Colorado PTET Guide
How to Make a Colorado PTET Election: The SALT Parity Act, Form DR 0106, and the 4.4% Rate
Colorado's pass-through entity tax runs at the flat 4.4% individual rate, and you elect it by checking one box on Form DR 0106. The election turns nondeductible personal state tax into a federal business deduction. Here is how it works, the estimated payment trap that catches people, and the 2026 math on a theoretical Colorado firm.
Picture a three-owner architecture firm in Denver, organized as an LLC taxed as a partnership, with $500,000 of income sourced to Colorado. All three owners already pay well over $40,000 in state and local taxes on their personal returns, so their personal deduction for those taxes is stuck behind the federal SALT cap. The Colorado SALT Parity Act lets the firm pay Colorado tax at the entity level and deduct it on the business return, where the cap does not reach. That firm is theoretical, not an actual EntityIQ client, but the mechanics below are exactly the ones a real one would face.
What the Colorado PTET actually is
Colorado created its elective pass-through entity tax through House Bill 21-1327 and amended it in Senate Bill 22-124, together known as the SALT Parity Act and codified at C.R.S. section 39-22-343. It is Colorado's version of the workaround the IRS blessed in Notice 2020-75, which confirmed that a state income tax paid by a partnership or S-corporation is deductible in computing the entity's federal income and is not subject to the individual SALT cap in IRC section 164(b)(6). The annual election has been available for tax years beginning on or after January 1, 2022. There was also a one-time window to make retroactive elections for 2018 through 2021, but that window closed in 2024, so it is not an option for a 2026 filer.
Who can elect, and how
A qualifying entity is a partnership or S-corporation. Sole proprietorships and single-member LLCs reported on Schedule C do not qualify, because there is no separate entity to pay the tax and file the return. You make the election by checking the SALT Parity Act box on Form DR 0106, the Colorado Partnership and S Corporation Income Tax Return. It is an annual election, so you make it again each year you want it, and once made it is binding for that tax year on every partner and shareholder, whether the owner is a resident or a nonresident. Owners do not get to opt out individually once the entity elects.
The rate, and why it is lower than a coastal state's
The electing entity pays Colorado tax at the state's flat individual income tax rate, which is 4.4% for 2025 and scheduled to hold at 4.4% for 2026. Colorado applies that single rate to all of the entity's Colorado-source income. There is no equivalent of Ohio's Business Income Deduction that shelters the first slice of profit, so every dollar of Colorado income is in the base. Even so, 4.4% is a low rate compared to a New York owner near 10.9% or a California owner at 9.3%, which means the deduction you are moving around is smaller. The whole point of the election is federal, so a low state rate caps the size of the prize.
The deadlines and the estimated payment trap
For a calendar-year entity, Form DR 0106 is due April 15 of the following year, and Colorado grants an automatic six-month extension to file, moving the deadline to October 15. The election is made on that return. The trap is the estimated payments. For tax years beginning on or after January 1, 2023, an electing pass-through entity is treated like a C-corporation for estimated tax and must make four quarterly payments on Form DR 0106EP if its net Colorado tax liability for the year will exceed $5,000. A partnership that has never made an estimated payment in its life can walk into a penalty the first year it elects, simply because it did not realize the election flips it into the corporate estimated regime.
The 2026 math on a theoretical Colorado firm
Back to the Denver firm with $500,000 of Colorado income. If it elects, it pays Colorado $22,000 at the 4.4% rate and deducts that $22,000 on its federal Form 1065. The owners are in the 35% federal bracket, so that deduction is worth about $7,700 in federal tax. Without the election, that same $22,000 of Colorado tax would have landed on the owners' personal returns, where it sits behind the SALT cap and produces close to nothing. The numbers below are 2026 figures and are rounded. The firm is theoretical.
Theoretical Colorado firm · $500,000 Colorado income
Federal savings from the SALT Parity election
The savings scale with income and with your federal bracket, because the state rate is fixed at 4.4%. Here is how the same election looks at three income levels for an electing Colorado entity whose owners have already maxed their personal SALT cap.
| Colorado income | DR 0106 tax (4.4%) | Federal bracket | Federal tax saved |
|---|---|---|---|
| $200,000 | $8,800 | 24% | $2,112 |
| $500,000 | $22,000 | 35% | $7,700 |
| $1,000,000 | $44,000 | 37% | $16,280 |
How owners get the money back
At the state level the election is designed to be close to a wash. Each owner claims a refundable Electing Pass-Through Entity Owner Tax Credit on Form DR 0104CR for their share of the entity tax, so the income is not taxed twice by Colorado. The owner also adds back their distributive share of the state tax the entity deducted on its federal return, so the deduction does not shrink their Colorado income. Those two moves cancel, which is the point. Colorado stays revenue neutral, the owner is neither better nor worse off at the state level, and the only thing left over is the federal deduction. Because the owner credit is refundable, any overpayment comes back on the DR 0104 rather than being trapped at the entity level.
When it makes sense, and when to skip it
Run the election if your Colorado profit is large, your federal bracket is high, and your personal state and local taxes already blow past the SALT cap so the deduction would otherwise be wasted. Think twice if your Colorado income is modest, if your total SALT already fits under the $40,400 cap for 2026, or if the extra return and quarterly estimates cost more than the deduction is worth. Because OBBBA raised the SALT cap to $40,400 for 2026 and phases it down only above $505,000 of modified adjusted gross income, some owners who benefited from the workaround in earlier years no longer clear the bar, so this is worth rechecking each year rather than setting once and forgetting.
If you want to see whether a Colorado SALT Parity election clears the cost of the extra return for your own numbers, the EntityIQ calculator models the federal deduction against your bracket and your SALT position. For the federal side of the workaround, see our guides on the PTET deduction and the SALT cap workaround and whether the PTET still saves you money in 2026.
This article is educational and is not legal or tax advice. The figures above are 2026 figures, and the firm is theoretical. Colorado adjusts its flat rate and revises its forms regularly, so confirm the current instructions and consult a qualified CPA before you check the SALT Parity box on Form DR 0106.