What Is a Colorado K-1 (DR 0106K) & How Do You Use It?

If you are a partner in a partnership, a shareholder in an S corporation, or a beneficiary of an estate or trust, you are likely familiar with the federal Schedule K-1. This document details your share of the entity’s income, deductions, and credits. The Colorado Schedule K-1, Form DR 0106K, serves a similar purpose for Colorado state income tax, reporting your portion of items that require different treatment for state versus federal tax purposes. While your federal K-1 provides the baseline income figures, the DR 0106K provides the state-specific adjustments and credits needed to accurately calculate your Colorado tax liability.

Understanding the Information on Form DR 0106K

The Colorado Form DR 0106K is structured to present your share of state-specific tax items. Part II, “Owner’s Share of Colorado Modifications,” details the adjustments—both additions and subtractions—that must be made to your federal taxable income to arrive at your Colorado taxable income. These modifications exist because Colorado’s tax laws do not always conform to federal tax laws.

One of the most common items in this section is an addition for interest earned from state and local bonds. While interest from most municipal bonds is exempt from federal income tax, Colorado law requires that interest from bonds issued by states and municipalities outside of Colorado be added back to your income. This means if the entity invested in New York City bonds, your share of that tax-exempt federal interest becomes taxable in Colorado.

Conversely, the form also lists several subtractions that can reduce your Colorado taxable income. One such subtraction applies to income from certain state pension plans, like the Public Employees’ Retirement Association (PERA) or the Denver Public Schools Retirement System (DPSRS). Another subtraction is for net capital gains from the sale of qualifying agricultural real property, generally available to taxpayers who file a federal Schedule F.

Part III of the DR 0106K outlines your share of any Colorado tax credits. These are different from subtractions as they reduce your tax liability dollar-for-dollar. Common credits reported here include those for historic property preservation, contributions to enterprise zones, or investments in clean energy technologies. The form specifies the exact amount of each credit you are entitled to claim.

The form has a checkbox indicating if the entity has made a SALT Parity Act election. This election allows the partnership or S corporation to pay the state income tax on behalf of its owners. If this box is checked, your DR 0106K will report the amount of tax paid on your behalf, which you will then claim as a refundable credit on your personal return, preventing double taxation.

Using Form DR 0106K on Your Colorado Tax Return

Once you receive your Form DR 0106K, you must transfer the information to your Colorado Individual Income Tax Return, Form DR 0104. The DR 0106K is not filed with your personal return; instead, you use it as a guide to report the necessary state modifications and credits.

The additions and subtractions in Part II of your DR 0106K are reported on the Colorado Additions and Subtractions Schedule, Form DR 0104AD. For example, an addition for out-of-state bond interest on the K-1 is entered on the corresponding line on the DR 0104AD. The total net modification from Form DR 0104AD then flows to the main Form DR 0104, adjusting your federal income to the correct Colorado taxable amount.

The tax credits listed in Part III of the DR 0106K are claimed on the Colorado Partnership and S Corporation Credit Schedule, Form DR 0106CR. You must transfer the amount of each credit from your K-1 to the correct line on the DR 0106CR. The total nonrefundable credits from this schedule are then carried over to your main Form DR 0104 to reduce your tax.

If the entity made the SALT Parity Act election, the tax paid on your behalf is reported on a specific line of your DR 0104 as a refundable credit. This amount, found on your DR 0106K, directly reduces your tax due or increases your refund, as it represents a direct payment made to the state on your behalf.

Filing Requirements for the Pass-Through Entity

The responsibility for creating and distributing Form DR 0106K lies with the pass-through entity, such as a partnership or S corporation. These entities file an annual return, Form DR 0106, with the Colorado Department of Revenue to report the entity’s total income and its apportionment to Colorado.

As part of this filing process, the entity must prepare a DR 0106K for each owner and provide them with a copy by the tax return due date. For calendar-year filers, this deadline is typically April 15th, but it can be extended to October 15th. This ensures that individual owners receive the necessary information to complete their own state tax returns.

The entity must also submit copies of every DR 0106K it issues to the Colorado Department of Revenue. These K-1s are sent separately and are not attached to the entity’s main DR 0106 return.