Colorado’s New Tax Incentives for Employee-Owned Businesses

There’s exciting news for business owners and advisors in Colorado: new tax incentives are making it easier to transition businesses to employee ownership.

But this legislation isn’t just about saving on taxes — it opens up access to a values-aligned exit strategy for owners looking to reward their teams, preserve their legacy, and keep their business rooted in the community.

Here’s what you need to know about the legislation, how it applies across different ownership models, and the steps you can take to make the most of these incentives.

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What’s in the legislation: A closer look at HB25-1021

Signed into law in June 2025, Colorado’s House Bill 25-1021 enhances the state’s employee ownership tax credit program and introduces new income tax subtractions for employee-owned businesses.

Key updates in HB25-1021 include:

• Extension of the tax credit program through income tax years 2026–2031
• Increased credit coverage: The percentage of conversion-related costs eligible for the credit rises from 50% to 75%, starting in tax year 2026 — while existing dollar caps remain in place
• $3 million aggregate annual credit cap for income tax years 2026 through 2031
• Creation of two new income tax subtractions for tax years beginning in 2027 and ending before 2038:
  
  • A subtraction for state capital gains realized by owners from the sale of at least 20% ownership in a business to a qualified employee-owned business; the amount is set and annually adjusted by the Colorado Office of Economic Development
  • A subtraction for worker-owned cooperatives equal to their federal taxable income, capped at $1 million
• Broadened eligibility for the tax credit to include qualified support entities — such as nonprofits and for-profit service providers — eligible to claim up to 75% of qualifying support costs (capped at $167,000), including staff salaries, marketing, and technical assistance
• Program oversight by the Colorado Office of Economic Development and International Trade (OEDIT)

Source: HB25-1021 Bill Summary

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What does this mean for employee ownership today?

At Common Trust, we’ve always believed that exiting through employee ownership is simply a better way to exit — not only for sellers and employees, but also as one of the most effective strategies to protect and preserve local businesses.

“The new legislation recently passed in Colorado is one of the highest-impact ways a state can ensure that as businesses transition to the next generation, those companies, jobs, wages, and tax base stay rooted in the community.” — Zoe Schlag, CEO, Common Trust

Making employee ownership more attainable

One of the biggest challenges in transitioning a business to employee ownership is the upfront cost. Legal fees, valuations, and structuring expenses can add up quickly — especially for smaller businesses.

The HB25-1021 tax credits help offset those costs, lowering the financial barrier to entry. That means employee ownership becomes a more attainable option for businesses that might have otherwise found the transition cost-prohibitive.

A boost for multiple ownership models

A key aspect of this legislation is that it’s model-neutral (as long as the transactions meet specific criteria), allowing business owners to pursue the right model for themselves and their business:

• Employee Ownership Trusts (EOTs): A long-term, sustainable ownership model that offers a simpler and often more affordable structure to transition to employee ownership, typically benefiting employees through profit sharing
• Employee Stock Ownership Plans (ESOPs): An ERISA-regulated retirement plan that offers a tax-advantaged approach to employee ownership 
• Worker Cooperatives: Democratic businesses owned and governed by workers themselves

For EOTs in particular, this legislation marks a meaningful advancement. While the model has steadily gained traction, it has traditionally received fewer public incentives than ESOPs. Colorado’s inclusive and forward-thinking approach could accelerate wider adoption of EOTs—not just within the state, but across the country.

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The broader significance: What this means for the future of employee ownership

Colorado’s tax credit is more than a financial incentive — it supports the long-term value of employee-owned businesses. This legislation recognizes employee ownership as a tool for:

• Strengthening local economic resilience
• Preserving businesses within their communities
• Encouraging equitable wealth-building through shared ownership‍
• Offering alternatives to sales to private equity or out-of-state buyers

“The research on wealth-building in employee-owned companies is clear: employees are more likely to earn more in higher-quality jobs at businesses that endure. What’s exciting about the potential impact of Colorado’s new legislation goes far beyond worker wealth. The second-order effect of protecting those jobs means another generation of wages flowing back into the community — in the form of down payments on a first home, tuition payments for kids going to college for the first time, even purchases from other employee-owned businesses — whether that’s a restaurant, a plumbing company, or a manufacturing business.” — Zoe Schlag, CEO, Common Trust

We anticipate that Colorado’s leadership will inspire similar programs in other states, especially as more business owners seek values-driven exit options.

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Next steps for business owners and advisors

If you’re considering employee ownership — or advising someone who is — here’s how to take advantage of these new incentives:

1. Understand your options.

Explore different employee ownership models like EOTs vs. ESOPs to determine which best fits your business structure, goals, and values.

2. Plan for the timeline.

HB25-1021 tax credits begin January 1, 2026, with certain subtractions starting in 2027. Use this time to clarify your business succession goals and kick-start early conversations with your team and advisors.

3. Engage with experienced advisors.

Navigating employee ownership transitions can be complex, but working with professionals who understand the legal, financial, and operational nuances of these models will help ensure a smoother path forward.

At Common Trust, we specialize in designing and implementing Employee Ownership Trusts tailored to your company’s unique values and goals. We guide business owners and advisors through every step — helping preserve your legacy and create lasting value for your employees.

If you want to explore whether an EOT could work for your business, we’d love to talk. Schedule a free advisory call today.

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