Colorado Enacts Landmark Legislation to Boost Employee Ownership

Colorado has firmly established itself as a national leader in championing employee ownership with the governor's signing of HB25-1021 into law. This legislation significantly enhances the state's support for a wide range of employee ownership models, including ESOPs, worker cooperatives, and employee ownership trusts (EOTs).

We've previously discussed the proposed legislation. Now, here's what has officially become law:

• • Capital Gains Tax Subtraction: Beginning in 2027, a capital gains tax subtraction will be available for owners who sell their business to a qualified employee-owned business. The amount of the subtraction is determined and annually adjusted by the Colorado Office of Economic Development and International Trade (OEDIT) and posted on their website. This subtraction is tied to the existing Conversion Tax Credit program, which supports businesses transitioning to employee ownership by covering costs associated with the transition (e.g., legal, valuation).
  • Worker Cooperative Deduction: Worker-owned cooperatives can deduct up to $1 million of their federal taxable income annually.
  • Nonprofit Access: Qualified support entities, including 501(c)(3) nonprofits, are now eligible to claim the tax credit for up to 75% of their expenses, not to exceed $167,000, when providing services that support businesses in converting to or expanding employee ownership.
  • Conversion Tax Credit Updates:
    
    • The existing Conversion Tax Credit program is extended through 2037. This program supports businesses transitioning to employee ownership by covering costs associated with the transition (e.g., legal, valuation, etc.).
    • The percentage of eligible conversion/expansion costs for the tax credit increases significantly from 50% to 75% beginning in 2026, providing greater financial support for these transitions.
    • Annual caps for the tax credit are reduced. This adjustment from the previous $10 million cap reflects a recalibration based on current and projected usage.
    • Alternate equity structure (AES) flexibility: The Colorado OEDIT is authorized to adjust the percentages required for an AES. AES is broadly defined to include mechanisms such as direct stock ownership, employee stock purchase plans, LLC membership, phantom stock, and similar arrangements beyond traditional ESOPs, cooperatives, and EOTs.
    • Employee ownership trust (EOT) definition: The definition of an EOT is clarified in the legislation to mean a trust that holds at least 20% of a qualified business's fully diluted securities. This clarification is crucial, as EOTs often lack precise definitions, particularly in the context of employee ownership tax credit programs.
    • Colorado headquarters definition: The definition of "corporate headquarters" is updated for improved clarity.

This legislative achievement cements Colorado's position at the forefront of the employee ownership movement, promising a more equitable and resilient economy for the state.

Find more information on the bill, and read a previous NCEO post on the proposed legislation.