Colorado Employee Ownership Tax Credit
About the Program
The Employee Ownership Tax Credit to Establish or to Expand is available to current Colorado-headquartered businesses and their employees to provide an incentive to establish or expand eligible employee ownership structures: employee stock ownership plan, worker-owned cooperative, employee ownership trust, LLC membership, phantom stock, profit interest, restricted stock, stock appreciation rights, stock options, or synthetic equity. The tax credit covers up to 75% of a qualified business’s conversion costs for use on its state income taxes. To participate in the program, the applying business must have existed in Colorado for at least one year prior to starting their employee-ownership conversion and applying for the tax credit.
In June 2021, Governor Polis signed into law HB21-1311, Income Tax. The bill provide tax credits to fund professional service costs of conversion to employee ownership. The program makes employee ownership conversions more accessible for businesses throughout Colorado.
In May 2023, Governor Polis signed into law HB 23-1081(opens in new window), which expanded the program eligibility criteria. The expansion bill provides four of the following updates to the program (more details can be found in the lower sections of this program page, under the “Eligibility” accordion):
- Increases the cap for converting a qualified business to a worker-owned cooperative or employee ownership trust from $25,000 to $40,000, and increases the cap for converting a qualified business to an employee stock ownership plan from $100,000 to $150,000;
- Effective for applications dated on or after January 1, 2024: Expands the tax credit to include 50% of the costs of a qualified employee-owned business expanding its employee ownership by at least 20%, not to exceed $25,000;
- Expands the tax credit to include 50% of the costs of a qualified business converting to or expanding an alternate equity structure, not to exceed $25,000. An alternate equity structure is a mechanism under which an employer grants to employees a form of employee ownership, including LLC membership, phantom stock, profit interest, restricted stock, stock appreciation right, stock option, or synthetic equity. The bill establishes certain minimum requirements for an alternate equity structure and requires the Colorado Office of Economic Development in the Office of the Governor to develop guidelines for the types of employee ownership grants that qualify as an alternate equity structure.
- Specifies that a qualified business or qualified employee-owned business may apply for and claim only one credit for the conversion or expansion costs per tax year.
Eligibility
Current Colorado-headquartered businesses converting to employee ownership between January 1, 2022 and December 31, 2033 may be eligible to apply. Eligible structures include: employee stock ownership plan, worker-owned cooperative, employee ownership trust, LLC membership, phantom stock, profit interest, restricted stock, stock appreciation rights, stock options, or synthetic equity. Businesses must apply for this tax credit prior to completing their employee ownership conversion. Typically, the conversion to an employee-owned structure takes between 6-12 months to complete.
To be eligible for this program, qualified businesses must:
- Be converting to an entity type offering at least 20% equity in the business to employees (excluding founders)
- Have at least 3 full-time employees (or 3 members, if a cooperative)
- Be headquartered in Colorado for at least 1 year
- Be in operation for at least 1 year
- Be in good standing with the Secretary of State
- Not have applied for this program more than once in a calendar year
- Once a tax credit has been reserved, the business has 18 months to demonstrate that at least 20% of the total costs have been incurred
Eligibility for a staged conversion
A staged conversion means that the initial application will include a minimum of 20% equity in the business being offered to employees. If you do not use the entire tax credit with your initial application and decide to add a minimum of an additional 20% of equity in the future (while the program remains open and funds are available), you may be eligible to access any remaining tax credits.
Businesses considering a staged conversation in the future must indicate it in their application. If a staged conversation is approved, you must share at least an additional 20% equity with employees with each additional stage to access any remaining reserved tax credits.
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