In furtherance of Colorado’s stance as the leading state (or jurisdiction anywhere) in terms of promoting employee ownership, Colorado’s Governor Jared Polis has signed a landmark bill—HB25-1021—that significantly boosts tax incentives for businesses transitioning to employee ownership and provides a new tax credit to support organizations. This bill marks one of the most ambitious efforts yet to make employee ownership more accessible, financially viable, and widespread in the state.

What the Bill Does

Starting in 2027, HB25-1021 introduces two powerful income tax subtractions designed to encourage the transition to employee-owned business models:

1. 1. Capital Gains Tax Subtraction for Conversions
      Owners who sell at least 20% of their business to employees—through worker cooperatives, employee stock ownership plans (ESOPs), or employee ownership trusts (EOTs)—can now subtract eligible state capital gains from their income taxes. This subtraction will be capped and adjusted annually by the Colorado Office of Economic Development and posted publicly.
   2. Tax Relief for Worker Cooperatives
      Worker cooperatives will be allowed to subtract up to $1 million of federal taxable income from their Colorado income taxes each year, offering a direct incentive to grow profits while sharing ownership with workers. This measure is a first of its kind in the United States and helps bring worker cooperatives closer to the tax treatment of 100% S-Corp ESOPs.

Extending and Expanding Existing Tax Credits

The bill also extends Colorado’s existing tax credit for employee ownership conversions through 2031 and increases the generosity of the credit:

• • The percentage of conversion or expansion costs eligible for credit jumps from 50% to 75%, starting in 2026.
  • The annual cap on total credits has been right-sized to $3 million.
  • The definition of an Employee ownership trust has been refined and clarified to bring it into line with ESOP and worker coop conversions.

Support for the Ecosystem Around Employee Ownership

In a particularly innovative move, HB25-1021 recognizes the critical role of technical assistance and ecosystem support. Qualified support entities—such as nonprofit incubators, law firms, and consultants—can now claim a tax credit worth up to 75% of their service costs (capped at $167,000) for helping businesses transition to employee ownership. These services can include legal and financial consulting, staff support, and community outreach. HB25-1021 sets forth requirements for qualified support providers to be eligible, such as having a headquarters in Colorado, and working on a minimum number of conversions per year.

Why This Matters

HB25-1021 is more than a tax reform—it’s a strategic investment in shared prosperity. By reducing the financial barriers to employee ownership, Colorado is making it easier for retiring business owners to sell to their workers, for entrepreneurs to start cooperatives, and for technical service providers to build the infrastructure needed to support these transitions.

This legislation is a model for other states seeking to retain local jobs, narrow the racial wealth gap, and promote long-term business sustainability.

Next Steps for Businesses and Advisors

• • Business owners considering a transition: Now is the time to explore employee ownership as a succession strategy.
  • Worker cooperatives: Prepare to take advantage of income tax subtractions starting in 2027.
  • Support organizations: Evaluate how your services might qualify for tax credits under the expanded eligibility definitions.

We’ll be watching closely as implementation guidance is released by the Colorado Office of Economic Development—and helping clients understand how to make the most of these new incentives.