Colorado launches employee ownership tax credit
by Karen Kahn
A promising model for how states can support more employee ownership conversions has just been put in place in Colorado, where Governor Jared Polis has long been a strong advocate for employee ownership. On January 1, the Employee Ownership Office at the Colorado Office of Economic Development and International Trade (OEDIT) announced it is now prepared to accept applications for the Colorado Employee Ownership Tax Credit. Businesses in the state that convert to employee ownership are eligible for a state tax credit covering up to 50 percent of the cost of the conversion.
Businesses in the state that convert to employee ownership are eligible for a state tax credit covering up to 50 percent of the cost of the conversion.
According to the OEDIT press release, businesses converting to employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), or worker cooperatives are eligible. The current program runs through 2027. A business must apply for the tax credit prior to completing its conversion.
In announcing the program, Governor Polis said, “Employee ownership is a business model with limitless potential to boost employee morale, engagement, and retention. We are hopeful that by covering up to 50 percent of the costs of converting, we will see more Colorado small businesses take advantage of this forward-looking business opportunity.”
Using tax incentives to cover the costs of feasibility studies and conversions is one of several state policies recommended by the National Center for Employee Ownership (NCEO) to encourage more businesses to choose employee ownership. In a series of new state policy blog posts, Corey Rosen, founder of NCEO, identifies four actions that states can take to create a more policy-friendly environment for employee ownership conversions.
In addition to tax incentives, Rosen recommends launching state employee ownership centers within state governments, like the Colorado Employee Ownership Office. Other states are following suit. Massachusetts has legislation pending (S.261) to make its Office of Employee Ownership a permanent part of the Massachusetts Office of Business Development. Texas is also considering legislation to support a state-level office.
Eighteen states now have employee ownership centers, according to the Employee Ownership Expansion Network, which works to expand these. A center also launched in Washington, DC, in 2021. The vast majority of these centers are nonprofits supported by private funding rather than through state policy.
An additional approach recommended by Rosen is allowing ESOPs to qualify as minority-, women- , or veteran-owned businesses, where applicable. Currently in most states, a business that converts to an ESOP—even if the majority of employees meet the designated criteria for a particular preference—cannot continue to qualify for preferred status.
Finally, numerous states restrict professional corporations from being owned by ESOP trusts. These rules impact accounting, medical, law, and veterinary services, as well as engineering, architecture, and other professions. Rosen recommends allowing professional firms to be structured as ESOPs as long as the trustee(s) are members of the profession.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.