Keeping up in Colorado: What in-state manufacturers need to know about R&D tax rules
From aerospace and energy to food and biomedical, Colorado is home to thousands of manufacturers across major industries. Over the years, the state has become one of the top destinations for national innovation, with numerous benefits for in-state research and development (R&D).
Now, with the 2025 One Big Beautiful Bill Act (OBBB), manufacturers are poised to push innovation and investment even further.
To take advantage of favorable new rules for taxpayers, Colorado manufacturers should revisit their federal tax strategies in alignment with state-level incentives. Keep reading to learn how to benefit from the changes to Internal Revenue Code Section 174 — and what tax credits to discuss with your financial advisor.
How new tax laws change the game for manufacturers
All U.S. manufacturers can now benefit from immediate tax relief along with long-term incentives to invest in production. But state-level nuances in Colorado affect cash planning for manufacturing businesses of all sizes.
Colorado is one of the many states that automatically adopts federal tax changes into state code, which is known as rolling conformity — unless the state specifically decouples from federal policy. While the updated Section 174 restores immediate expensing for domestic R&D, Colorado is taking legislative action to limit expected revenue losses from lower taxable income.
In August 2025, Colorado passed numerous bills to offset the projected budget shortfall from the OBBB. These state-level bills include making the addback of qualified business income (QBI) permanent, expanding the state’s authority to tax income from foreign subsidiaries and allowing the State Treasurer to sell corporate income tax and insurance premium tax credits. Even though Colorado’s automatic conformity to federal tax changes simplifies compliance in some ways, these recent legislative actions mean that expensing, tax benefits and timing will play out differently at the state level.
Let’s unpack the changes to Section 174 — and what you need to know in Colorado.
You can immediately expense domestic R&D
Under the previous Tax Cuts and Jobs Act (TCJA) of 2017, U.S. manufacturers were required to capitalize and amortize R&D costs over a period of five to 15 years, under Section 174. The new tax law rewinds the clock to pre-TCJA options and restores full and immediate expensing of domestic R&D — making it more cost-effective than ever to invest in process improvements and innovation.
In addition, all companies are now allowed to deduct any remaining unamortized R&D expenses from 2022 to 2024 and reduce their taxable income in 2025 or spread the deduction between 2025 and 2026. If you’re a small business, you may be eligible to go a step further and amend tax returns from 2022 through 2024 to receive refunds for taxes already paid.
Need-to-know in Colorado
Colorado continues to run its Enterprise Zone EZ R&D credit program, which is the primary way for manufacturing businesses to benefit from in-state work. As a location-based incentive for companies of all sizes to invest in research and development, businesses can earn a tax credit for 3% of the increase in qualifying annual R&D compared to what they spent in the previous two years. The state continues to limit this credit to businesses that operate within designated zones that can benefit from economic growth.
We recommend speaking to a tax advisor about additional ways to take advantage of this program. No matter where your business is primarily located, it may be possible to perform qualifying R&D in enterprise zones or collaborate with a business already operating in those areas.
You can free up cash flow with accelerated depreciation
OBBB rewrote legacy rules so businesses can immediately expense the full cost of capital investments such as machinery, equipment and other assets used in manufacturing. With the reinstatement of 100% bonus depreciation, businesses can more easily justify upgrades and capital investments and benefit from write-offs in the year new assets are put into service.
In addition, OBBB includes a new provision for qualified production property (QPP), which allows businesses to write off eligible property, construction and renovation. To qualify, the property in question must be used for production purposes (versus for administrative, sales or other functions). QPP gives manufacturers a powerful incentive to invest in their facilities — not just equipment — and improve their return on investment from large modernization projects.
Need-to-know in Colorado
In 2024, Colorado’s Department of Revenue (DOR) issued updated guidance on manufacturing exemptions. Regardless of company size or location, businesses that manufacture “personal tangible property” can reduce their sales tax on qualifying equipment and parts. This sales and use tax exemption is independent from both Section 174 and the Enterprise Zone program, so it’s a powerful way to offset the cost of machinery and equipment.
It’s important to note that Colorado lets businesses overlay these manufacturing exemptions with the Enterprise Zone program. Within the designated areas, a manufacturer can claim exemptions for machinery and equipment that wouldn’t otherwise qualify outside the zone. We recommend working closely with a tax advisor to understand DOR guidance, confirm exemption eligibility before buying new equipment and retroactively claim refunds for taxes paid on qualifying purchases.
In Colorado, small businesses — and their investors — get even more
For in-state manufacturers in an “advanced industry” that also qualify as a small business (annual revenues of less than $5 million or operating for less than five years), there’s more they can do under the Advanced Industry Investment Tax Credit (AITC) program. To attract private investors, Colorado offers income tax credits for investments in advanced manufacturing, aerospace, bioscience, electronics, energy and natural resources, infrastructure engineering and information technology.
This is a big deal for investors. For every investment, they can receive the following income tax credit:
- Standard: 25% for each investment up to $100,000
- Enterprise zone or rural county: 35% for each investment up to $100,000
While this financial incentive is for investors, small businesses that are approved for AITC can lower their risk profile and use the program to boost investment appeal. The Office of Economic Development & International Trade (OEDIT) oversees this program, and they have limited annual credit allocations. Small businesses should apply to AITC before deals are made, so investors don’t miss out on their credits.
What’s next for Colorado’s manufacturing sector?
While other states may be more aggressive with baseline tax advantages for manufacturers, Colorado continues to reinforce incentives for businesses that operate within certain locations and within specific industries. Another key trend in the state: Manufacturing that involves clean technology or sustainability improvements can take advantage of new policies like the Colorado Industrial Tax Credit Offering (CITCO) which incentivizes projects that reduce energy costs and improve air quality.
While manufacturers can start to benefit from national taxpayer-friendly policies for R&D, Colorado is expanding its authority to add back taxable income and limit the revenue impact of the OBBB — so tax advisors can help model scenarios that stack federal and state-level incentives to weigh different tax results.
Here are the kinds of key considerations to work through with your advisor:
- Confirm R&D eligibility: Review whether your projects meet the definition of qualified research under Section 174 and Colorado’s Enterprise Zone program.
- Evaluate timing of deductions: Decide whether to deduct remaining unamortized R&D costs in 2025 or spread them into 2026 for optimal cash flow.
- Leverage location-based credits: Explore opportunities to perform qualifying R&D in designated Enterprise Zones or partner with businesses already operating there.
- Plan for capital investments: Assess how 100% bonus depreciation and QPP provisions can accelerate modernization projects.
- Stack incentives strategically: Model scenarios that combine federal expensing rules with Colorado-specific credits and exemptions to maximize tax benefits.
- Small business advantage: If you qualify as an advanced industry small business, apply early for AITC approval to attract investors and secure credits.
It’s time for manufacturers to ensure tax planning is fully integrated with research strategy and plans for innovation, and not an afterthought.
How Wipfli can help
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