Can an individual taxpayer claim Colorado's foreign source income exclusion if they claim the federal foreign tax credit?

Plain-English summary

Someone asked whether an individual can claim Colorado's foreign source income exclusion — the provision in § 39-22-303(10), C.R.S. — when they take the federal foreign tax credit for foreign income taxes. The Department said no: the exclusion is only for C corporations.

Two structural reasons drive that conclusion:

• Where the statute lives. Section 39-22-303 sits within Subpart 1 of Part 3 of Article 22 — the "Colorado C Corporation Income Tax Act." It governs C corporations specifically.
• How it operates. Section 39-22-303(10) sets rules for including or excluding foreign source income "in apportioning income pursuant to section 39-22-303.5, 39-22-303.6, or 39-22-303.7." Those are C corporation apportionment provisions. Resident individuals don't apportion their income at all, and nonresidents/part-year residents apportion under different statutes (§§ 39-22-109 and 39-22-110). So the machinery of the exclusion simply doesn't apply to individuals.

And when a taxpayer takes the foreign tax credit route, the exclusion is computed by reference to foreign taxes "paid or accrued… by or on behalf of the C corporation" under IRC §§ 901/902/960/904(c). That text confirms the exclusion is a C corporation benefit only.

What this means for you

Individuals with foreign income

You can't use Colorado's § 39-22-303(10) foreign source income exclusion — it's not available to individuals, whether or not you claim the federal foreign tax credit. Your federal foreign tax credit (or deduction) still works on your federal return as usual; this is just about a Colorado corporate-level exclusion that doesn't reach individuals.

C corporations with foreign operations

The exclusion is yours to consider. Note the federal election interplay: you can deduct foreign income taxes under IRC § 164(a)(3) or credit them under § 901, but if you credit them, § 275(a)(4) bars the deduction — and the Colorado exclusion, in the credit scenario, is measured by the foreign taxes paid by or on behalf of the C corporation.

Accountants and tax professionals

Placement matters: § 39-22-303 is in the C Corporation Income Tax Act, and § 39-22-303(10) keys off the C-corp apportionment sections (303.5/303.6/303.7). Individuals either don't apportion (residents) or apportion under §§ 39-22-109/110 (nonresidents/part-year), so the exclusion is structurally unavailable to them.

Common questions

Q: Can an individual claim Colorado's foreign source income exclusion?
A: No. It is available only to C corporations under § 39-22-303(10), C.R.S.

Q: Does claiming the federal foreign tax credit change that?
A: No. Whether the taxpayer credits or deducts foreign income taxes federally, the Colorado exclusion remains a C corporation provision and doesn't extend to individuals.

Q: Why doesn't it apply to individuals?
A: The exclusion operates within the C corporation apportionment sections (§§ 39-22-303.5/303.6/303.7). Resident individuals don't apportion, and nonresidents/part-year residents apportion under different statutes (§§ 39-22-109/110).

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding on the Department. A binding answer requires a private letter ruling.

Citations and references

Statutes and Internal Revenue Code:
- § 39-22-303(10), C.R.S. (foreign source income exclusion; in the C Corporation Income Tax Act); (10)(b)(III) (foreign taxes paid by/on behalf of the C corporation)
- §§ 39-22-303.5, 39-22-303.6, 39-22-303.7, C.R.S. (C corporation apportionment)
- §§ 39-22-109, 39-22-110, C.R.S. (nonresident / part-year resident apportionment)
- I.R.C. §§ 164(a)(3), 275(a)(4), 901 (deduction vs. credit for foreign income taxes)

Source

• Landing page: Colorado Letter Rulings
• Original PDF: GIL-23-002.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL 23-002
July 7, 2023
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Via Electronic Mail: XXXXXXXXXX
Re: Foreign Source Income Exclusion
Dear XXXXXXXXXX:
You submitted a request for a general information letter regarding the foreign source income
exclusion and whether it is allowed to individuals. The Colorado Department of Revenue
(“Department”) issues general information letters and private letter rulings. A general information
letter provides a general overview of the relevant tax issues, but is not binding on the
Department. A private letter ruling provides a specific determination for a specific set of facts, is
binding on the Department, and requires payment of a fee. For more information about general
information letters and private letter rulings, please see 1 CCR 201-1, Rule 24-35-103.5.
Issue
Is the foreign source income exclusion authorized by section 39-22-303(10), C.R.S., allowed to
individuals who claim a federal income tax credit for foreign income taxes paid or accrued?
Discussion
The foreign source income exclusion authorized by section 39-22-303(10), C.R.S., is not
allowed to individuals. The foreign source income exclusion is allowed only to C corporations.
Section 39-22-303(10), C.R.S.,1 prescribes rules for the inclusion or exclusion of foreign source
income "in apportioning income pursuant to section 39-22-303.5, 39-22-303.6, or 39-22-303.7."
Resident individuals do not apportion their income pursuant to section 39-22-303.5, 39-22303.6, or 39-22-303.7, C.R.S. Nonresidents and part-year residents apportion their income
pursuant to sections 39-22-109 and 39-22-110, C.R.S., respectively.
Section 39-22-303(10), C.R.S., prescribes separate methods for determining the includible and
excludible portions of foreign source income, depending on whether the taxpayer has elected2
1 Section 39-22-303, C.R.S., is located within Subpart 1 of Part 3 of Article 22 of Title 39, which applies specifically to

C corporations and is titled the “Colorado C corporation Income Tax Act.”
2 See sections 164(a)(3), 275(a)(4), and 901 of the Internal Revenue Code. Taxpayers may claim a federal deduction
under section 164(a)(3) for foreign income taxes, but if a taxpayer chooses to instead claim a federal credit under

GIL 23-002
July 7, 2023
Page 2

to claim foreign taxes paid or accrued as a credit or has elected to claim foreign taxes paid or
accrued as a deduction. If the taxpayer has elected to claim foreign taxes paid or accrued as a
credit, the exclusion is determined with respect to "the total of taxes paid or accrued to foreign
countries and United States possessions by or on behalf of the C corporation pursuant to
section 901 or 902 of the internal revenue code, deemed paid pursuant to section 902 or 960 of
the internal revenue code for the tax year, or carried over or carried back to such tax year
pursuant to section 904 (c) of the internal revenue code" (emphasis added).3 As a result, the
exclusion is allowed only with respect to foreign income taxes paid by or on behalf of a C
corporation.
Miscellaneous
This letter represents the good-faith opinion of Department personnel who are knowledgeable
on state taxes issues. However, the Department does not make a specific determination on any
of the issues raised and the Department is not bound by this general information letter.
Thank you for your request.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

section 901 for foreign income taxes, section 275(a)(4) prohibits the taxpayer from claiming a deduction for foreign
income taxes.
3 Section 39-22-303(10)(b)(III), C.R.S.