Colorado Adopts Worldwide Combined Reporting with Water’s-Edge Election

On June 3, 2026, Colorado enacted legislation that adopts mandatory worldwide combined reporting for unitary groups, with a water’s-edge election available for tax years beginning on or after January 1, 2027.¹ In doing so, the state repeals its existing 80/20 rule under which a combined group excludes any corporation with 80% or more of its property or payroll assigned to non-United States (U.S.) locations. The combined reporting changes are just one part of a comprehensive tax measure.

Under Colorado law, all members of an affiliated group of C corporations, incorporated anywhere in the world, that are members of a unitary business must file a combined report for income tax years beginning on or after January 1, 2027. However, members of a combined group may make a water’s-edge election. Under such election, the group must take into account the income and factors of:

• every member incorporated in the U.S. or formed under the laws of any U.S. state or territory;

• every member, regardless of where incorporated, with at least 20% of its property and payroll assigned to the U.S. (limited to the 50 states and the District of Columbia);

• Domestic International Sales Corporations (DISCs) and export trade corporations; and

• members incorporated in a foreign jurisdiction for tax avoidance purposes (which is presumed if the incorporation occurs in a listed jurisdiction).

In addition, the legislation requires that a combined group include:

• the apportionable income of any member that is effectively connected or treated as effectively connected under the Internal Revenue Code (IRC) with a trade or business within the U.S.; and

• the related net income and factors of any member that is a resident of a country that does not have a comprehensive income tax treaty with the U.S. and that earns more than 20% of its net income from intangible property or service-related activities that are deductible from the apportionable income of any group member.

To the extent that the net income of a unitary combined group member includes subpart F income or net CFC tested income (NCTI) with respect to another group member of which the member is a U.S. shareholder, the group will eliminate such subpart F income or NCTI from the combined report. The legislation also repeals the existing subtraction for subpart F income under Colo. Rev. Stat. § 39-22-304(q), effective for tax years beginning on or after January 1, 2027.

The water’s-edge election must be made on a timely filed original return and is effective for the year of the election and the next nine succeeding years. At the end of that period, the group may withdraw the election. In addition, the group may petition to have the election terminated early or to reinstate a withdrawn election.

Ryan’s Take and Action Steps

Colorado combined filers have become accustomed to legislative changes affecting these provisions. Two years ago, the state abandoned its much-litigated three-of-six unities test in favor of a constitutional test for unity. Although this legislation does not redefine unity, it marks a significant change in how combined groups must file in Colorado. Unitary groups must examine how these changes affect their Colorado liability and weigh the merits of a water’s-edge election.

The combined reporting changes are just one part of the larger bill that makes significant changes to credits, other corporate and personal income tax provisions, and sales and use taxes.

¹ H.B. 26-1289, enacted June 3, 2026.

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.