Colorado Bonus Depreciation: Full Conformity Now, State Add-Back Coming in 2027.
Colorado currently conforms to federal §168(k) bonus depreciation for the individual income tax. For tax years 2025 and 2026, an individual Colorado investor gets the full bonus benefit at both the federal and the Colorado level. But House Bill 26-1222 (HB26-1222) requires a Colorado bonus-depreciation add-back beginning tax year 2027, so the current window is time-sensitive. Current-year federal usability still depends on passive-activity, at-risk, basis, and business-interest limits.
Reviewed by Cost Seg Smart Editorial Team · Last reviewed: · Cites Colorado Department of Revenue, HB26-1222
The 30-second answer: Colorado currently conforms to federal §168(k) bonus depreciation for the individual income tax. For tax years 2025 and 2026, an individual Colorado investor gets the full bonus benefit at both the federal and the Colorado level, because Colorado starts from federal taxable income and does not add it back today. The one catch is timing: HB26-1222 requires a Colorado add-back beginning tax year 2027, so this is a closing window.
On a $750K Colorado rental with $600K depreciable basis and 18.3% reclassified to shorter-life property, the reclassified components generate about $109,800 of federal Year-1 depreciation. At a 37% federal bracket, that is about $40,600 of federal savings from the reclassified components alone; including regular depreciation on the remaining building basis, total illustrative Year-1 federal savings are about $43,900.
Because Colorado conforms for tax years 2025 and 2026, that Year-1 benefit also flows through at Colorado's flat income tax of roughly 4.4% (subject to TABOR adjustments), an added state benefit on top of the federal savings before the 2027 add-back. Current-year federal usability still depends on passive-loss, at-risk, basis, and business-interest limits.
Federal vs Colorado, Side by Side
For an individual investor's cost-segregation-reclassified components:
| Tax provision | Federal (IRC) | Colorado income tax |
|---|---|---|
| Bonus depreciation under §168(k) | 100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to §168(k) eligibility, related-party/prior-use, binding-contract, and election rules | Conforms for tax years 2025 and 2026. Rolling conformity, no §168(k) decoupling, so the full Year-1 bonus flows through at the Colorado level |
| Change coming in 2027 (HB26-1222) | No change; §168(k) continues to be governed by federal law | Bonus-depreciation add-back required beginning tax year 2027. The Colorado-level bonus benefit available in 2025 and 2026 is reduced by the add-back starting 2027 (confirm transition mechanics with your CPA) |
| Income tax on rental income | Ordinary rates, up to 37% | Flat income tax of roughly 4.4% (subject to TABOR adjustments) on Colorado taxable income, which starts from federal taxable income |
| State depreciation treatment of reclassified basis (2025-2026) | Year-1 bonus on eligible components, then MACRS on the remainder | Follows federal for tax years 2025 and 2026, including the Year-1 bonus; full state benefit at the flat rate |
| MACRS asset class lives | 5 / 7 / 15 / 27.5 / 39 yr per Rev. Proc. 87-56 | Same class lives; Colorado conforms to federal depreciation for tax years 2025 and 2026 |
| Federal usability of the deduction | Subject to passive activity, at-risk, basis, and business-interest limits | Same federal limits govern the federal deduction; Colorado applies its own flat rate to Colorado taxable income |
| Depreciation form the individual files | Form 4562 → Schedule E (rental) or Schedule C (active business) | Colorado individual income tax return, which starts from federal taxable income (with the HB26-1222 add-back beginning 2027) |
Sources: Colorado Department of Revenue, HB26-1222 (Colorado General Assembly, link pending verification), IRC §168(k). Federal bonus figures reflect current law; eligibility depends on acquisition and placed-in-service dates and elections. Confirm the 2027 add-back transition with your CPA.
How Colorado's current conformity affects your cost segregation study
The study itself does not change. The same engineering-based reclassification, using nationally-recognized 2026 construction cost data, MACRS classification per Rev. Proc. 87-56, and IRS Pub 5653 ATG-aligned documentation, produces the same component schedule whether the property sits in Colorado, Texas, or anywhere else. What matters in Colorado is the timing: for tax years 2025 and 2026, Colorado conforms to federal §168(k), so the Year-1 bonus on eligible reclassified components flows through at the state level too. Beginning tax year 2027, HB26-1222 requires a Colorado add-back, which reduces that state-level bonus benefit going forward.
Your CPA receives the same Cost Seg Smart engineered report, the same Form 4562-ready schedule, and the same Form 3115 §481(a) section if this is a lookback study. The components then run through two calculations:
- Federal book: bonus depreciation on eligible 5/7/15-year components in Year 1, plus half-year-convention MACRS on the 27.5-year residential (or 39-year commercial) remainder, subject to the federal passive-loss, at-risk, basis, and business-interest limits.
- Colorado book (2025-2026): Colorado starts from federal taxable income and conforms, so the same Year-1 bonus reduces Colorado taxable income, taxed at the flat income tax of roughly 4.4% (subject to TABOR adjustments). Beginning tax year 2027, HB26-1222's add-back changes this at the Colorado level.
The practical point is that cost segregation is especially valuable in Colorado right now: the full federal Year-1 bonus is claimed on the federal return, and for tax years 2025 and 2026 the same benefit also reduces Colorado taxable income before the 2027 add-back takes effect. How much of the federal deduction you actually use in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation.
Illustrative numbers: $750K Colorado rental
An illustrative example using the Cost Seg Smart residential benchmark (SFR reclass 18.3%) and 100% federal bonus depreciation for eligible components under current law. Headline dollar figures are federal; the Colorado column is described qualitatively, because Colorado conforms for tax years 2025 and 2026 (the benefit flows through at the flat rate) and then applies the HB26-1222 add-back beginning 2027:
| Line item | Federal | Colorado income tax |
|---|---|---|
| Purchase price | $750,000 | $750,000 |
| Land allocation (20%) | $150,000 | $150,000 |
| Depreciable basis | $600,000 | $600,000 |
| Reclassified to 5/7/15-yr (18.3% SFR benchmark) | $109,800 | $109,800 |
| Year-1 deduction on reclassified components | $109,800 (100% bonus, if eligible) | Conforms for 2025-2026: the same Year-1 bonus flows through at the state level; beginning 2027 an add-back applies under HB26-1222 |
| Federal savings from reclassified components alone | ~$40,600 (37% × $109,800) | Added Colorado benefit at the flat ~4.4% rate for 2025-2026 (on top of federal), before the 2027 add-back |
| Year-1 depreciation on remaining 27.5-yr basis | ~$8,909 | Same 27.5-year recovery, conforming at the state level |
| Total Year-1 federal depreciation | ~$118,700 | Same amount flows to Colorado taxable income for tax years 2025 and 2026 |
| Marginal tax rate | 37% | Flat ~4.4% (subject to TABOR adjustments) |
| Illustrative Year-1 federal tax savings | ~$43,900 (37% × ~$118,700) | Full Colorado benefit at the flat ~4.4% rate for 2025-2026, then reduced by the HB26-1222 add-back from 2027 |
| Cost Seg Smart study cost | $995 (residential under $1M basis) | |
| ROI on $995 study fee (illustrative, federal savings) | ~44× | |
The headline dollars above are federal. For tax years 2025 and 2026 Colorado conforms, so the same deduction also reduces Colorado taxable income at the flat rate of roughly 4.4% (subject to TABOR adjustments); we keep the Colorado dollar effect qualitative rather than quoting a precise state figure. Beginning tax year 2027, HB26-1222 requires a Colorado add-back. Whether the full federal deduction is usable in the current year depends on your passive-loss, at-risk, basis, and business-interest situation. Figures are illustrative; your result depends on basis, land allocation, bracket, and eligibility.
See a sample cost segregation report
Look at exactly what your Colorado study delivers: the component-by-component 5/7/15-year schedule, the Form 4562-ready numbers, and the documentation your CPA files. Real reports are our best answer to "is this legit?"
Forms your CPA files for a Colorado property
For an individual Colorado investor, the workflow runs on both the federal return and the Colorado return, because Colorado does tax rental income at a flat rate of roughly 4.4% (subject to TABOR adjustments):
- Federal Form 4562: depreciation and amortization, including the §168(k) bonus deduction on eligible reclassified components. Flows to Schedule E (rental) or Schedule C (active business).
- Schedule E (or Schedule C): the accelerated federal deduction reduces federal taxable income in Year 1, subject to the federal passive-loss, at-risk, basis, and business-interest limits.
- Colorado individual income tax return: Colorado starts from federal taxable income, so for tax years 2025 and 2026 the same accelerated deduction reduces Colorado taxable income, taxed at the flat rate. Beginning tax year 2027, HB26-1222 requires a bonus-depreciation add-back.
- Form 3115 §481(a) section: included only if this is a federal lookback method change on a property placed in service in a prior year (see below).
The reclassified schedule is the same engineered output for both books; for tax years 2025 and 2026 Colorado conforms, so the Year-1 bonus reduces both federal and Colorado taxable income before the 2027 add-back takes effect.
Form 3115 lookback on a Colorado property
If the property was placed in service in a prior tax year and depreciation was reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up adjustment for the accelerated depreciation you missed, generally without amending prior returns. This is often the single biggest acceleration mechanism in cost segregation. Any catch-up dollars are illustrative and depend on placed-in-service date, prior depreciation claimed, bonus eligibility, land allocation, and component mix.
The federal §481(a) catch-up is the primary lever, and it remains subject to the federal passive-loss, at-risk, and basis limits. Because Colorado starts from federal taxable income and conforms for tax years 2025 and 2026, the federal catch-up generally flows through to the Colorado return today. HB26-1222's 2027 add-back is a forward change, so if the timing of a catch-up straddles the 2027 transition, confirm the Colorado treatment with your CPA.
See our full Form 3115 cost segregation guide for federal mechanics, partnership and LLC pass-through treatment, and timing rules.
Should you wait on cost segregation in Colorado? No, the window is closing.
Colorado is a currently-conforming state, and that conformity is a closing window. The math favors acting now, for three reasons:
- The full federal Year-1 bonus is intact. Colorado does not reduce the federal deduction; the full §168(k) bonus is claimed on the federal return. How much you use in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation.
- Colorado conforms for tax years 2025 and 2026. Because Colorado starts from federal taxable income and does not add the bonus back today, the same Year-1 benefit also reduces Colorado taxable income at the flat rate of roughly 4.4% (subject to TABOR adjustments), an added state benefit that is not available in add-back states.
- HB26-1222 changes this beginning 2027. Colorado enacted House Bill 26-1222, which requires a bonus-depreciation add-back for Colorado income tax beginning tax year 2027. Claiming the benefit in the 2025 or 2026 window captures the full federal and Colorado-level benefit before the add-back takes effect.
The nuance to flag with your CPA is the 2027 transition: HB26-1222's add-back is a forward change, so the timing of your placed-in-service date and any Form 3115 catch-up relative to tax year 2027 matters at the Colorado level. The federal benefit remains the dominant driver, subject to the taxpayer's passive-loss, at-risk, and basis situation. This page is educational and is not tax advice for your specific situation.
Frequently asked
Does Colorado conform to bonus depreciation?
Yes, today. For tax years 2025 and 2026, Colorado's individual income tax conforms to federal §168(k) bonus depreciation under rolling conformity, with no §168(k) decoupling. Because Colorado starts from federal taxable income and does not add the bonus back, an individual Colorado investor gets the full bonus benefit at both the federal and the Colorado level for those years (100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to §168(k) eligibility, related-party/prior-use, binding-contract, and election rules). This is not permanent: Colorado enacted House Bill 26-1222, which requires a bonus-depreciation add-back for Colorado income tax beginning tax year 2027.
Is Colorado changing its bonus depreciation rules? (HB26-1222, 2027)
Yes. Colorado enacted House Bill 26-1222 (HB26-1222), which requires a bonus-depreciation add-back for Colorado income tax beginning tax year 2027. In practical terms, the full state-level bonus benefit that Colorado allows for tax years 2025 and 2026 will be reduced by an add-back starting in 2027. That makes the current window time-sensitive: an individual Colorado investor who places qualifying property in service and claims bonus depreciation in the 2025 or 2026 window gets the full benefit at both the federal and Colorado level, while the same claim beginning in 2027 is subject to the Colorado add-back. The add-back is a forward change; confirm the transition and recovery mechanics with your CPA. (The HB26-1222 citation link below is flagged for verification.)
Does Colorado tax my rental income?
Yes. Colorado imposes a flat income tax of roughly 4.4% (subject to TABOR adjustments) that applies to net rental income, because Colorado starts from federal taxable income. So unlike a no-income-tax state, a Colorado investor does have a state return on which depreciation matters. For tax years 2025 and 2026 the flat rate applies to income already reduced by the full federal bonus depreciation, so the state benefit flows through automatically. Beginning tax year 2027, HB26-1222's add-back changes that at the Colorado level.
Should I act before 2027?
For many Colorado investors, the timing matters. Colorado allows the full bonus-depreciation benefit at the state level for tax years 2025 and 2026, then HB26-1222 requires a state add-back beginning tax year 2027. A study completed while the property qualifies in the 2025 or 2026 window can capture the full federal Year-1 bonus and the full Colorado-level benefit before the add-back takes effect. Whether you can use the full federal deduction in the current year still depends on federal passive-activity, at-risk, basis, and business-interest limits, and the state transition mechanics should be confirmed with your CPA. This page is educational and is not tax advice for your specific situation.
Can I use Form 3115 on a Colorado property I bought years ago?
Often, yes, at the federal level. If the property was placed in service in a prior tax year and depreciation was reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up for the accelerated depreciation you missed, generally without amending prior returns. Any catch-up dollars are illustrative and depend on placed-in-service date, prior depreciation, bonus eligibility, land allocation, and component mix. Because Colorado starts from federal taxable income and conforms for tax years 2025 and 2026, the federal catch-up generally flows through to the Colorado return today; HB26-1222's 2027 add-back is a forward change, so discuss the timing with your CPA.
What is Colorado's income tax rate?
Colorado levies a flat income tax of roughly 4.4% (subject to TABOR adjustments), rather than graduated brackets. It applies to Colorado taxable income, which starts from federal taxable income, so net rental income is taxed at that flat rate. Because the rate is flat and modest relative to the top federal rate of 37%, the federal deduction is the dominant driver, while the Colorado-level benefit is meaningful for tax years 2025 and 2026 and then subject to the HB26-1222 add-back beginning 2027.
What does a Colorado cost segregation study rely on for its numbers?
The study reclassifies building components into IRS-recognized MACRS class lives (5, 7, and 15-year) per Rev. Proc. 87-56, using an engineering-based methodology that follows the IRS Cost Segregation Audit Techniques Guide (Publication 5653). The reclassified components may then qualify for federal §168(k) bonus depreciation on the federal return (100% for qualified property acquired and placed in service after January 19, 2025, subject to eligibility and election rules). For tax years 2025 and 2026, Colorado conforms, so the benefit also flows through at the flat state rate; beginning tax year 2027, HB26-1222 requires a Colorado add-back. The engine ships our own calibrated, nationally-recognized construction cost data.
Related guides
- Bonus depreciation by state: overview
- All 50 states: conformity reference table
- California bonus depreciation (non-conforming)
- Pennsylvania bonus depreciation (PIT non-conforming)
- Texas bonus depreciation (no state income tax)
- Form 3115 cost segregation lookback: §481(a) mechanics
- What is cost segregation: the full primer
- Cost segregation in Colorado: market and property examples
- Sample cost segregation reports