Colorado 2026 Small Business Tax Changes: QBI, Vendor Fee, BPPT

Colorado business owners face three tax changes in 2026 that affect pass-through income, sales tax remittance, and property tax credits. Two came from the state’s special session responding to the federal One Big Beautiful Bill Act (OBBBA); the third came from a regular-session bill signed in May 2025.

Here is what changed and what it means for your planning:

• QBI deduction add-back is now permanent for single filers above $500,000 and joint filers above $1 million (HB25B-1001)
• Sales tax vendor fee eliminated starting January 1, 2026, removing the 4% retention allowance for retailers (HB25B-1005)
• Business personal property tax (BPPT) income tax credit repealed for tax years beginning January 1, 2026 (HB25-1296)

Quick Glossary

QBI (Qualified Business Income)

A federal deduction of up to 20% of pass-through business income under IRC Section 199A.

SSTB (Specified Service Trade or Business)

Service businesses (medical, legal, accounting, consulting) where the QBI deduction phases out at lower federal income levels.

SALT Parity

A Colorado election that lets pass-through entities pay state tax at the entity level, working around the federal $10,000 SALT cap.

TABOR (Taxpayer’s Bill of Rights)

A Colorado constitutional amendment that limits the legislature’s ability to raise revenue without voter approval.

Why Colorado Acted: The OBBBA Budget Gap

The federal OBBBA, signed July 4, 2025, made several Tax Cuts and Jobs Act (TCJA) provisions permanent, including the Section 199A qualified business income (QBI) deduction. Colorado uses federal taxable income as its starting point and is one of only four states that does so. The OBBBA’s expanded federal deductions would have reduced the state tax base without any state action.

The projected impact: an estimated $1.2 billion reduction in state income tax collections for the current fiscal year, according to the Colorado Sun and the governor’s office. After TABOR cap adjustments, the true budget shortfall fell between $680 million (per Legislative Council Staff) and $783 million (per the governor’s office). Governor Jared Polis called the General Assembly into a special session on August 21, 2025, and five bills (HB25B-1001 through HB25B-1005) were signed into law on August 28, 2025.

The third change covered here, the BPPT credit repeal, was part of a separate regular-session bill (HB25-1296) signed on May 16, 2025, before the OBBBA was enacted.

Key fiscal numbers

• $1.2 billion — projected state income tax loss from federal OBBBA conformity (Colorado Sun, governor’s office)
• $680M–$783M — true budget shortfall after TABOR adjustment (Legislative Council Staff; governor’s office)
• ~$100 million per year — projected state revenue from making the QBI add-back permanent (Legislative Council Staff fiscal note, HB25B-1001)

2026 Tax Changes at a Glance

What Changes for the QBI Add-Back in 2026?

The federal Section 199A deduction allows owners of pass-through businesses to deduct up to 20% of their qualified business income on their federal return. The 2017 TCJA created the deduction; the OBBBA made it permanent in July 2025.

Colorado has required certain taxpayers to add that deduction back when calculating state taxable income since the 2021 tax year, originally enacted under HB 20-1420 (the Tax Fairness Act) and set to expire after 2025. HB25B-1001 removes the sunset and makes the add-back permanent.

“The act continues indefinitely the existing requirement, which otherwise would have ended for income tax years commencing on or after January 1, 2026…”

— Colorado General Assembly, HB25B-1001 bill summary

Who Must Add Back the QBI Deduction?

The add-back applies to:

• Single filers with adjusted gross income (AGI) above $500,000
• Joint filers with AGI above $1,000,000

Pass-through owners below those thresholds still benefit from the QBI deduction at the state level. Taxpayers reporting farm income on Schedule F are exempt regardless of income.

One practical note: owners of specified service trades or businesses (SSTBs)—medical practices, law firms, and accounting firms—are largely unaffected. Federal rules already phase out the QBI deduction for SSTBs at income levels well below Colorado’s add-back thresholds. By the time an SSTB owner’s income reaches $500,000 or $1 million, the federal deduction has already disappeared, leaving nothing to add back. The add-back hits non-SSTB owners hardest: construction, manufacturing, real estate, and retail, where the federal QBI deduction is still available at higher incomes.

According to the Legislative Council Staff fiscal note, the permanent add-back is projected to raise nearly $100 million per year.

What This Means for Your Tax Planning

If you own an S-corp, partnership, or sole proprietorship and your income exceeds the thresholds, Colorado treats your taxable income as though the QBI deduction does not exist. At the state’s 4.4% flat income tax rate, a $200,000 QBI add-back increases your Colorado tax by $8,800.

There is an additional consideration for businesses making a SALT Parity election. If your partnership or S-corp pays state tax at the entity level, you must add back the entire federal QBI deduction on your individual Colorado return, regardless of your AGI. The normal $500,000/$1,000,000 thresholds do not apply in the SALT Parity context.

Owners near the income thresholds should evaluate whether timing income or deductions differently could reduce add-back exposure in a given tax year.

The Sales Tax Vendor Fee Is Gone

Under prior law, Colorado allowed retailers with taxable sales of $1 million or less per filing period to keep 4% of the state sales tax they collected, up to $1,000 per filing period, to cover collection costs. This was the vendor fee (or vendor allowance).

“Beginning January 1, 2026, the act eliminates the sales tax vendor fee that retailers are authorized to retain in connection with collecting and remitting state sales tax.”

— Colorado General Assembly, HB25B-1005 bill summary

Retailers now remit the full state sales tax collected, with no retention.

Impact on Small Retailers

Larger retailers were already capped at $1,000, so the practical impact falls hardest on smaller businesses. A restaurant or franchise retailer collecting $20,000 in state sales tax per month previously kept $800 per month ($9,600 annually). That money now goes to the state.

If your business uses the vendor fee to offset bookkeeping or point-of-sale costs, account for the lost revenue in your 2026 operating budget. The change applies only to the state portion of sales tax. According to the Colorado Department of Revenue, retailers may still retain the service fee for local jurisdictions that administer their own sales tax. Check the DR 1002 publication for local jurisdiction service fee rates.

Why Colorado Repealed the BPPT Credit

Colorado previously offered a refundable income tax credit for property tax paid on business personal property—equipment, furniture, tools, and fixtures. According to the Colorado Department of Revenue, the credit applied to property tax assessed on the first $18,000 of actual value of a taxpayer’s business personal property. Because the credit was refundable, qualifying businesses received a payment even if they owed no income tax.

Section 10 of HB25-1296 repeals the BPPT income tax credit starting in tax year 2026. The Department of Revenue updated its guidance in November 2025 to reflect the repeal. Businesses that claimed this credit on their 2024 or 2025 returns will not be able to claim it going forward.

Who Loses the Most

The credit was most valuable to smaller businesses whose total business personal property value was at or below $18,000. For those businesses, the credit effectively offset the full property tax bill on that equipment. Businesses with property values above $18,000 received a partial offset on the first $18,000 of value.

Industries that rely on tangible personal property—manufacturers, auto dealerships, and construction companies—should update tax projections to account for the loss.

The underlying business personal property tax itself has not changed. Businesses still owe the tax to their county. The repeal only removes the state income tax credit that partially reimbursed them.

Scenario: How These Changes Add Up

Consider the owner of a Colorado-based manufacturing company structured as an S-corp. The owner files jointly with AGI of $1.1 million and claims a $180,000 federal QBI deduction. The business collects $15,000 per month in state sales tax and owns $50,000 in business personal property.

Under the 2026 rules:

• QBI add-back: The full $180,000 deduction is added back to Colorado taxable income, raising state tax by approximately $7,920 ($180,000 × 4.4%).
• Vendor fee loss: The business previously kept about $600 per month ($7,200 annually). That now goes to the state.
• BPPT credit loss: The credit on the first $18,000 of personal property value is gone. Depending on county mill levy and assessment rate, this might have been $200 to $400 per year.

Combined: roughly $15,320 to $15,520 per year in higher state tax and lost credits.

Next Steps for Colorado Business Owners

These changes take effect for the 2026 tax year, which means they affect returns filed in 2027. Planning decisions—especially around income timing and entity structure—should be made now. Several special-session provisions may face TABOR challenges, which limits the legislature’s ability to raise revenue without voter approval. If any provisions are struck down, the landscape could shift again.

• Review your QBI exposure. If you are near the $500,000 or $1,000,000 AGI threshold, consider whether accelerating deductions or deferring income could reduce the add-back in a given year.
• Update your operating budget. If your business relied on the vendor fee or the BPPT credit, build the lost revenue and credits into your 2026 projections.
• Talk to your CPA about SALT Parity. The interaction between the SALT Parity election and the QBI add-back is an area where a small planning error can create unexpected tax liability.

Frequently Asked Questions

Does the QBI add-back apply to me?

Yes, if you are a Colorado pass-through owner (S-corp, partnership, sole proprietor) with AGI above $500,000 (single) or $1,000,000 (joint), and you are not in a specified service trade or business that has already phased out federally. SSTB owners (medical, legal, accounting) are typically unaffected because the federal QBI deduction has already phased out at lower income levels.

How much does the vendor fee repeal cost a typical small retailer?

A retailer collecting $20,000 in state sales tax per month loses about $9,600 per year. The 4% retention had been capped at $1,000 per filing period, so a retailer at the cap loses up to $12,000 annually.

Can I still claim the BPPT credit on my 2025 return?

Yes. The repeal applies to tax years beginning on or after January 1, 2026. Returns for tax year 2025 (filed in 2026) can still claim the credit if the business otherwise qualified.

Does SALT Parity change the QBI add-back rules?

Yes. If your partnership or S-corp makes a SALT Parity election to pay state tax at the entity level, the entire federal QBI deduction must be added back on your individual Colorado return, regardless of AGI. The $500,000 / $1,000,000 thresholds do not apply.

Are the special-session changes permanent?

The QBI add-back is now permanent under HB25B-1001, and the vendor fee repeal under HB25B-1005 has no sunset. Several provisions may face TABOR-based legal challenges; the landscape could shift if any are struck down.

Last reviewed by the WhippleWood tax team on April 26, 2026. Sourced from the Colorado General Assembly, Colorado Department of Revenue, and Legislative Council Staff fiscal notes.

How WhippleWood Can Help

Colorado’s 2026 tax changes affect pass-through businesses, retailers, and property owners differently, and several provisions interact. We model QBI add-back exposure and SALT Parity tradeoffs side-by-side so you can see the dollar impact before year-end, and we factor in the vendor fee and BPPT credit losses against your full operating budget.

Related WhippleWood services and industry pages:

• Business Tax Planning & Compliance
• Manufacturing & Distribution
• Real Estate & Construction
• Auto Dealership
• Hospitality

Contact WhippleWood to schedule a conversation.