Colorado S Corporation Taxes and Filing Requirements

Key Takeaways

• A Colorado S corporation is a tax designation that allows income to pass through to shareholders to avoid double taxation.
• S corporations must file both a federal Form 1120S and Colorado Form 106 annually.
• Nonresident shareholders must file Forms DR 0107 and DR 0108 and have 4.63% of their income withheld.
• Colorado S corps are not subject to corporate tax but may owe other taxes like sales and payroll taxes.
• Eligibility for S corp election includes having no more than 100 shareholders and only one class of stock.
• Filing requirements and steps include forming a business entity and submitting IRS Form 2553.
• LLCs in Colorado can elect S corp status for tax savings but must maintain compliance with IRS rules.

Colorado corporate tax is a business tax related to the gross taxable income of the majority of businesses and corporations registered or doing business within Colorado borders. Businesses are required to file an annual tax return, and may include deductions such as wages paid, cost of products sold, and other applicable business expenses. Thus, corporate income tax is similar to personal income tax, except that it's for businesses. It revolves around a bracketed tax system.

Colorado Corporate Tax for S Corporations

S Corporations' tax designation prevents corporations from being taxed twice. Instead of requiring taxation from both the corporation and its shareholders, income and tax liability passes through the corporation and directly to its shareholders (which is why this type of taxation is referred to as "pass through"). Both at the federal level and Colorado state level, this type of business avoids corporate tax. However, S corporations still have tax filing requirements and are required to report their income.

Colorado businesses must file both federal and state tax returns. S corporations registered or conducting business in Colorado must complete the following:

• Federal Tax Return - S corporations operating in Colorado must file a federal tax return. The federal return must be completed first, as the state tax return will reference what is reported on the federal return. The correct IRS form for S corporations is 1120S. The company must distribute 1120S Schedule K-1 to each shareholder. This form shows the shareholder their portion of the company's profits, deductions, and credits and can be used for their personal tax return.
• Colorado Form 106 - Form 106: Income Tax Returns for Pass-Through Entities must be filed for each year that an S corporation is conducting business in Colorado. The deadline to file Colorado Form 106 is three and a half months after the conclusion of the corporation's tax year. This means that for tax years that end in December, the form is due April 17th. This form requires the business to report both the corporation's income and the profit distribution to each shareholder.
• Colorado Form DR 0107 - For shareholders who are not residents of Colorado, forms DR 0107 and DR 0108 must be filed to make sure each shareholder fulfills their Colorado state tax liabilities. Nonresident shareholders are required to sign DR 1017 and agree to file a Colorado state income tax return. The corporation includes the signed forms with their yearly tax return.
• Colorado Form DR 0108 - As of 2012, the company must withhold 4.63 percent of the income of each nonresident shareholder and send this payment by utilizing form DR 0108. An individual DR 0108 form is required for each nonresident shareholder associated with payment, and each form is required to be filed along with Form 106.
• Additional Business Taxes - S corporations are not liable for state business taxes, but they can be responsible for other state taxes. For example, they might be required to pay sales tax. If the corporation sells physical personal property, they must acquire a Colorado sales tax license and charge sales tax.

If a corporation makes sales at a location outside of their normal business location, they must also acquire a special event license from the Department of Revenue. The corporation must keep track of all sales records and then submit a yearly sales tax return. The Department of Revenue will mail this to licensed businesses.

LLCs Electing S Corporation Status in Colorado

A Colorado LLC can elect to be taxed as an S corporation while retaining its LLC structure. This hybrid approach allows business owners to benefit from the limited liability and operational flexibility of an LLC while gaining the tax savings associated with an S corp.

Steps for an LLC to Elect S Corp Status:

1. Form an LLC with the Colorado Secretary of State.
2. Apply for an EIN from the IRS.
3. File Form 2553 with the IRS to elect S corporation status.
4. Continue filing Form 106 annually with the Colorado Department of Revenue.

Considerations:

• The IRS requires that LLC members who work for the company pay themselves a “reasonable salary” subject to payroll taxes.
• Distributions beyond the salary may not be subject to self-employment taxes, potentially reducing tax liability.

Advantages and Disadvantages of a Colorado S Corporation

Choosing S corporation status in Colorado can offer several advantages, but also comes with limitations:

Advantages:

• Pass-through taxation avoids double taxation at the corporate level.
• Self-employment tax savings: S corp owners may reduce employment tax liability by taking part of their earnings as distributions.
• Credibility: Operating as an S corp can improve a company’s credibility with investors and financial institutions.

Disadvantages:

• Strict eligibility rules: Limited to 100 shareholders and only one class of stock.
• Administrative complexity: Must comply with IRS and Colorado filing requirements annually.
• IRS scrutiny: S corps that pay unreasonably low salaries and large distributions risk triggering audits.

Filing Steps to Become a Colorado S Corporation

Here are the general steps to become a Colorado S corporation:

1. Form Your Business Entity
   First, establish your business as either a limited liability company (LLC) or C corporation in Colorado by filing the appropriate formation documents with the Colorado Secretary of State.
2. Obtain an EIN
   Apply for an Employer Identification Number (EIN) from the IRS. This is required before electing S corporation status.
3. File IRS Form 2553
   Complete and submit Form 2553, Election by a Small Business Corporation, to the IRS. Ensure that all shareholders sign the form.
4. File Colorado Form 106
   Submit Colorado Form 106 to report income and profit distribution annually.
5. Fulfill State Tax Obligations
   Although S corporations are not subject to Colorado’s corporate income tax, they may still be responsible for:
   • Sales Tax: If selling tangible goods or taxable services
   • Withholding Tax: On wages paid to employees
   • Nonresident Shareholder Tax: As outlined in Forms DR 0107 and DR 0108

Eligibility Requirements for a Colorado S Corporation

To qualify as a Colorado S corporation, a business must first meet the IRS requirements for S corporation status, which include:

• Be a domestic corporation or LLC
• Have only allowable shareholders, which include individuals, certain trusts, and estates—but not partnerships, corporations, or non-resident aliens
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (e.g., certain financial institutions, insurance companies, and domestic international sales corporations)

Once eligibility is confirmed, the entity must file IRS Form 2553 to elect S corporation status. This election must be made within 75 days of forming the business or within 75 days of the beginning of the tax year in which the election is to take effect.

Colorado Corporate Tax for Nonprofit Corporations

Some types of nonprofit organizations registered within Colorado borders will be allowed to exempt some or all of their qualifying income from both federal and state income taxes. In Colorado, certified 501(c) nonprofit corporations are exempt from the state corporate income tax. The most common tax-exempt corporations include:

• Labor unions and workers' organizations
• Tax-exempt recreational organizations, including social clubs and recreational groups
• Educational and scientific institutions, including nonprofit schools, colleges, and universities, and some research institutions
• Tax-exempt religious institutions, including churches, mosques, temples, and synagogues
• Tax-exempt charities

To qualify for tax-exempt status in Colorado, a nonprofit corporation must be considered a 501(c) organization and acquire a Nonprofit Tax-Exempt ID Number from the IRS. Colorado may require additional paperwork to be filed with the Colorado Department of Revenue in order to gain exemption.

Frequently Asked Questions

1. What is the difference between a Colorado S corporation and a C corporation?
   A C corporation pays corporate income tax, while a Colorado S corporation allows income to pass through to shareholders to avoid double taxation.
2. Do Colorado S corporations pay corporate income tax?
   No. Colorado S corporations are not subject to corporate income tax, but they must file an annual return and may owe other taxes like sales or withholding tax.
3. Can an LLC in Colorado elect S corp status?
   Yes. A Colorado LLC can elect to be taxed as an S corporation by filing Form 2553 with the IRS and meeting eligibility requirements.
4. What happens if a nonresident shareholder doesn’t file Form DR 0107?
   If the shareholder doesn’t file the form, the S corporation may be required to withhold Colorado income tax and submit Form DR 0108 on their behalf.
5. When is the deadline to file Form 106 in Colorado?
   The due date for Form 106 is 3.5 months after the end of the tax year—typically April 17 for calendar-year filers.

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