Business owners contemplating retirement or selling their companies have several options for passing the torch – transferring ownership and control to their children or their family members, listing and selling to third parties, and transitioning to an employee ownership model, most prominent among them. From the perspective of many state and local governments, this latter course – employee ownership – provides significant economic and employment benefits for urban and rural communities alike, leading them to actively implement programs and incentives to encourage departing business owners to take this path.

Few states have been as aggressive and active in promoting employee ownership structures as Colorado. This includes significant tax credits for conversion or expansion costs incurred during the transition to employee business ownership. In 2025, Governor Jared Polis signed legislation (HB25-1021) that expands the availability and size of the state’s existing Employee Ownership Tax Credit (EOTC), allowing more business owners to reap even greater tax advantages by handing off their companies to their employees. These changes to the law are particularly advantageous for Colorado businesses utilizing employee stock ownership plans (ESOPs) as the vehicle for transitioning to employee ownership.

For Colorado business owners, those with retirement on the horizon, and those who are considering a business succession plan that provides for employee ownership through an ESOP, this legislation may warrant accelerating those plans, as discussed below.

Colorado’s Employee Ownership Tax Credit Program

Colorado’s original Employee Ownership Tax Credit program, established under HB21-1311, provided refundable tax credits to help offset the professional service costs associated with converting to employee ownership. The program was designed to make employee ownership transitions more accessible by covering a portion of the legal, financial, and consulting fees that businesses incur during conversion.

The original EOTC covered up to 50% of conversion costs, with a maximum credit of $150,000 for ESOPs and $40,000 for other employee ownership structures. This program allocated $10 million annually in tax credits and had been available for five-year cycles.

HB25-1021, passed in 2025 with bipartisan support, further solidifies Colorado’s status as a national leader in encouraging departing business owners to transition to an employee ownership model. The legislation makes two major modifications to the EOTC program that are noteworthy for ESOP-driven transitions:

(1) Larger Conversion Cost Tax Credits

The updated fully refundable tax credit will now cover 75% of the conversion costs, up from 50%, capped at $150,000. This increase applies not only to businesses transitioning to employee ownership but also extends to qualified support entities, such as nonprofit incubators, law firms, and consulting firms, that provide technical assistance to businesses undergoing such a transition. The tax credits for support entities are capped at $167,000.

(2) New Capital Gains Tax Subtraction for ESOPs

Eligible business owners can avail themselves of a new capital gains tax subtraction for income tax years beginning on or after Jan. 1, 2027, but before Jan. 1, 2038.

Specifically, the subtraction is for an amount equal to state capital gains that are realized by the taxpayer/owner of a qualified business during the taxable year for the conversion by an increment of at least 20% ownership to employees through an ESOP.

Credits can be secured up to 18 months in advance of use, and taxpayers eligible for this subtraction are the same as those eligible for the tax credit for conversion costs for employee business ownership. The Colorado Office of Economic Development will set and annually adjust the cap on this subtraction.

Utilizing Employee Ownership Tax Credits

The foregoing credits are available to businesses in good standing that are headquartered in Colorado and have operated in the state for more than one year. To utilize the credits, companies converting to employee ownership through an ESOP must:

• Complete their ESOP conversions by Jan. 1, 2027;
• Reserve their credits in advance, with Colorado’s Office of Economic Development;
• Have transition expenses validated by an independent CPA.

What These Changes Mean for Owner Exit Strategies

The cumulative effect of HB25-1021’s increased conversion cost credits and capital gains tax relief is to make employee ownership transitions through ESOPs more economically attractive and viable. This is particularly important for owners who already were leaning in such a direction due to the intangible but equally important benefits of putting their workers in charge: preserving their company’s legacy and enhancing its goodwill, rewarding loyal and long-term employees, and maintaining close ties to the communities that have supported their business over the years.

With the enhanced conversion tax credits taking effect in Jan. 2026 and the income tax subtractions beginning in 2027, now is a ripe time for Colorado business owners to start discussing their transition plans with counsel, including options for employee ownership as a financially advantageous succession strategy.