- Colorado lawmakers introduced HB 25-1021 to address phantom income taxation for specific business entities.
- The bill proposes a federal taxable income subtraction for qualified employee-owned businesses starting in 2027.
- Tax provisions are set to expire permanently by July 2042 following a decade-long implementation phase.
(COLORADO) — Colorado lawmakers put “phantom income” on the state tax agenda with House Bill 25-1021, which includes a new subtraction from federal taxable income for a defined group of taxpayers over a limited set of years.
House Bill 25-1021 includes provisions related to phantom income taxation, though the available document excerpt is partially redacted.
The bill establishes a subtraction from federal taxable income for income tax years commencing on or after January 1, 2027, but before January 1, 2038. The provision is set to expire on July 1, 2042.
The excerpt ties that subtraction to a “qualified employee-owned business,” signaling that eligibility depends on definitions used in the bill text.
Colorado’s debate over phantom income reflects concerns that can arise when tax liability does not align with cash actually received, an issue that can surface in business and employee-ownership contexts referenced in the bill.
In the text that is available, the subtraction operates by reference to federal taxable income, a term used as the baseline in the bill’s language. The mechanism itself is framed as a subtraction, which the bill sets out for specific income tax years rather than permanently.
Timing is central to how the proposal would work because the bill limits the subtraction to income tax years commencing on or after January 1, 2027, but before January 1, 2038. That design makes the change time-bound from the start, rather than open-ended.
The later statutory expiration date adds another time marker. Under the bill, the provision is set to expire on July 1, 2042, a date that would sit beyond the last covered income tax year range in the subtraction language.
The structure creates two separate timing concepts in the excerpt: when the subtraction could apply on returns, and when the statutory authority for the provision ends. The bill’s text sets out both.
House Bill 25-1021 also frames eligibility through the “qualified employee-owned business” concept. The excerpt does not provide the full operational tests for qualification, but it identifies the term as the gateway for the provisions it describes.
Entity type appears in the bill’s scope as presented in the excerpt. The legislation references “qualified employee-owned business” as a category of taxpayer subject to these provisions, including C corporations, S corporations, and other business entities.
The excerpt does not spell out the full scope of the legislation’s phantom income situations or the legislative rationale for the subtraction. It also does not fully specify the exact amount of the subtraction in the available text, even as it establishes the subtraction’s existence and timing.
As written in the excerpt, the bill’s core tax mechanism is the subtraction from federal taxable income, linked to the bill’s eligibility concept. That pairing—eligibility through “qualified employee-owned business,” and relief through a subtraction from federal taxable income—forms the centerpiece of what is visible.
Sunset dynamics also sit at the center of the proposal as presented. The income tax year window runs from years commencing on or after January 1, 2027, but before January 1, 2038, while the provision is set to expire on July 1, 2042.
For taxpayers and advisers watching House Bill 25-1021, the details that matter most will sit in the full bill text: how “qualified employee-owned business” is defined, how the subtraction is calculated, and how the bill links its phantom income focus to specific transactions or income items.
Coloradans seeking to follow the bill’s progress can track House Bill 25-1021 through the Colorado General Assembly’s legislative resources, where readers can review the full text as introduced and any changes adopted through amendments, along with related legislative documents as the measure advances.
