Current State:
Currently, Colorado encourages businesses to convert to employee ownership primarily through a tax credit for conversion costs. That credit is scheduled to expire after tax year 2026. It covers 50% of qualified conversion expenses (with some caps per conversion method), and the total credits statewide are limited each year. There are no special state income tax deductions for selling a business to employees, and worker-owned cooperatives don’t have a specific income subtraction under current law. In short, the incentives are limited to the conversion-cost tax credit (ending in 2026) and some technical assistance programs; no ongoing tax breaks on capital gains or business income exist today for employee-owned enterprises.
Proposed Changes:
HB25-1021 expands and extends incentives for employee ownership: (1) It creates two new state income tax subtractions (deductions) available from 2027 through 2037. The first subtraction lets an owner deduct the state capital gains realized from selling at least 20% of a business to employees (i.e. converting to an employee-owned business). The second subtraction allows worker-owned cooperatives to deduct their taxable income (up to $1 million per year) from state taxes. These effectively reduce tax for those who sell to employees and for cooperatives’ earnings. (2) It extends the existing tax credit for employee ownership conversion costs by 11 years (through 2037 instead of 2026). It also increases the annual cap on total credits and the percentage of costs that can be credited. Specifically, from 2026 onward, the credit covers 75% of conversion or expansion costs (up from 50%), though dollar caps per project remain. The statewide cap would be $3 million per year in 2026–2031 and $4 million per year in 2032–2037. (3) The bill broadens eligibility definitions and even allows certain nonprofit “support entities” (organizations that help businesses convert to employee ownership) to claim a credit for 75% of their costs in assisting these conversions, up to $167,000. In summary, the bill introduces significant tax breaks to encourage owners to sell to employees and to support cooperative business models, while boosting an existing incentive.
Impact on Providers:
For behavioral health providers and organizations, this mainly matters if they are in a position to become employee-owned or already operate as such. For example, a group psychiatric practice or a counseling clinic could consider converting to an employee-owned cooperative or an employee stock ownership plan (ESOP). The bill would make that financially more attractive – owners could sell part or all of the practice to the staff and avoid state capital gains tax on the sale portion, and the practice (if structured as a cooperative) could potentially pay no state income tax on its first $1M of income. Additionally, much more of the technical assistance and transaction cost could be offset by tax credits (75% of costs). In practical terms, this could encourage consolidating or transitioning private behavioral health clinics to employee-owned models, possibly improving workplace morale and retention of providers (since employees would have ownership stakes). Large community mental health centers or human services nonprofits typically aren’t privately sold, so they may not be directly affected, but smaller for-profit practices might take advantage. Behavioral health professionals might also see more job opportunities in worker-cooperative settings if this leads to growth of such businesses. Overall, while this bill is economic in focus, it could indirectly strengthen some behavioral health organizations by supporting employee ownership transitions, which can lead to more stable, invested workforces (a potential benefit in a field that struggles with burnout).
Status:
The bill was introduced in the House and referred to the House Business Affairs & Labor Committee (as well as to Finance and Appropriations, given its tax implications). It is under consideration in House committees. (It has bipartisan sponsorship, indicating a decent chance of advancing, but as of early March 2025 it has not yet had a full House vote.)
