The Enterprise Zone Research and Development Tax Credit helps businesses invest in research and development. Businesses can earn a state income tax credit for 3% of the increase in annual research and development expenses compared to what the business spent the prior two years.
If your business’ tax liability is less than the tax credit, your business may carry forward the remaining amount to subsequent tax years. There is no limit on the number of years your business may carry forward this credit.
The Colorado legislature created the Enterprise Zone (EZ) Program to encourage development in economically distressed areas of the state. The 16 designated enterprise zones have high unemployment rates, low per capita income, or slow population growth.
Local enterprise zone administrators manage their respective enterprise zones.
We recommend reviewing the Enterprise Zone Income Tax Credit Guide for the complete eligibility requirements.
Type: Tax credit
For: Businesses located in enterprise zones
Amount: 3% of increase in annual research and development expenses
Application deadline: Rolling
OEDIT division: Business Funding and Incentives
To use this map, type in your address in the top left-hand corner. You may need to scroll out to identify whether or not you are located within an enterprise zone. If your location is highlighted in a color, you are located in an enterprise zone. If your location is in a checkered colored area, it is located in an enhanced rural enterprise zone.
Visit the Colorado Information Marketplace for enterprise zone map resources.
Both new and existing businesses located in enterprise zones may qualify for the credit. For businesses that open in the middle of a tax year, you will need to prorate the credit based on the number of full calendar months during the year that the business operated in the zone.
Businesses need to be legal under both state and federal law. For example, businesses in the marijuana industry do not qualify for this tax credit.
You need to be in the same enterprise zone for three years to claim this credit. If your company moves to a different enterprise zone, the three-year window starts over, and you cannot claim this credit until your company has been in the new zone for three years.
Eligible research and expenses
Research needs to:
- be technological in nature
- be useful for developing a new or improved product or component of the business
- use experimentation
In-house research expenses may include:
- wages, excluding fringe benefits
- payments for the right to use computers
Contract research expenses may include the amount paid for research done by a third-party for the benefit of the contracting firm. Third-party research needs to be performed in an enterprise zone.
These expenses do not qualify for this tax credit:
- land or improvements to land
- depreciable equipment
- management surveys
- costs to adapt a product to a particular customer’s needs
- research funded by any government entity
Businesses can earn a state income tax credit for 3% of the increase in annual research and development expenses compared to what the business spent the prior two years. If your business had no research and experimental expenditures in one or both of the previous two income tax years, then calculate the average expenditure using zero for the year(s).
Your business needs to claim 25% of the credit each year for four years.
Once you determine that your business is in an enterprise zone, there are three steps to claim this tax credit.
1. Complete the pre-certification application on the OEDIT application portal. You will need to pre-certify each business location. You will need to apply for pre-certification in advance of the activity that is eligible for the credit.
- Log in to your account or create a new account. To protect your personal information, we manually add new users to the portal, so it may take several days to activate your account. Review this Enterprise Zone Pre-certification How-To Guide (PDF).
- Pre-certify each year. You can pre-certify up to three months before the start of the business’ tax year. You can pre-certify at any time during the tax year; however the business is only eligible to earn enterprise zone tax credits for the period certified.
- The local enterprise zone administrator will review and approve your pre-certification application.
2. Complete the certification application on the OEDIT application portal.
- Log in to your account and fill out the certification application. Review this Enterprise Zone Certification How-To Guide (PDF).
- Activity conducted during the covered pre-certification period is eligible for enterprise zone tax credits.
- The local enterprise zone administrator will review and approve your certification application.
- For tax years prior to 2014 (formatted YY-XXXXXX) use the EZ Legacy Application System.
3. File Colorado income taxes and include certification documents.
- Once the certification application is approved by the local enterprise zone administrator, you will receive via email a tax credit certificate that you need to submit with your Colorado income tax return. You can also access the certificate in the OEDIT application portal. This certificate replaces Colorado Department of Revenue forms DR0074, DR0076, and DR0077.
- Complete and submit the Colorado Department of Revenue form DR1366 and the EZ Tax Credit Certificates with your Colorado income tax return.
- Partnerships need to also complete and submit the DR0078a for distribution of the credits.
Amend your enterprise zone record
If you misreported or need to modify your enterprise zone certification application, you can amend or reset your certification by submiting the amendment form. To amend or submit certification applications for years 2014 or earlier (formatted YY-XXXXXX) you need to use the Enterprise Zone Legacy Application System.
Transfer ownership of your enterprise zone record
If your business changed accounting firms, you will need to transfer your pre-certification and certification records. A business owner or authorized company official will need to submit the transfer form.