The QBI Deduction: Who Qualifies and What Changes Above the Threshold

Week 8: February 23-March 1, 2026

Your State Filing Deadline May Not Be April 15

Most states align with the federal April 15 deadline, but five use different dates. If you are in one of them, planning around April 15 means planning around the wrong date. This includes payment timing, which these states enforce independently of the federal calendar. 

On a side note, there are nine states that have no individual income tax. These include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Residents still file federal returns according to the federal tax calendar. Also to consider is that there may be several state-level business tax obligations that solopreneurs often overlook. For instance, Texas requires registered business entities to file an annual Public Information Report regardless of whether franchise tax is owed. In addition, Washington imposes a Business and Occupation tax on gross receipts and a separate 7 percent capital gains tax on gains above $270,000.

As with federal income tax, for all states, an extension to file is not an extension to pay. The estimated tax owed is due by the state’s original deadline, regardless of whether an extension is requested.

Source: State revenue department websites; IRS Publication 509

The QBI Deduction: Who Qualifies and What Changes Above the Threshold

The qualified business income deduction, created by the Tax Cuts and Jobs Act of 2017, allows eligible sole proprietors to deduct up to 20 percent of qualified business income from taxable income. For most solopreneurs below the income threshold, the deduction is available without restriction.

The One Big Beautiful Bill Act, signed in July 2025, made the QBI deduction permanent, removing the original 2025 sunset provision. The deduction is no longer scheduled to expire.

What Counts as Qualified Business Income

Qualified business income is the net income from your trade or business, reported on Schedule C. It does not include wages paid to yourself as an employee, capital gains or losses, dividends, or investment income. The deduction for one-half of self-employment tax, self-employed health insurance premiums, and retirement contributions reduce QBI before the deduction is calculated.

The Income Threshold

For 2025 tax returns, the threshold is $197,300 for single filers and $394,600 for married filing jointly. Below these amounts, the deduction is straightforward. It amounts to 20 percent of QBI and is subject to an overall cap of 20 percent of taxable income minus net capital gains.

What Changes Above the Threshold

Above the threshold, two sets of rules apply depending on your business type.

Most sole proprietors with no employees and no significant depreciable property may find the deduction disappears above the threshold even without an SSTB classification.

Where the Deduction Appears

The QBI deduction is claimed on Form 1040, Line 13a. It reduces taxable income but does not reduce adjusted gross income or self-employment tax.

Source: IRC §199A; IRS Publication 535; Treasury Regulation 1.199A-1; Treasury Regulation 1.199A-4; Treasury Regulation 1.199A-5; IRS Form 8995 Instructions

The Texas LLC That Filed Nothing and Lost Its Right to Do Business

A graphic designer in Austin operated her business through a single-member LLC. She was aware of the Texas franchise tax and had confirmed that businesses with annual revenue below the no tax due threshold of $2.65 million for the 2026 report year would owe no franchise tax. On that basis, she filed nothing with the Texas Comptroller for the first two years of operation.

The Mistake

The Texas franchise tax has two distinct components: the tax itself, calculated on margin above the threshold, and the annual reporting requirement, which applies to all registered entities regardless of whether any tax is owed. Below the threshold, entities are required to file either a Public Information Report (Form 05-102, for most LLCs and corporations) or an Ownership Information Report (Form 05-167, for entities with no publicly available ownership information). These are informational filings with a firm May 15 deadline.

After two consecutive years without a report, the Texas Comptroller automatically forfeited the LLC’s certificate of formation. A forfeited entity loses the right to conduct business in Texas, cannot enter into contracts, and cannot maintain a legal action in a Texas court.

The Correction

Reinstatement required filing all delinquent franchise tax reports, paying associated late filing penalties ($50 per report), and submitting a reinstatement application to the Texas Secretary of State along with the reinstatement fee. The process took several weeks and delayed a contract signing scheduled during the forfeiture period.

No franchise tax was owed at any point. The entire problem was caused by not filing a form that reported a zero balance.

The Lesson

State tax compliance involves two separate questions: how much is owed, and what must be filed. The answers are not always the same. Many states require annual informational filings from entities that owe nothing. Texas is the most prominent example, but similar annual report requirements apply in several other states through the Secretary of State’s office, independent of any tax liability.

The Texas no tax due threshold is indexed and changes each report year. For the 2026 report year, the threshold is $2.65 million. You can verify the current figure at comptroller.texas.gov before filing. As illustrated here, entities below the threshold must still file a Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167) by May 15.

Source: Texas Tax Code §171.0003; Texas Comptroller Forms 05-102 and 05-167; Texas Business Organizations Code §11.251

Key takeaway: The QBI Deduction is available to most sole proprietors below the income threshold. Classification matters above it, and the difference between a service business and a non-service business can be the difference between a deduction and no deduction.

In last week’s issue: The One Big Beautiful Bill Act created four brand new deductions for 2025, including tips, overtime, a senior bonus, and vehicle loan interest. Each one has its own income limits and eligibility rules. However, none of these are automatic. If you file without checking, you will never know what you missed.

Next week: S-corporation and partnership returns are due March 16, which is two weeks from Week 9. We cover entity selection considerations, Form 2553 timing requirements, and when the election makes financial sense.

Disclaimer: This publication is provided for general informational and educational purposes only and does not constitute personalized tax, legal, or accounting advice. Tax laws are complex and subject to change, and their application depends on individual circumstances. Readers should consult qualified professionals regarding their specific situations.

Circular 230 Disclosure: To ensure compliance with U.S. Treasury Department regulations, we inform you that any U.S. federal tax discussion contained in this publication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for promoting, marketing, or recommending any transaction or matter addressed herein.