Business taxes, also referred to as corporate taxes, in Colorado can be far more complicated to calculate as than individual income taxes, as there are a number of additional factors that business owners have to consider when filing corporate income taxes each year. Specifically, business taxes can involve sales taxes, unemployment insurance taxes and property taxes on any residential or commercial property owned by the business.
Methods for Calculating Corporate Taxes in Colorado
According to changes made to Colorado tax laws in 2008, which enacted single-factor legislation for business taxes in Colorado, corporate taxpayers can choose either of the following two methods by which to calculate the taxes for their business for the previous year (i.e., they can choose the method that results in the lesser tax liability):
- Two-factor formula: This calculates the average value of a business’ property and sales and then compares this average to the total property and sales to determine the amount of taxes the business will be liable for paying.
- Three–factor formula: With this method, which has been around since 1968, the business’ property, sales and the corporate income are averaged and compared to their respective totals to evaluate how much of the business’ profits will be eligible for taxation. This method may be referred to as the Multistate Tax Commission formula.
For businesses that are primarily operated abroad but that do have bases in Colorado, the “80/20” rule may apply. In order to qualify for this rule, at least 80 percent of the business’ property and payroll must be located in another country, and only 20 percent at most of the business’ assets can be located in Colorado. For qualifying businesses, the Colorado income tax return will not comply; however, the business must pay taxes on the percentage of its profits that are generated from sources within Colorado.
Because calculating corporate taxes are complicated, it’s not uncommon that businesses miscalculate their tax obligations and put themselves at risk of facing IRS audits. When this occurs, businesses may find themselves obligated to pay massive amounts of back taxes (if they miscalculated their tax obligations for previous years), which could leave business owners in the position of having to consider filing business bankruptcy.
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