R&D Tax Credits in Colorado

The Colorado R&D Tax Credit is available to  taxpayers who incur qualifying research expenses in enterprise zones in Colorado which are identified by the Colorado Office of Economic Development.

Colorado offers a 3% income tax credit that is based on the increase of a company’s research and experimental expenditures within an enterprise zone over the average of such expenditures conducted in the same enterprise zone during the previous two income tax years.

To qualify, the expenses must be made in of the enterprise zones in Colorado which are identified by the Colorado Office of Economic Development.

Claiming the credit

  • The credit must be divided equally over 4 years.
  • The taxpayer may claim 25% of the credit in the year the expenditure is made and the remaining 75% in 25% increments over the next 3 years.
  • The expenses must meet the Federal definition of qualifying research expenses.

Eligibility Requirements

To be eligible for the Colorado R&D Credit, qualified research expenses must satisfy three criteria:

  1. It must be technological in nature
  2. It must be useful in the development of a new or improved product or component of the business.
  3. It must utilize the process of experimentation.

Qualified research expenses include:

  • Wages, excluding fringe benefits
  • Supplies
  • Payments for the right to use computers
  • Contract research expenses may include the amount paid for research done by a third-party for the benefit of the contracting firm.

Ineligible expenses include:

  • Land or improvements to land
  • Depreciable equipment
  • Management surveys
  • Costs incurred to adapt a product to a particular customer’s needs
  • Research funded by any government entity.

Case Study

An engineering company in Colorado conducted qualified research activities from 2013-2016. The company had never claimed the credit prior to 2013. After 3 years of claiming the credit, the company was able to receive the 14% credit rate, rather than 6% for the federal credit. Although the company was able to claim the federal credit for all four years, it was only eligible for the state credit in 2016.

Summary of credits:

FEDERALCOLORADO
YearTotal QREsCreditTotal QREsCredit
2016$450,000$63,000$450,000$5,450
2015$250,000$15,000$250,000 n/a
2014$100,000$6,000$100,000n/a
2013$50,000$3,000$50,000n/a
Total$850,000$87,000$850,000$5,450

Colorado R&D Tax Credit Form

  • The credit can be found in Part five of Form DR1366, The Enterprise Zone Credit and Carryforward Schedule.
  • For credits generated on or after January 1, 2012, most enterprise zone credits must be pre-certified by the zone administrator prior to any business activity that would generate the enterprise zone credit.