner’s Colorado tax; it changes where the deduction appears federally and how the owner reports the payment on the state side.
On the federal return, the tax paid by the entity reduces the entity’s net income before it flows through on Schedule K-1. Each owner’s federal income is lower by their share of the payment, which is what produces the federal savings. The IRS treats the payment as a business expense that does not touch any owner’s individual SALT cap.7IRS. Notice 2020-75
On the Colorado side, the entity issues each owner a Colorado K-1 (Form DR 0106K) showing their share of income, deductions, and the credit for entity-level tax paid on their behalf.1Colorado Department of Revenue – Taxation. Income Tax Topics: SALT Parity Act Owners file their own Colorado returns and claim the credit on the Individual Credit Schedule (DR 0104CR). The credit is fully refundable, so any excess over the owner’s Colorado tax liability comes back as a refund.5Colorado Department of Revenue. Income Tax Topics: SALT Parity Act
What Changes for Nonresident Owners
When the election is made, the entity no longer files a Nonresident Partner or Shareholder Agreement (DR 0107) or remits payment with a Statement of Colorado Tax Remittance (DR 0108) for its nonresident owners.8Colorado Department of Revenue – Taxation. SALT Parity Act Reporting The entity-level payment covers their Colorado liability instead.
The election also blocks the entity from filing a composite return for nonresident owners during the election year.1Colorado Department of Revenue – Taxation. Income Tax Topics: SALT Parity Act Most nonresident owners will therefore need to file their own Colorado individual returns. One exception: a nonresident whose only Colorado-source income comes through the electing entity doesn’t need to file a separate Colorado return, since the entity’s payment already covers the tax.
For entities with many out-of-state owners, this is a real tradeoff. The election removes nonresident withholding paperwork for the entity but can add individual filing obligations for owners who previously used a composite return.
Whether the Election Still Pays After the 2026 SALT Cap Increase
Federal legislation passed in 2025 raised the individual SALT cap to $40,400 for 2026, with the cap phasing down for taxpayers earning above $505,000. Because a federal cap still exists, Colorado’s election remains available; the Department of Revenue has confirmed the entity-level election will continue for future tax years,9Colorado Department of Revenue – Taxation. October Tax Policy Updates and the statute ties the election’s availability to the existence of a federal cap on individual SALT deductions under Section 164 of the Internal Revenue Code.2Justia Law. Colorado Revised Statutes 39-22-343 – Election
The higher cap changes the math. An owner whose total state and local taxes fall under $40,400 can already deduct the full amount on the individual return, which makes the entity-level election extra work for no benefit. The election tends to produce the largest savings for owners with substantial Colorado tax bills who also carry property taxes or taxes to other states that push them past the cap, and for higher-income owners caught in the phasedown. Running the numbers with a tax professional before electing matters more now than it did when the cap was $10,000, especially given that the election cannot be undone once filed.