Employee Ownership Tax Credit

The Employee Ownership Tax Credit is available to Colorado-headquartered businesses to cover up to 50% of a qualified business’ conversion costs for use on their state income taxes. This program provides an incentive to establish employee stock ownership plans, worker-owned cooperatives, and employee ownership trusts. 

In June 2021, Governor Polis signed into law HB 21-1311, providing $10 million annually in tax credits to fund professional service costs of conversion to employee ownership.The goal of the program is to make employee ownership conversions more accessible for businesses throughout Colorado.  The program and funding are available for the next 5 years, closing on January 1, 2027. 

If you and your business need access to a service provider directory or resources to support your conversion for this program or any of our other employee ownership programs, please contact us

This program is now open for applications, please view the "eligibility" and "how to apply" sections below to get started. 

Overview

Type: Tax credit

For: Businesses converting to employee ownership

Amount: Up to $25,000 or up to $100,000

Application period: Open and accepted on a rolling basis

OEDIT division: Colorado Employee Ownership Office

Businesses converting to employee ownership between January 1, 2022 and January 1, 2027 may be eligible to apply. Eligible structures include employee stock ownership plans, worker-owned cooperatives, and employee ownership trusts. Businesses must apply for this tax credit prior to completing their employee ownership conversion

To be eligible for this program, qualified businesses must: 

  • be converting to an entity type offering at least 20% equity in the business to employees (excluding founders) 
  • have at least 3 full-time employees (or 3 members if a cooperative) 
  • be headquartered in Colorado
  • be in operation for at least 1 year, or are a newly formed worker-owned cooperative
  • be in good standing with the Secretary of State
  • not currently have, in whole or in part, an employee stock ownership plan, employee ownership trust, or worker-owned cooperative at the time of application

Eligibility for a staged conversion

A staged conversion means that the initial application will include a minimum of 20% equity in the business being offered to employees. If you do not use the entire tax credit with your initial application and decide to add a minimum of an additional 20% of equity in the future (while the program remains open and funds are available), you may be eligible to access any remaining tax credits. 

If you are considering a staged conversion in the future, you must indicate that in your application. If a staged conversion is approved, with each additional stage you must add at least 20% equity share more with employees to access any remaining reserved tax credits. 

HB 21-1311, which established the tax credit, defines each structure the following way for the purposes of this program: 

  • employee stock ownership plan: as defined in section 4975 (e)(7) of the internal revenue code, as amended
  • worker-owned cooperative: as defined in section 1042 (c)(2) of the internal revenue code, as amended
  • employee ownership trust: an indirect form of employee ownership in which a trust holds a controlling stake in a qualified business and benefits all employees on an equal basis

Eligible expenses include:

  • legal services
  • accounting services
  • business valuation services 
  • technical assistance 
  • succession planning services 

Eligible expenses must be approved by a Certified Public Accountant that is not affiliated with the owner of the qualified business.

The tax incentive amount will be calculated based on expenses of professional services (see above for included expenses) required to transition the business to 1 of the recognized employee ownership structures.

Businesses may be issued tax credits of up to 50% of their conversion costs, not to exceed $25,000 for Worker-Owned Cooperatives and Employee Ownership Trusts, and not to exceed $100,000 for Employee Stock Ownership Plans. 

If your certified expenses are more than the amount of tax credits reserved, we will issue an overage for the difference. This is subject to annual limits up to the maximum allowable tax credit by structure type. If your certified expenses are fewer than the tax credits you reserved during pre-application, we will calculate your tax credit based on your actual expenses.

This program is now open for applications and will be reviewed in order of receipt.

You must complete the pre-application and application for reservation prior to completing your employee ownership conversion to qualify for the tax credit, otherwise your application will become ineligible. We encourage you to apply before starting the conversion or during the early stages of the conversion.

View application graphic   Watch the 5 minute tutorial

Step 1: Complete and pass the pre-application

Log in or create a new account in the OEDIT application portal. To protect your personal information, we manually add users to the portal, so please allot up to several days for us to activate your account. 

If your answers to the pre-application qualify your business, you will receive an email confirmation of approval. Follow the steps outlined in the email to access the next step.

To meet initial eligibility requirements as a qualified business, you must disclose which structure type you are converting to (employee stock ownership plan, employee ownership trust, or worker-owned cooperative). 

Step 2: Apply for reservation of tax credit

Follow the directions outlined in the email you receive to complete your application for reservation. To access your application: 

  1. Go to the application portal
  2. Log in to your account
  3. Click on the Employee Ownership tile
  4. Find the draft application
  5. Click on the blue pencil [edit] icon
  6. Save your work frequently to avoid losing progress

For this step in the application process, you will need to provide:

  • certificate of Good Standing from the Secretary of State showing your existing business structure (or proposed newly forming worker-owned cooperative)
    • C corporation
    • S corporation
    • Limited Liability Company
    • Partnership 
    • Limited Liability Partnership
    • Sole Proprietorship
    • Or other pass-through entity
  • information on whether you will be applying for a staged conversion in addition to initial conversion 
  • Federal Employer Identification Number, Colorado Account Number, or Individual Taxpayer Identification Number 

Step 3: Apply for tax credit issuance

This application will become available summer 2022. You will need to provide: 

  • Expenditures Worksheet: this document should describe the certified costs incurred as part of the conversion that have been reviewed by a Certified Public Accountant
  • Notarized Corporate Resolution: establishing the new employee ownership structure type
  • Notarized Stock Purchase Agreements
  • S-Corp or Partnerships Owners will need tax identification numbers along with ownership percentage to add to their request, so that certificates can be generated for each individual
  • Certificate of Good Standing from the Secretary of State for a newly established worker-owned cooperative

Based on your application, you may be asked to provide additional documents to substantiate your employee ownership conversion and the costs associated with it. 

Step 4: Claim your tax credit

The final step is to claim your tax credit on Colorado state income tax. You will be provided a certificate to be submitted with your Colorado tax return. They can reduce an existing tax liability or result in a cash refund payment.

We will provide informational sessions for service providers such as certified public accountants, to be aware of this tax credit and learn how they can support businesses in applying. As we finalize informational session dates and details, we will offer registration here. 

Program Manager

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