The Colorado PTE Election

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Since 2018 an individual can deduct only a capped amount of state and local taxes on Schedule A: $10,000 through 2024, $40,400 for 2026 under the 2025 act (phasing back down toward $10,000 above $505,000 of modified AGI (verify 2026 cap and phase-down figures)). IRS Notice 2020-75 confirmed that a pass-through entity that pays state income tax at the entity level deducts it in computing the owners’ distributive share, outside the cap. Colorado’s SALT Parity Act (C.R.S. 39-22-340 through 39-22-346) lets S corporations and partnerships elect to do exactly that.

The entity pays Colorado’s 4.40% on its Colorado income, deducts it on the federal 1120-S or 1065, and each owner takes a refundable credit for their share on the Colorado DR 0104. The owners’ federal income drops by the Colorado tax; their Colorado tax is unchanged. For an owner whose SALT deduction is capped, the saving is the federal rate times the Colorado tax paid. This is the procedure and the arithmetic, and the two owner situations where the election does nothing or costs money.

Step 1: How It Works

• The electing entity computes its Colorado taxable income (the owners’ shares of the entity’s income, gains, losses, deductions and Colorado modifications, apportioned for nonresidents) and pays 4.40% on it with the DR 0106 (Part III).
• The entity deducts the Colorado tax on its federal return as a tax imposed on the entity (Notice 2020-75; §164(b)(6) doesn’t reach it). Ordinary income on the K-1s is lower by that amount.
• Each owner receives a credit on the Colorado K-1 (DR 0106K) equal to their share of the entity-level tax, claimed on the DR 0104; excess credit is refunded.
• The owners add back on the Colorado return their share of the state tax the entity deducted federally (so Colorado taxable income is not reduced twice) and, under the statute, any §199A deduction attributable to the electing entity (verify the scope of the QBI add-back for electing-PTE owners under C.R.S. 39-22-104(3)(p) as amended).
• Net effect: Colorado collects the same tax; the federal government collects less, because the state tax moved from a capped Schedule A deduction to an uncapped business deduction.

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Step 2: Who Benefits

Owner	Benefit
Itemizes and is over the SALT cap (property tax plus Colorado income tax exceed $40,400, or the cap has phased down because MAGI exceeds $505,000)	Full: federal marginal rate × the Colorado tax moved to the entity
Takes the standard deduction	Full: the owner was deducting none of the Colorado tax; now it is deducted at the entity level. This is the larger group in Colorado after the 2025 act raised the standard deduction.
Itemizes and is under the cap	None: the tax was already fully deductible on Schedule A; moving it changes nothing federally. Slightly negative if the entity-level deduction reduces QBI.
Owner with a net loss from the entity	Excluded from the entity computation; no tax paid on their behalf, no credit
Owner in the 0% / 10% / 12% brackets	Small; the benefit is the owner’s marginal rate
Nonresident owner whose home state doesn’t credit Colorado PTE tax	Possibly negative; see below

A secondary effect: the entity-level deduction reduces QBI, so the 20% deduction falls by 20% of the Colorado tax; at a 24% bracket, the net federal saving is 24% minus 4.8% of the tax moved, about 19%. Still worth doing. For an owner above the §199A thresholds whose QBI deduction is already limited by wages, the reduction may not apply.

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Step 3: Making the Election

• Who: any partnership or S corporation, by a person authorized to bind it. All owners are bound; owner consent is not separately required by the state, but the operating or shareholder agreement should authorize it and the owners should be told (a nonresident owner can be harmed).
• How: either file DR 1705 (SALT Parity Act Election) during the year, which is mainly used to make the election before paying estimates, or check the election box on the DR 0106 when the return is filed. The DR 0106 box is sufficient; the DR 1705 is not required.
• When: by the time the DR 0106 is filed for the year, including extensions. There is no earlier deadline. A calendar-year entity decides by October 15 of the following year; the estimated-payment rules make an earlier decision practical.
• Binding and irrevocable for the year once the return is filed; annual, so each year is a fresh decision. An election is not carried forward automatically; the box must be checked each year.
• Not available to a partner that is a C corporation unitary with the partnership; a single-member LLC (disregarded) has no entity to elect; a trust or estate that is itself a pass-through can elect if it has Colorado income (verify).

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Step 4: Computing the Entity’s Tax

• Start with each owner’s share of the entity’s federal income, gain, loss and deduction items and Colorado modifications (Column A of the DR 0106K for residents; Column B, the Colorado-apportioned share, for nonresidents).
• Exclude guaranteed payments (they are taxed to the partner directly, not through the election), which is why a partnership paying most of its profit as guaranteed payments gets little from electing. Convert guaranteed payments to priority allocations of profit, where the economics allow, to bring them inside the election (verify DOR treatment of priority allocations).
• Exclude any owner with a negative net share for the year; their loss doesn’t offset other owners’ income in the entity computation.
• Exclude unitary C corporation partners.
• Sum the remaining owners’ shares; multiply by 4.40%; report in Part III of the DR 0106. The entity cannot claim credits of its own (the owners claim them).
• Report each owner’s share of the tax paid on their DR 0106K as the SALT Parity credit. The credit is allowed only if the entity actually paid the tax and listed the owner.
• Federal side: deduct the Colorado PTE tax on the 1120-S line 12 (taxes and licenses) or 1065 line 14; it is a specified income tax payment under Notice 2020-75, deductible when paid under the entity’s method (cash-basis entities should pay by December 31 to deduct in the current year; a payment in March deducts next year).

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Step 5: Estimated Payments

• An electing entity follows the C corporation estimated tax rules: quarterly payments on DR 0106EP if the year’s net Colorado tax will exceed $5,000, due the 15th of the 4th, 6th, 9th and 12th months (April 15, June 15, September 15, December 15 for a calendar year).
• Safe harbor: 70% of the current year’s tax, or 100% of the prior year’s tax only if the entity elected for the prior year (verify the corporate safe-harbor percentages applied to PTEs). A first-year election has no prior-year harbor; pay 70% of the estimate or accept the underpayment penalty (C.R.S. 39-22-606), which is interest-based and modest, and often smaller than the federal benefit of paying by December 31.
• Make the December 15 payment (or a December 31 payment, for the federal deduction) large enough to cover the year; a cash-basis entity deducts only what it paid in the year.
• Owners should reduce their own Colorado estimates (DR 0104EP) by the credit they expect, or they will be refunded in April after lending Colorado the money twice.
• The owner’s federal estimates can also drop: lower K-1 income means lower federal tax.

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Step 6: The Owner’s Return

• Federal 1040: K-1 income is already net of the Colorado PTE tax; nothing further. Do not also deduct the entity-paid Colorado tax on Schedule A; it isn’t the owner’s payment.
• Colorado DR 0104: add back the owner’s share of the PTE tax the entity deducted federally (so Colorado taxes the full share); add back the §199A deduction as required (verify); claim the SALT Parity credit from the DR 0106K on the DR 0104CR; excess credit refunds.
• Schedule A: the owner’s own Colorado withholding, estimates and property taxes remain subject to the cap; the PTE tax is outside it.
• Owner-level Colorado tax is unchanged by the election: the add-back puts the income back, the credit removes the tax. The federal saving is the whole point.
• Tiered structures: a lower-tier partnership’s PTE credit passes up through an upper-tier pass-through on the “SALT Parity credit from lower-tier partnership” line.

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Nonresident Owners and Other States

• Nonresident owners are included at their Colorado-apportioned share. The entity may not file a composite return (DR 0106 composite) for nonresidents in an election year, and need not file the DR 0107 nonresident agreement.
• A nonresident owner need not file a Colorado return if their only Colorado-source income is covered by the election; filing anyway to claim a refund of excess credit is allowed.
• Whether the owner’s home state gives a credit for Colorado PTE tax paid on their behalf varies: most PTE-election states do (by statute or guidance); some states have refused or limited it. Check the resident state before electing for a nonresident owner. If the home state gives no credit, that owner pays Colorado tax through the entity and full home-state tax on the same income; the federal benefit may not cover it.
• Colorado residents who own interests in other states’ electing PTEs: Colorado allows the credit for taxes paid to another state to include PTE-level tax paid on the resident’s behalf (verify DOR guidance on other-state PTE tax in the DR 0104CR computation); the resident adds back their share of the other state’s PTE tax deducted federally.
• An entity doing business in several PTE-election states can elect in each; the interactions (apportionment, resident credits, add-backs) multiply, and a multistate entity’s election should be modeled state by state.

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A Worked Example

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The Annual Go / No-Go

Every December, for every S corporation and partnership with Colorado income, five lines per owner:

1. Projected owner Schedule A SALT (property tax plus own Colorado income tax plus other state taxes) versus the cap after phase-down, or the owner takes the standard deduction. Over the cap or standard deduction: proceed. Under the cap and itemizing: stop; no benefit.
2. Owner’s federal marginal rate × owner’s share of the entity’s Colorado tax = gross federal benefit.
3. Less 20% × the same amount × marginal rate if the owner’s QBI deduction is unlimited (QBI effect); zero if wage-limited or SSTB-excluded.
4. Less home-state double tax for any nonresident owner whose state gives no credit.
5. Less the cost of estimates (interest on money paid early) and preparation. If the net is positive for the owners as a group and no owner is harmed without consent, elect, and pay by December 31.

Then: DR 0106EP schedule set, DR 1705 filed if estimates start before the return, owners’ DR 0104EP reduced, the election box checked on the DR 0106, the tax paid, the credit on each DR 0106K, and the add-backs on each DR 0104. Next December, start over.

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Questions at the desk

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Written for the Tax Shop desk; figures are for the 2026 tax year as currently published. Items marked (verify) are to be confirmed against primary sources before the figures freeze in December. Last updated October 16, 2026.