If your Colorado construction company is structured as a partnership or S corporation, the State and Local Tax (SALT) Parity election may offer a valuable tax-planning opportunity. But that doesn’t mean making the election is automatically the right move.
Colorado allows eligible partnerships and S corporations to elect to pay state income tax at the entity level rather than having the tax paid solely at the individual owner level. The election can provide a federal tax benefit, but it also comes with Colorado tax consequences to consider.
For 2026, the election is annual, binding on the entity and its owners, and irrevocable for the tax year. Before you make it, here’s what you should know.
Assess your eligibility
Colorado’s SALT Parity election is available to partnerships and S corporations. The election is made by the entity, not by individual owners, and generally applies to all partners or shareholders.
In other words, you can’t have one owner opt in while another opts out. Once your construction company makes the election, it’s binding on the entity and its owners for that tax year.
This makes ownership structure an important part of the decision. If your company has multiple owners, especially owners who live in different states, the election may affect each owner differently.
| Quick check: The SALT Parity election is made annually at the entity level. For 2026, once the election is made, it can’t be revoked for that tax year. |
Understand how the entity-level tax works
Normally, partnerships and S corporations don’t pay state income tax at the entity level. Instead, income passes through to the owners, who report their shares on their individual tax returns.
Colorado’s SALT Parity election changes how the state tax is paid. An electing company calculates Colorado taxable income at the entity level and pays Colorado income tax on that amount.
For Colorado resident owners, the calculation generally includes their share of the entity’s entire qualifying income, gain, loss, or deduction. For nonresident owners, it generally includes their share attributable to Colorado. Certain exceptions and adjustments can apply.
The owners still receive their Colorado K-1s, but the state tax associated with qualifying pass-through income has already been paid by the business.
So, why move the tax payment from the owners to the business?
The potential advantage is on the federal side. The SALT Parity Act was designed to allow qualifying pass-through entities to pay state income tax at the entity level, generally making the state tax deductible in calculating the income that passes through to owners. The state taxes paid by the business are a deduction to income resulting in less income taxed federally.
This can be beneficial when an owner would otherwise face limitations on deducting state and local taxes personally. Since the SALT cap on the individual 1040 return has increased to $40,400 for 2026, the decision whether to make this election is even more crucial and requires additional calculations. Under the previous $10,000 SALT cap, it was a much easier decision.
The result can be lower federal taxable income for the owners. But the actual savings depend on the company’s income and each owner’s tax situation, which is why it’s important to run the numbers rather than assume the election will generate a specific benefit.
Account for Colorado’s owner-level credit
Paying tax at the entity level doesn’t mean owners simply pay Colorado tax again on the same income.
Colorado generally gives each partner or shareholder a refundable credit for their share of the income tax imposed on and paid by the entity with respect to their income.
This credit is an important piece of the SALT Parity calculation. But it’s also important to distinguish the Colorado credit from the potential federal upside. The entity-level tax payment may help reduce federal taxable income, while the owner-level credit helps account for the Colorado tax the business has already paid.
In short, you need to look at both sides of the calculation.
Don’t overlook the QBI addback
There’s another Colorado-specific issue that can change the math: the qualified business income (QBI) deduction.
Eligible owners of pass-through businesses may claim a QBI deduction of up to 20% of qualified business income on their federal returns. Colorado generally requires certain higher-income taxpayers to add that deduction back when determining Colorado taxable income.
The rules are different when a partnership or S corporation makes the SALT Parity election. In that case, all partners or shareholders must add back their federal QBI deduction, regardless of their income level.
That can offset some of the benefit you might otherwise expect from making the election.
| How the QBI deduction changes the math: If your entity makes the SALT Parity election, owners generally must add back their federal QBI deduction for Colorado purposes, regardless of income level. |
Consider where your owners live
The SALT Parity election also works differently depending on owner residency.
For Colorado residents, the entity-level calculation generally includes their share of the entity’s qualifying income from all sources. For nonresidents, it generally includes only their share attributable to Colorado.
There can also be a filing benefit for some nonresident owners. A nonresident individual whose only Colorado-source income comes from an entity making the SALT Parity election generally isn’t required to file a Colorado return.
But that’s not the end of the analysis. If an owner lives in another state, you also need to consider how that state treats taxes paid through Colorado’s SALT Parity election. For construction companies with multistate ownership, those differences can have a meaningful impact on the overall benefit.
Run the numbers for the election every year
Even if the SALT Parity election saves your construction company and its owners money in 2026, don’t assume you should automatically make it again the following year.
A lot can change from one year to the next, including:
- Company profitability
- Ownership percentages
- Where owners live
- Owners’ individual tax situations
- Federal or Colorado tax rules
- The amount of the QBI deduction
- Cash flow and estimated tax payments
Because the election is annual, you’re able to model it each year based on your current numbers.
Make an informed SALT Parity decision
At John A. Knutson & Co., we help Colorado construction companies look at the full picture before making the SALT Parity election, including the federal benefit, Colorado QBI addback, owner credits, residency, and other tax considerations.
The SALT Parity election can be a useful planning tool, but the value is in the math. Running the numbers before you make the election can help you determine whether it truly works in your company’s favor.
FAQs
What is the Colorado SALT Parity election?
The Colorado SALT Parity election allows eligible partnerships and S corporations to pay Colorado income tax at the business entity level.
Normally, income from these pass-through entities flows to the owners, who report it and pay the related income tax on their individual returns. By shifting the state tax payment to the entity, the election may create a federal income tax benefit for owners.
The election is made annually at the entity level and applies to the entity and its owners for that tax year. For 2026, the election is binding and irrevocable once made.
What are the tax benefits of making the Colorado SALT Parity election?
The primary potential benefit of Colorado’s SALT Parity election is federal tax savings. When an eligible partnership or S corporation pays Colorado income tax at the entity level, the payment may reduce the federal taxable income that passes through to its owners.
This can provide a tax benefit compared with paying the state income tax individually, particularly when an owner’s personal deduction for state and local taxes is limited.
However, the federal savings are only one part of the calculation. Colorado’s QBI addback rules, owner-level tax credits, residency, and each owner’s individual tax situation can affect the election’s overall value.
How does Colorado’s SALT Parity election affect the QBI deduction?
Making the SALT Parity election can change how the federal qualified business income (QBI) deduction is treated for Colorado income tax purposes.
Eligible pass-through business owners may claim a federal QBI deduction, but Colorado has separate rules requiring certain taxpayers to add that deduction back when calculating Colorado taxable income.
When a partnership or S corporation makes the SALT Parity election, its partners or shareholders generally must add back their federal QBI deduction for Colorado purposes regardless of their income level. Because this requirement can reduce some of the election’s overall tax benefit, construction company owners should include the QBI addback when modeling the election.
How does the SALT Parity election affect nonresident owners of a Colorado business?
For a nonresident owner, Colorado’s entity-level tax calculation generally includes the owner’s share of qualifying income attributable to Colorado rather than income from all sources.
The election may also simplify Colorado filing requirements in certain situations. A nonresident individual whose only Colorado-source income comes from an entity making the SALT Parity election generally may not need to file an individual Colorado income tax return.
However, owners who live outside Colorado should also consider the tax rules in their state of residence, including whether that state provides appropriate treatment for taxes paid through Colorado’s pass-through entity tax election.
Should a construction company make the Colorado SALT Parity election every year?
Because the election is annual, construction companies get a chance to evaluate whether it makes financial sense based on that year’s circumstances.
Changes in taxable income, ownership percentages, owner residency, the QBI deduction, tax laws, and owners’ individual tax positions can all affect the calculation. A company that benefits from the election one year may see a different result the next.
Rather than automatically repeating a prior-year election, construction company owners should model both scenarios annually. John A. Knutson & Co. can help evaluate the entity- and owner-level tax consequences before the election is made.