Colo. Code Regs. 39-22-109

Current through Register Vol. 47, No. 20, October 25, 2024

Rule 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.

39-22-109

Colorado Register, Vol 37, No. 14. July 25, 2014, effective 8/14/2014

37 CR 18, September 25, 2014, effective 10/15/2014

37 CR 19, October 10,2014, effective 10/30/2014

37 CR 22, November 25, 2014, effective 12/16/2014

38 CR 04, February 25, 2015, effective 3/17/2015

38 CR 07, April 10, 2015, effective 4/30/2015

38 CR 11, June 10, 2015, effective 6/30/2015

38 CR 22, November 25, 2015, effective 12/15/2015

38 CR 24, December 25, 2015, effective 1/14/2016

38 CR 24, December 25, 2015, effective 1/19/2016

39 CR 01, January 10, 2016, effective 1/30/2016

39 CR 16, August 25, 2016, effective 9/14/2016

40 CR 08, April 25, 2017, effective 5/15/2017

40 CR 12, June 25, 2017, effective 7/15/2017

40 CR 16, August 25, 2017, effective 9/14/2017

40 CR 23, December 10, 2017, effective 1/1/2018

41 CR 14, July 25, 2018, effective 8/14/2018

41 CR 20, October 25, 2018, effective 11/14/2018

42 CR 02, January 25, 2019, effective 12/18/2018

42 CR 02, January 25, 2019, effective 12/18/2018, expires 4/17/2019

42 CR 06, March 25, 2019, effective 4/14/2019

43 CR 04, February 25, 2020, effective 3/16/2020

43 CR 13, July 10, 2020, effective 6/2/2020

43 CR 17, September 10, 2020, effective 9/30/2020

44 CR 03, February 10, 2021, effective 3/2/2021

44 CR 07, April 10, 2021, effective 4/30/2021

44 CR 08, April 25, 2021, effective 5/15/2021

45 CR 01, January 10, 2022, effective 1/30/2022

45 CR 04, February 25, 2022, effective 3/17/2022

45 CR 05, March 10, 2022, effective 3/30/2022

46 CR 11, June 10, 2023, effective 5/2/2023

46 CR 09, May 10, 2023, effective 5/30/2023

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.