Colorado's Pitch: Cut Corporate Tax Perks to Fund a New Monthly Child Tax Credit

What This Bill Actually Does

At its core, House Bill 26-1221 is a massive revenue-shifting exercise. The bill's authors argue that recent changes to the federal tax code inadvertently shrank Colorado's state income tax revenue, which in turn defunded the state's existing family affordability credit. To patch this hole, lawmakers want to eliminate three specific tax expenditures utilized mostly by corporations and wealthy individuals, and funnel 100% of that saved money directly into a new Family Affordability Credit.

Here is how they are paying for it: First, the bill entirely repeals the Alternative Minimum Tax (AMT) credit for income tax years starting in 2026. Second, starting in 2027, corporations that deduct exorbitant executive compensation on their federal returns (specifically under IRC Section 162(m), which generally limits deductions for executive pay over $1 million) will have to add that amount back to their Colorado taxable income. Finally, the bill takes a significant bite out of Net Operating Losses (NOLs). For losses incurred after 2026, corporations will only be able to carry those losses forward for 10 years instead of the current 20 years. Additionally, they will only be able to use those losses to offset 70% of their taxable income in a given year, down from the current 80%.

All the new tax revenue generated from these three rollbacks won't just sit in the state's General Fund. Instead, the bill creates a new refundable child tax credit that acts as a financial seesaw. Every December, the state's Legislative Council Staff will calculate exactly how much extra money the corporate tax hikes brought in. They will then set the exact dollar amount of the new child tax credit so that it drains that exact amount of money back out to eligible parents. Kids under five get the maximum amount, while kids aged six to sixteen get 75% of the base credit.

What It Means for You

If you are a parent juggling child care and housing costs, this bill is laser-focused on your wallet, provided you fall under certain income thresholds. The new Family Affordability Credit acts as an add-on to existing state and federal child tax credits. If you file taxes jointly as a married couple and your Adjusted Gross Income (AGI) is $25,000 or less, you qualify for the absolute maximum credit per child. For single filers, that maximum threshold is an AGI of $15,000.

If you make more than those limits, the credit phases out quickly. For every $5,000 you earn over the threshold, your credit shrinks by 6.875%. The bill does include a mechanism to adjust these income limits for inflation starting in 2027, which prevents "bracket creep" from eating away at your eligibility as the cost of living rises. Perhaps the most interesting practical change for families is how the money arrives. The Department of Revenue is directed to try and pay this credit out in 12 equal monthly installments rather than a single lump-sum refund at tax time, effectively turning it into a monthly basic income for child-rearing expenses.

On the flip side, if you are a high-earning individual who regularly relies on the Alternative Minimum Tax (AMT) credit, you need to prepare for that write-off to vanish entirely for tax years beginning January 1, 2026.

Action Items for Residents:

• Check your recent AGI: Pull your most recent tax return and look at your Adjusted Gross Income to see if you fall near the $15,000 (single) or $25,000 (joint) thresholds.
• Talk to your CPA about AMT: If you historically claim the state Alternative Minimum Tax credit, ask your accountant to run a projection for your 2026 tax liability without it.

What It Means for Your Business

For the Colorado business community—particularly C-corporations, startups, and real estate developers—this bill represents a massive tightening of the belt. The most sweeping impact comes from the changes to Net Operating Losses (NOLs). Right now, if your business takes a massive financial hit (say, opening a new restaurant group or surviving a lean startup phase), you can carry those losses forward for two decades to offset your tax burden when you finally become profitable. Starting in 2027, this bill slashes that runway in half to just 10 years. Furthermore, in any given profitable year, you'll only be able to use those losses to wipe out 70% of your taxable income, down from 80%. This means you will start paying state income taxes on recovering profits much sooner, and at a higher effective rate.

If you run a larger corporation, you also need to watch the new Executive Compensation add-back. Federal law under IRC 162(m) limits how much publicly held (and some privately held) corporations can deduct for top executives' pay—usually capping at $1 million. If your company takes a federal deduction for employee remuneration under this specific code, Colorado will require you to add that exact amount back to your state taxable income starting in 2027. Lawmakers are explicitly stating that they do not want Colorado taxpayers subsidizing out-of-state executive salaries.

Because these provisions target very specific corporate mechanisms, standard pass-through entities (like single-member LLCs or sole proprietorships) won't feel the sting of the executive compensation or corporate NOL limits in the same way C-Corps will, but you should still consult your tax professional about how your specific entity structure interacts with the new rules.

Action Items for Business Owners:

• Stress-test your NOLs: Sit down with your CFO or CPA this week and model what a 10-year carryforward limit and a 70% usage cap would do to your tax projections starting in 2027.
• Review executive contracts: If your corporation is currently deducting executive compensation under IRC 162(m), calculate the exact cost of losing that deduction at the state level.

Follow the Money

This bill is an incredibly clever piece of legislative accounting designed specifically to navigate around the Taxpayer's Bill of Rights (TABOR). Under TABOR, any state policy that causes a net tax revenue gain requires voter approval. Because lawmakers want to pass this without a ballot measure, they structured the bill so the revenue generated by the corporate tax hikes is drained down to the penny by the new child tax credits.

Every December, Legislative Council Staff will publish a quarterly revenue forecast. They will project exactly how much extra money the state will collect from the AMT repeal, the NOL limits, and the executive pay add-backs. They will then divide that total pool of money by the projected number of eligible children, setting the exact size of the Family Affordability Credit for that year. Because the new revenue and the new tax credit exactly offset each other, the bill legally claims it results in "no net district revenue gain" and therefore bypasses the need for a statewide vote. While an official Fiscal Note hasn't been published yet, the internal mechanics guarantee a dollar-for-dollar wash for the state's General Fund, shifting millions from the corporate tax base to lower-income households.

Where This Bill Stands

HB26-1221 was officially introduced in the House on February 17, 2026, and has been assigned to the House Finance Committee. It is sponsored by Representatives Yara Zokaie and Emily Sirota, along with Senators Judy Amabile and Katie Wallace.

Because this bill directly attacks corporate tax incentives to fund progressive family policy, expect an absolute brawl in committee. Business advocacy groups, chambers of commerce, and corporate lobbyists will heavily contest the restriction on Net Operating Losses, arguing it punishes businesses trying to recover from economic downturns. Conversely, family advocacy groups and progressive policy organizations will champion it as a vital, revenue-neutral way to combat child poverty. Watch the House Finance Committee calendar closely—the upcoming initial hearing will be the bellwether for whether moderate Democrats are willing to swallow the corporate tax hikes to secure the child tax credit.