On August 28, 2025, Colorado Governor Jared Polis signed a package of bills from a special legislative session called specifically to counteract the federal One Big Beautiful Bill Act (OBBBA), which Congress had enacted on July 4. Rather than let the state's tax base shrink to match the new federal breaks, Colorado chose to permanently decouple from several of them, becoming the first state to formally legislate a response to OBBBA. The centerpiece, House Bill 25B-1001, makes permanent a state addback of the federal 20% qualified business income (QBI) deduction for higher-income owners of pass-through businesses, a provision that had been scheduled to expire at the end of 2025.
What changed
Colorado has required certain taxpayers to add back their federal QBI deduction under Internal Revenue Code Section 199A when computing state taxable income since 2021, but that addback carried a sunset date of January 1, 2026. HB25B-1001 removes the sunset, so the addback now applies indefinitely for single filers with more than $500,000 of income and joint filers with more than $1,000,000, the same thresholds used previously. A companion bill, HB25B-1002, requires corporations to add back the federal deduction for foreign-derived deduction eligible income (FDDEI) — the export-income break created under Section 250 — equal to 33.34% of the amount claimed, and adds Hong Kong, Ireland, Liechtenstein, the Netherlands and Singapore to the state's list of tax-haven jurisdictions for combined reporting purposes, both effective for tax years starting January 1, 2026. Three smaller bills raised an insurance premium tax rate, authorized the state to sell corporate tax credits for immediate cash, and eliminated the small fee retailers were paid for collecting sales tax.
Who is affected
The QBI addback lands on higher-earning owners of S corporations, partnerships, LLCs and sole proprietorships who live in or earn income from Colorado — physicians, law and consulting partners, real estate operators and other professionals who benefited most from the federal Section 199A deduction. Because Colorado uses federal taxable income as its starting point, these owners already lost the QBI deduction for state purposes; the new law simply removes the date on which that addback was due to disappear. Multinational corporations with export sales or foreign operations face the separate FDDEI and tax-haven provisions. Wage earners, retirees and pass-through owners below the income thresholds are not directly affected by the QBI change.
The after-tax math
Example: a Colorado-based couple filing jointly earns $1.4 million of qualified business income from a partnership and would otherwise claim the full 20% federal QBI deduction, or $280,000, cutting their federal taxable income accordingly. For Colorado purposes, because their income exceeds the $1,000,000 joint threshold, they must add the entire $280,000 back to the state tax base. At Colorado's flat statutory income tax rate of 4.4%, that addback costs them roughly $12,300 in additional state tax each year — a bill that, absent HB25B-1001, would have gone away starting with the 2026 tax year. Instead, it now recurs every year going forward, layered on top of whatever federal savings OBBBA delivers elsewhere in their return.
| Item | Without HB25B-1001 (old law) | With HB25B-1001 (new law) |
|---|---|---|
| QBI addback after 2025 | Expires, no addback | Continues indefinitely |
| State tax on $280,000 QBI deduction | $0 starting 2026 | About $12,300 every year |
What to watch
Colorado's move is widely expected to be a template rather than an outlier: RSM US has flagged Colorado as the first state to formally respond to OBBBA, and other states with rolling conformity to the federal tax code face similar revenue pressure from the same federal deductions. High-income pass-through owners with multistate operations should expect a patchwork to develop over the next one to two state legislative sessions, with some states following Colorado's addback approach and others accepting the federal revenue loss. The FDDEI and tax-haven provisions taking effect in 2026 also warrant attention from any Colorado-based company with material export sales or foreign subsidiaries, since combined-reporting exposure can be larger than the QBI change for those businesses.
Sources
- First reported Colorado acts to counter the OBBBA — RSM US
- Colorado Leads in Responding to OBBBA Tax Updates — BDO
- Significant Colorado Tax Changes in Response to the OBBBA — Reed Smith
- HB25B-1001: Qualified Business Income Deduction Add-Back — Colorado General Assembly
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