39-22-109 - Colorado-Source Income
(1)
General Rule. A Nonresident who derives income from sources in
Colorado and who has Nexus must file a Colorado income tax return and pay
Colorado income tax on Colorado net taxable income. Deferred recognition of any
income from sources in Colorado remains Colorado-source income when such income
is finally recognized. A Nonresident's Colorado income tax liability is
calculated by first calculating the Nonresident's Colorado income tax as if the
Nonresident was a full year Colorado resident and multiplying such tentative
tax by the ratio of the Nonresident's Colorado modified federal adjusted gross
income to the Nonresident's total modified federal adjusted gross income. See
Department Rule 39-22-110 for rules governing modifications to
income.
(2)
Definitions. The following terms have the meanings set forth below
unless the context of the rule indicates otherwise:
(a) 'Nonresident' means an individual who is
neither a domiciliary of Colorado nor a statutory resident of Colorado as set
forth in §
39-22-103(8),
C.R.S., and Department Rule 39-22-103(8)(a).
(b) 'Business' means a business, trade,
profession or occupation, including the activities of a nonprofit Pass-through
entity that has unrelated business taxable income for federal income tax
purposes. Business does not include activities of a Nonresident whose only
activity in Colorado is buying and selling intangible property on his or her
own account (See §
39-22-109(2)(a)(V),
C.R.S.).
(c) 'Entertainer' means an
individual who receives compensation to act, entertain, or inform (e.g.,
speaker or lecturer) at one or more discrete events in Colorado. This includes,
but is not limited to, actors, bands, singers, orchestras, dancers, comedians,
speakers, lecturers and similar performers.
(d) 'Member' means a partner, member, or
shareholder of a Pass-through entity as defined in subparagraph (2)(e),
below.
(e) 'Pass-through entity'
means a partnership, limited partnership, limited liability partnership, a
limited liability company that is treated as a partnership for Colorado tax
purposes or a trust that is not taxed at the entity level (e.g., a grantor-type
trust).
(f) 'Nexus' means the
Nonresident's presence in Colorado, whether by being personally present in
Colorado or being present in Colorado through agents or representatives,
including through membership in a Pass-through entity or in a series of
Pass-through entities described in paragraph (3)(c), below, for the purpose of
direct or indirect financial profit, gain, benefit or advantage. Once nexus has
been established, that nexus will continue for as long as the person continues
to receive income from sources in Colorado that are related to such
presence.
(3)
Common Types of Income Derived from Sources Within Colorado. A
Nonresident's income derived from a source within Colorado is subject to
Colorado income tax. The source of income refers to the location where income
is earned and not to the location of the payor or to the residency of the
taxpayer. §
39-22-109, C.R.S., lists several
types of income that are conclusively presumed to be Colorado-source income,
but it is not an exclusive list of Colorado-source income. Colorado-source
income includes any income derived from sources within Colorado including, but
not limited to:
(a)
Ownership of Real
or Tangible Personal Property. Income derived from any ownership
interest in real or tangible personal property located in Colorado (e.g.,
leases and licenses) is Colorado-source income, regardless of whether the
Nonresident carries on a Business within Colorado and regardless of the place
where the sale of such property is consummated. The following are examples of
Colorado-source income.
(i) Rent and royalty
income earned from real or tangible personal property located in Colorado is
Colorado-source income.
(ii) Any
gain or loss realized from the sale of real property located in Colorado is
Colorado-source income. Deferred recognition of a gain (or loss) from the sale
or exchange of real property located in Colorado remains Colorado-source income
when such gain (or loss) is finally recognized. These types of transactions
include installment sales, exchanges or transfers.
(A) Example: A Nonresident owns real property
in Colorado and makes an I.R.C. § 1031 exchange of the Colorado property
for real property located in Texas. At the time of the exchange, the property
had appreciated in value. In the following year, the Nonresident sells the
Texas property. That portion of the gain attributable to the appreciation in
value of the Colorado property is Colorado-source income even though the income
was not recognized until the Texas property was sold. The Nonresident continues
to have Colorado Nexus as long as the gain is deferred.
(iii) With respect to tangible personal
property that appreciates in value while located in Colorado but is removed
from Colorado for purposes of selling such property, the gain from the sale of
such property is Colorado-source income.
(A)
Example: A Nonresident owns a valuable painting that is displayed in her
vacation home in Colorado. The painting significantly appreciates in value
while located in Colorado. The Nonresident moves the painting to Nevada and
immediately sells the painting for significant gain. The gain is
Colorado-source income.
(iv) Interest income paid on a tax lien
certificate for property located in Colorado is Colorado-source income. Any
other interest income derived from the ownership of real or tangible personal
property located in Colorado is also Colorado-source income. However, interest
income from a loan secured by real or tangible property located in Colorado is
not Colorado-source income.
(v)
Interest income from an installment sale of real or tangible personal property
located in Colorado is Colorado-source income.
(b)
Business Income. Income
earned by, credited to, derived from, accumulated for, or otherwise effectively
attributable to (referred to herein as "derived from") a Business carried on in
Colorado is Colorado-source income. A Nonresident carries on a Business in
Colorado if the Nonresident (a) is present in Colorado for Business or (b)
directly or indirectly (e.g., through employees, representatives, or as a
member of a pass-through entity) maintains, operates or shares in the
maintaining or operating of any place in Colorado where Business affairs are
conducted. When a Business is carried on within and outside Colorado, only such
income that is fairly and equitably attributable to the Business carried on in
Colorado is Colorado-source income. The following is a non-exhaustive list of
common types of Business income and rules for sourcing such income.
(i)
Wage Income. Income
earned as an employee for work performed in Colorado is Colorado-source income,
unless a more specific rule below applies. "Performed in Colorado" means the
employee is physically in Colorado when the employee performs the work.
(A)
Telecommuting. A
Nonresident employee who telecommutes from a location outside of Colorado is
not working in Colorado and the employee's income from such work is not
Colorado-source income.
(B)
Work Days. An employee's income is apportioned to Colorado
based on the number of days the employee works ("Work Day") in Colorado. A Work
Day in Colorado means a day in which the majority of the employee's work time
for that day is performed in Colorado. Travel time to Colorado is included in
calculating the Colorado Work Day hours, but travel time departing from
Colorado is not included calculating the Colorado Work Day hours. The
denominator of this ratio is the total number of Work Days the employee works
in the year. A day is not a Work Day if the work done on such day is de
minimis. See example (II) below.
(I)
Example. Nonresident flies from California to Colorado on Tuesday but does not
perform any other Business-related work in either California or Colorado on
Tuesday. Nonresident attends a 2 hour Business meeting on Wednesday, returns to
California Wednesday afternoon, and works 1 hour in the California office.
Travel time to Colorado on Tuesday is considered a Work Day in Colorado because
no other work was performed on Tuesday. Wednesday is not a Colorado Work Day
because the majority of the work hours are allocated to California (flight to
California and office work in California).
(II)
Example. Nonresident
prolongs his work trip to Colorado through the weekend. While in Colorado on
the weekend vacation, the Nonresident checks his or her email and responds to a
few nonsubstantive emails. Such a day is neither a Colorado Work Day nor a Work
Day anywhere.
(ii)
Independent Contractor.
Business income of an independent contractor is sourced depending on whether
the income is from a purely personal service or is from other than purely
personal service. Purely personal services consist of services performed by an
individual independent contractor with only incidental contributions from
either other individuals or property. Such services include, but are not
limited to, legal, accounting, architecture, or other professional services.
(A)
Purely Personal Service
Income. If an independent contractor's Business income is earned by
performing purely personal services and the purely personal services are
performed both within and outside Colorado, the Nonresident shall apportion
such income in the ratio of the number of hours the individual performed such
services in Colorado to the total number of hours the individual performed such
services in the year. But see paragraph (4)(b)(iii) and (iv) if the Nonresident
is paid on commission or contingency for purely personal services. Each
discrete Business activity shall be separately apportioned. See paragraph
(4)(b)(ii)(3) for a discussion of discrete Business activities.
(I) Hours worked includes non-billable
hours.
(II) Nonresidents
independent contractors who work on a single job for entire days may utilize
the Work Day rule described in paragraph (3)(b)(i)(B) of this rule.
(III) Example. An expert witness testifies in
trials conducted in Colorado during the year. The total hours the expert
witness spent working in Colorado was 26. Therefore, the expert witness must
apportion his or her income in the ratio of 26 hours in Colorado over the total
number of work hours performed in that year.
(B)
Other Than Purely Personal
Services Income. If an independent contractor's Business income is
earned from activities other than the performance of purely personal services,
then the Business income is apportioned under the apportionment rules for
corporations set forth in §
39-22-303.6, C.R.S., and the rules
thereunder.
(I) Example. A Nonresident
independent contractor provides oil and gas consulting services and travels to
Colorado to provide consultation services to an oil and gas exploration
company. Consultant hires Company B to perform laboratory analysis, the results
of which are used by consultant to provide consulting services to the
exploration company. Consultant is not performing purely personal services
because the personal services of Company B are not incidental in value to
consultant's services. Consultant uses the apportionment rules set forth in
§
39-22-303.6(6),
C.R.S., and the rules thereunder.
(II) Example. Nonresident independent
contractor provides interior design consulting services to homeowners. Designer
also sells a substantial amount of tangible personal property to Colorado
homeowners. Designer is not performing purely personal services in Colorado
because he or she makes sales of tangible personal property that are not
incidental in value. The designer will apportion Business income using §
39-22-303.6(5),
C.R.S., and the rules thereunder.
(C)
Discrete Business
Activities. If the Nonresident independent contractor carries on two
or more discrete Business activities in Colorado during the year, then the
Nonresident independent contractor shall separately apportion the income
derived from each activity, unless the income from each cannot be separately
determined. The apportionment for each discrete Business activity, if both are
purely personal services, is calculated based on the ratio of the number hours
the individual performed such services in Colorado to the total number of hours
the individual performed such purely personal services everywhere in the tax
year. If the Nonresident independent contractor carries on more than one
discrete Business activity, and at least one is a purely personal service while
at least another is not a purely personal service, the Nonresident independent
contractor may choose to either apportion his or her income under 1) §
39-22-303.6, C.R.S., and the rules
thereunder or 2) may separately calculate and apportion his or her income on
the basis of work hours.
(I) Example. An
independent contractor provides purely personal services in the form of
consulting services for two separate companies in the same year. Contractor is
paid on an hourly basis and performs these services in and outside Colorado for
the first company and performs all consulting services outside Colorado for the
second company. Each consulting job is a discrete income producing activity
and, in the absence of records demonstrating a more accurate apportionment
methodology, the Department will presume that the income for work performed for
the first company should be apportioned based on the ratio of the number of
work hours the consultant worked in Colorado to the total number of work hours
in the tax year for the first company. Income from the second company is a
discrete Business activity, the income from such work is entirely allocated to
a source outside Colorado, and neither the income nor the work hours for such
work is included in the apportionment for the first company.
(iii)
Commissions. The amount of Colorado-source income of a
Nonresident employee or independent contractor whose compensation is based on
commissions is determined by multiplying the gross income earned from all
commissions by a fraction, the numerator of which is the amount of sales made
within Colorado and the denominator of which is the amount of sales made
everywhere. The determination of whether sales are made within Colorado or
elsewhere is based upon where the salesperson performs the activities in
obtaining the order, not the location of the formal acceptance of the contract.
If the Nonresident also earns income other than as commissions (e.g., wages as
base pay), then the Nonresident must apportion such non-commission income based
on the applicable rule (e.g., wage income apportioned as set forth in paragraph
(4)(b)(i), above).
(iv)
Contingency Fees. Each contingency fee arrangements is usually
viewed as discrete Business activity and the fee is apportioned based on the
ratio of the number of hours the Nonresident worked in Colorado on the discrete
Business activity to the total number of hours worked everywhere on the
discrete Business activity in the year.
(v)
Board of Directors.
Compensation paid by a corporation for services performed in Colorado by a
Nonresident member of the board of directors for director services, including
attendance at a board of directors' meeting, is Colorado-source income. If all
services are performed in Colorado, the total income for such services is
Colorado-source income. If the director's services are performed both within
and outside Colorado, then the total income paid for performing such service is
multiplied by a fraction, the numerator of which is the number of hours the
director is in Colorado performing director services and the denominator of
which is the total hours the director provides services in the year. If the
Nonresident is a paid member of more than one board of directors in the year,
then the ratio is determined separately for each board.
(vi)
Construction
Contractors. Income of a construction contractor or subcontractor for
construction services is sourced to the state where construction service is
performed.
(vii)
Professional Athletes Employed by a Professional Team. Income
earned in Colorado by a Nonresident professional athlete employed by a
professional team is Colorado-source income. The compensation received for
services rendered as a member of a professional athletic team reported for
federal income tax purposes shall be apportioned in the ratio of the number of
duty days of professional services performed in Colorado over the total number
of duty days during the tax year for which the athlete is required to make his
or her services available to the franchise under the terms of his or her
contract. The formula applies to active team members, team members on the
disabled list, and other persons required to travel with the team and to
perform services on behalf of the team, including coaches, managers and
trainers. Teams include, but are not limited to, any professional baseball,
basketball, football, hockey, soccer,and lacrosse teams.
(A) Duty days include all days of game,
practice or travel that occur on or after the beginning of the team's official
pre-season training through the last game in which the team competes. Duty days
also include days the Nonresident is required by contract to perform services,
but which fall outside this period, such as instructional leagues, "Pro Bowl",
or promotional events. In addition, duty days include days during the offseason
when a team member undertakes training activities as part of a team-imposed
program, but only if performed at the team facilities. Duty days for any member
joining a team during the season shall begin on the day such person becomes a
member, and for any member leaving a team during the season shall end on the
day such person ceases to be a member. When a person switches teams during a
taxable year, a separate duty day calculation shall be made for the period such
person was with each team. Duty days do not include any try-out or pre-season
cut days for which the Nonresident is not under contract with a team or any
days for which a member is not compensated and is not rendering services for
the team in any manner because such person has been suspended without pay and
prohibited from performing any services for the team.
(B) Each duty day is assigned to the state in
which the service is performed. Duty days during which a team member is on the
disabled list performing no substantial services for the team will not be
apportioned to any particular state but will be included in the total number of
duty days for apportionment purposes.
(C) Travel days are considered duty days and
are apportioned as follows: Travel days which include a game, required
practice, meeting, or other service are duty days apportioned to the state in
which the game, practice, or service is conducted. Travel days not involving a
game, practice, or required service will not be apportioned to any particular
state, but will be included in the total number of duty days.
(D) "Compensation received for services
rendered as a member of a professional athletic team" means the total
compensation received for the official pre-season training period through the
last game in which the team competes or is scheduled to compete during the
taxable year, plus any additional compensation received for rendering services
for the team on a date that is not during the season (e.g., compensation for
representing a team at an all-star game) during the taxable year. "Compensation
received for services rendered as a member of a professional athletic team"
includes, but is not limited to, salaries; wages; guaranteed payments; bonuses
except as otherwise provided herein. Bonuses are includable in "compensation
received for services rendered as a member of a professional athletic team" if
they are earned as a result of play during the season or for playing in
championship, playoff or "all-star" games. Bonuses are also includable if paid
for signing a contract, unless all of the following conditions are met:
(I) The bonus is not conditional upon the
athlete playing any games, or performing any subsequent services, for the team,
or even making the team,
(II) The
bonus is separate from the payment of salary or any other compensation,
and
(III) The bonus is
nonrefundable.
(E)
Income not subject to apportionment would include strike benefits contract
buy-out payments, severance pay, termination pay, relocation payments, and
other payments not related to the performance of service.
(F)
Examples.
(I) Player A, a Nonresident individual, is a
member of a professional athletic team. His accounting period for federal
income tax purposes (and, hence, for Colorado income tax purposes) is the
calendar year. Player A's contract with the team requires Player A to report to
his team's training camp and to participate in all exhibition, regular season
and playoff games. This two-season contract covers an athletic season that
begins during calendar year 2013 and ends during calendar year 2014 (for which
Player A shall be paid $400,000) and an athletic season that begins during
calendar year 2014 and ends during calendar year 2015 (for which Player A shall
be paid $600,000). Assuming that Player A is paid $500,000 during 2014 (50% of
his salary for the 2013-2014 season and 50% of his salary for the 2014-2015
season), the proportion of such compensation received by Player A for calendar
year 2014 that is derived from Colorado sources is that proportion of the
$500,000 Player A had duty days in Colorado during calendar year 2014 to the
total duty days for Player A during calendar year 2014.
(II) Player C, a Nonresident individual, is a
member of a professional athletic team. During the season, Player C travels to
Colorado to participate in the annual all-star game as a representative of his
team. The days that Player C spends in Colorado for travel, practice and the
game are considered to be duty days spent in Colorado during the taxable year
and are included in duty days for Player C during the taxable year.
(III) Assume that the facts are the same as
in Example (c), except that Player C is not participating in the all-star game
and is not rendering services for his team in any manner. Player C is
travelling to and attending the game solely as a spectator. If Player C is not
required to render services for the team during the all-star game, then the
days that Player C spends in Colorado to attend the all-star game are not
considered to be duty days spent in Colorado during the taxable year and are
not included in duty days for Player C during the taxable year.
(viii)
Entertainers and Professional Athletes Not Employed by a Professional
Team. Income earned by a Nonresident professional athlete that is not
a member of a professional team (e.g., golfers, boxers, wrestlers, racers,
etc.) or a Nonresident Entertainer for performances, competitions, or events
held within Colorado is Colorado-source income. If the Entertainer or
professional athlete is paid an identifiable amount for each event performed in
Colorado, that amount is the amount of Colorado-source income. If the
Nonresident is not paid a specific amount for the performance or competition in
Colorado, then the Department will presume that a fair apportionment of the
Nonresident's income for such activity is the Nonresident's gross income
derived from the performance(s) or competition(s) multiplied by the ratio of
the number of performances or competitions performed in Colorado divided by the
total number of performances and competitions performed anywhere in the
year.
(ix)
Stock
Options. Income from the exercise of employee stock options is
Colorado-source income if such income is treated as compensation for federal
tax purposes and to the extent the employee worked in Colorado during the
period the employee was required to work for the employer prior to the exercise
of the option.
(x)
Severance, Paid-out Sick and Vacation Leave, Disability Pay and
Unemployment Insurance. Severance pay, paid-out sick and vacation
leave pay, disability pay and unemployment insurance is Colorado-source income
to the extent that the income is attributable to employment in Colorado
regardless of whether the person is a resident when the benefit is
paid.
(xi)
Deferred
Compensation. Deferred compensation is Colorado-source income to the
extent it is income derived from a Business, including employment, carried on
in Colorado. Deferred compensation includes all compensation paid or made
available to the Nonresident in a tax year following the year in which the
compensation was earned. Deferred compensation paid to a Nonresident is not
subject to Colorado income tax if
4 U.S.C. §
114 applies to such income (including
retirement plans under sections I.R.C. § 401(a), 403(a) and (b), 408(k),
7701(a)(38), 457, railroad retirement benefits (45 U.S.C. §
231(m)), Social Security
benefits, or other income that federal law precludes Colorado from subjecting
to Colorado income tax, even if the retirement benefits were earned in tax
years when the taxpayer was a resident or was a Nonresident earning income from
Colorado sources). Deferred compensation is often treated as wage income and
therefore paragraph 4(b)(i) above applies in determining whether or not the
deferred compensation derived from a Business carried on in Colorado in the
year it was earned is Colorado-source income. Similarly, to the extent that
deferred income reflects other types of income (e.g., royalties from patents
employed in Colorado), then the relevant subparagraph of this rule
applies.
(xii)
Guaranteed
Payments. Guaranteed payments typically are in lieu of wage income and
the source of such income is determined in accordance with the rules for
sourcing wage income (see paragraph (4)(b)(i), above). If the guaranteed
payment is not in lieu of wage income, then the guaranteed payment is allocated
or apportioned based on the income-generating activity (e.g., a guaranteed
payment based on partnership income from the sale of real property located in
Colorado is allocated pro rata to the Nonresident partner).
(xiii)
State Income Tax
Refunds. A state income tax refund is apportioned to Colorado to the
extent the underlying or related income is derived from any Business, including
employment, carried on by the Nonresident in Colorado.
(xiv)
Military Personnel and Their
Spouses. Compensation paid by the United States for service in the
armed forces of the United States performed by a Nonresident in Colorado is not
Colorado-source income. See §§
39-22-109(2)(b)
and 103(8)(b), C.R.S., and Department Rule 39-22-103(8) governing income of
military personnel and their spouses.
(xv)
Payments from a Covenant Not to
Compete. Income derived from a covenant not to compete is
Colorado-source income to the extent that it is derived from any Business,
including employment, carried on by the Nonresident in Colorado.
(xvi)
Disaster Relief
Workers. For tax years beginning on or after January 1, 2015, the
income earned by a Nonresident disaster relief worker performing work in
Colorado during a disaster period is exempt from Colorado income tax. See
§
39-22-104(4)(t),
C.R.S.
(c)
Distributive Share of a Member of a Pass-Through Entity.
Income received as part of the Nonresident individual's distributive share of a
Pass-through entity income, gain, loss, or deduction is Colorado-source income
to the extent that the Pass-through entity determines that income is
Colorado-source income pursuant to §
39-22-203(1)(a),
C.R.S., and the rules promulgated thereunder. These rules apply to all Members
of a Pass-through entity regardless of the type of the entity (e.g., limited
liability company, limited liability partnership, limited liability limited
partnership) or the status of the Member (e.g., limited or general).
(i) A Nonresident has Nexus with Colorado if
the Nonresident is a Member of a Pass-through entity doing business in
Colorado.
(ii)
Character of
Income. The activities of a Pass-through entity are attributable to
its Members. Therefore, a Member is engaged in a Business in Colorado to the
extent the Pass-through entity is engaged in Business in Colorado. The
character of the item of income, loss, deduction or credit included in the
Member's distributive share is determined as if the item was realized or
incurred directly by the Member from the source from which the item was
realized by the Pass-through entity or incurred in the same manner as the
Pass-through entity. The principles of this paragraph apply in the case of an
ownership chain that runs through multiple Pass-through entities.
(iii) A Nonresident Member of a Pass-through
entity deriving income from within Colorado and elsewhere has Colorado-source
income as determined by §
39-22-109, C.R.S., and this rule,
or as determined by §
39-22-303.6, C.R.S., and the rules
thereunder if the Pass-through entity elects under §
39-22-203(1)(a),
C.R.S., to apportion its income pursuant to §
39-22-303.6, C.R.S.
(iv) A Nonresident Member's share of
Colorado-source Business income of a Pass-through entity that elects to
apportion its income pursuant to §
39-22-303.6, C.R.S. (including the
special apportionment rules adopted thereunder), shall be based on the Member's
pro rata share of such Pass-through entity's income multiplied by the
Pass-through entity's apportionment percentage.
(v) In the case of a Nonresident who is a
Member of a partnership ("first partnership"), which partnership is a partner
in another partnership ("second partnership"), the following rules apply:
(A)
Unitary Partnerships. In
the case of unitary partnerships, the election made by the second partnership
is irrelevant to the treatment of income of the first partnership.
(I) If the first partnership makes the
election to apportion its income pursuant to §
39-22-303.6, C.R.S. (including the
special apportionment rules adopted thereunder), and is unitary with the second
partnership as determined by general unitary theory, then the Nonresident
member of the first partnership's share of Colorado source income is the
Member's pro rata share of the partnership's Colorado-source income as
determined by §
39-22-303.6, C.R.S. The first and
second partnerships are treated as a single entity for purposes of calculating
apportionment under §
39-22-303.6, C.R.S.
(II) If the first partnership makes the
election not to apportion its income pursuant to §
39-22-303.6, C.R.S., and is
unitary with the second partnership, then the partnerships are treated as one
partnership and the income is sourced in accordance with this rule.
(B)
Non-Unitary
Partnerships. In the case of non-unitary partnerships, the election
made by the first partnership is irrelevant to the treatment of income of the
second partnership.
(I) If the two
partnerships are non-unitary, then regardless of the election made by the first
partnership, the first partnership's pro-rata share of the second partnership's
Colorado-source income is directly allocated by the first partnership to
Colorado and is not apportioned. The pro-rata share of such income passes
through to the Nonresident Member as Colorado-source income.
(vi) A Nonresident
individual may include as a credit for taxes paid on their Nonresident
individual income tax return any payment made on their behalf by a partnership
or Subchapter S corporation on a composite return. See §§
39-22-601 (2.5) and (5), C.R.S.
(vii)
Investment
Partnerships. A partnership whose sole activity is to buy and sell
securities for its own account is not carrying on a Business in Colorado.
Therefore, a Nonresident individual partner of such a partnership is not
subject to Colorado income tax on their distributive share of such partnership
income. §
39-22-109(2)(a)(V),
C.R.S. A partnership that engages in other activities in Colorado that are
neither the described activities here nor entirely ancillary to such activities
is carrying on Business in Colorado.
(viii)
Foreign Source Income of an
Export Partnership. See, §
39-22-206, C.R.S., for the
exclusion of foreign source income of an export partnership from Colorado
taxable income.
(d)
Estates and Trusts. The Colorado-source income of a
Nonresident's distributive share of estate or trust income shall be determined
as follows:
(i) A Nonresident individual's
share of estate or trust income, gain, loss or deduction is Colorado-source
income to the extent the estate or trust derives income from sources described
in section (3), above. Estates or trusts that derive income from a Business
carried on partly within and without Colorado allocate and apportion their
income in accordance with the provisions of this rule.
(ii) Income received by a Nonresident
fiduciary of a resident trust is sourced to Colorado.
(iii) The character of the item of income,
loss, deduction or credit included in the Nonresident beneficiary's
distributive share is determined as if the item was realized or incurred
directly by the beneficiary from the source from which the item was realized by
the estate or trust, or incurred in the same manner as the estate or
trust.
(e)
Intangible Personal Property. Income, including gain, loss,
interest, annuity benefits, and dividends earned by a Nonresident is
Colorado-source income when the intangible property earning income is employed
in a Business in Colorado. The following is a non-exhaustive list of examples
of intangible property employed in a Business activity.
(i) Patent and copyright (including trademark
and other similar intangible interests) royalties constitute Colorado-source
income if, in the case of a patent, the patent is employed in production,
fabrication, manufacturing, processing or other commercial activity in Colorado
and, in the case of copyright, if the printing or publication of the
copyrighted material occurs in Colorado.
(ii)
Sale of Interest in Pass-Through
Entity. Gain or loss from the sale of a Member's active interest in a
Pass-through entity is Colorado-source income in the same proportion as the
entity's average apportionment factor for the immediately prior three tax
years. Gain or loss from the sale of a Member's passive interest in a
Pass-through entity is not Colorado-source income. A Member's interest is
passive if, in the tax year the interest is sold, the Member did not materially
participate in the Business of the Pass-through entity as defined in I.R.C.
§ 469(h).
(iii) Income from
the sale of goodwill in a Business is allocated or apportioned in the same
percentage as the sale of the Business's other assets.
(f)
Subchapter S
Corporations.
(i) A Subchapter S
corporation's distribution of Colorado-source income to a Nonresident is
subject to Colorado income tax. Subchapter S corporation distribution of income
attributable to Colorado sources is allocated and apportioned pursuant to
§
39-22-303.6, C.R.S., and the rules
thereunder.
(ii) The character of
income of a shareholder of a Subchapter S corporation is not determined as if
the item of income or expense is incurred by the shareholder but, rather, is
determined as if the income is incurred directly by the Subchapter S
corporation. See §
39-22-323(3),
C.R.S
(iii) See §
39-22-326, C.R.S., for calculation
for an individual who is a part-year Nonresident. A subchapter S corporation
must file a tax return that applies apportionment as described in §
39-22-303.6, C.R.S. See §
39-22-601 (2.5), C.R.S.
(g)
Gambling and Games of
Chance. Income from gambling and games of chance conducted in
Colorado, including limited stakes gambling, bingo, raffle, Colorado Lottery,
sweepstakes, door prizes and other games of chance, is Colorado-source income
regardless of whether the Nonresident was present in Colorado when the gambling
or game was conducted or the winnings or prize was awarded or paid.
(4)
Net Operating Loss
Carryforwards. A net operating loss carryforward is treated as Colorado
or non-Colorado sourced based on the source in the year the loss was generated.
(a)
Example: Taxpayer is a
resident of California in tax year 1 and generates a federal net operating loss
of $80,000 that is carried forward on the federal return. In tax year 2,
taxpayer has $50,000 of California-source income and $60,000 in Colorado-source
income. Pursuant to §
39-22-110, C.R.S., taxpayer
calculates the tentative Colorado income tax based on the net income of
$30,000. The numerator of the apportioning ratio that is applied to the
tentative Colorado income tax does not include the net operating loss generated
in California but the denominator includes the net operating loss. Assuming
taxpayer has no "above-the-line" adjustments or adjustments described in
§§
39-22-104(3) and
(4), C.R.S., the ratio is 50/(50+60-80)=5/3.
In this case, the taxpayer multiplies Colorado tentative tax by a ratio greater
than one. See Department Rule 39-22-110 for a discussion of the tentative tax
and adjustments to income of part-year residents and full-year
nonresidents.
Notes
1. See 1 CCR 201-2, Rule 39-22-110 for guidance on how a part-year resident or nonresident reports Colorado-source income,and for the treatment of modifications to federal income on the Colorado return.
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