The Qualified Business Income deduction has been one of the most valuable tax benefits available to pass-through business owners since its introduction in 2018. Until recently, it was also scheduled to disappear at the end of 2025.
That changed in July 2025 when the One Big Beautiful Bill Act was signed into law. OBBBA made the QBI deduction permanent — and expanded who qualifies for it starting in 2026. For Texas business owners operating as S-Corporations, LLCs, sole proprietorships, and partnerships, these changes create meaningful planning opportunities. But the rules are nuanced, and the details matter.
Here's what changed, what it means, and what to think about as 2026 begins.
A Quick Refresher on QBI
The QBI deduction, found in Section 199A of the tax code, allows eligible pass-through business owners to deduct up to 20% of their qualified business income on their personal tax return. The deduction is calculated as the lesser of:
- 20% of your qualified business income, or
- 20% of your taxable income (excluding net capital gains)
The deduction is available to owners of sole proprietorships, partnerships, S-Corporations, LLCs taxed as any of those, and certain REIT or publicly traded partnership investors. C-Corporations are not eligible — they benefit from the flat 21% corporate tax rate instead.
It's a below-the-line deduction, meaning it doesn't reduce your Adjusted Gross Income. It sits between AGI and taxable income. You can take it whether you itemize or claim the standard deduction.
What OBBBA Changed
Three changes matter most.
1. Permanence
The original QBI deduction was scheduled to sunset after 2025 as part of the Tax Cuts and Jobs Act's expiration. OBBBA eliminated that sunset. The deduction is now a permanent feature of the tax code, indexed to inflation. For business owners making long-term decisions about entity structure, compensation strategy, and retirement planning, this removes a major source of uncertainty.
2. Wider phase-in ranges
Starting in 2026, the income ranges over which the QBI limitations phase in are expanding significantly. Under the old rules, phase-ins spanned $50,000 for single filers and $100,000 for joint filers. Under OBBBA, those ranges expand to $75,000 and $150,000 respectively.
For 2026, the specific numbers look like this:
- Single filers: Phase-in begins at $201,750 of taxable income and ends at $276,750
- Married filing jointly: Phase-in begins at $403,500 of taxable income and ends at $553,500
This matters because of what happens inside the phase-in range. For owners of Specified Service Trades or Businesses — including doctors, lawyers, consultants, accountants, financial advisors, and performing artists — the deduction phases down to zero. For other business owners, it phases down to the Wage and Depreciable Property (WDP) limit: the greater of 50% of W-2 wages paid or 25% of wages plus 2.5% of the unadjusted basis of qualifying property. A wider phase-in range means more income can fall inside the partial-deduction zone before the benefit is fully lost.
3. A new $400 minimum deduction
OBBBA created a floor. Starting in 2026, taxpayers who meet two conditions are entitled to a minimum QBI deduction of $400 regardless of the standard calculation:
- They materially participate in an active trade or business (using the Section 469(h) definition — regular, continuous, and substantial involvement), and
- They have at least $1,000 of active qualified business income from that business
Both the $400 minimum and the $1,000 threshold will be indexed to inflation starting in 2027. The practical effect: smaller business owners who might have calculated a small QBI deduction under the standard rules — or none at all due to wage limitations — now have a guaranteed baseline benefit.
Why This Matters More in Texas Than in California
Texas doesn't have a state income tax. That simple fact creates meaningful differences in how QBI planning plays out compared to high-tax states.
In states with income tax, business owners often use Pass-Through Entity Tax elections to work around the federal SALT deduction cap. The entity pays state income tax at the corporate level, which is federally deductible without being subject to the SALT cap, and the owner receives a credit for state tax paid. This doesn't apply to Texas-source income because there's no state income tax to deduct.
What this means practically: Texas business owners capture more of their federal tax benefit without state-level interference. The QBI deduction is purely a federal calculation, and Texas's tax environment lets you keep the full benefit without worrying about state conformity issues that affect owners in California, New Jersey, Pennsylvania, and other high-tax states.
For Texas business owners who also have operating income in other states — common for real estate investors with out-of-state properties, business owners with multi-state operations, or Texas residents working remotely for companies headquartered elsewhere — the rules get more complex. PTET elections in those other states may still apply, and the interaction with QBI planning requires careful analysis.
The S-Corporation Balancing Act
For S-Corporation owners, QBI planning creates a specific tension. S-Corp owners take compensation in two forms: a W-2 salary (subject to FICA taxes) and distributions (not subject to FICA). Lower salary means less FICA tax — but it also means less ability to claim the QBI deduction when the wage limitation applies.
Here's the mechanics. Once taxable income exceeds the threshold ($201,750 single / $403,500 joint in 2026) and moves past the phase-in range, the QBI deduction is limited by the W-2 wages your business pays. The limitation is the greater of:
- 50% of W-2 wages paid by the business, or
- 25% of wages plus 2.5% of the unadjusted basis of qualified property
Consider a simplified example. A married Texas S-Corp owner with $700,000 of taxable income (past the $553,500 end of phase-in) pays themselves $0 in W-2 wages and takes everything as distribution. Their tentative QBI deduction would be $140,000 (20% of $700,000). But their wage limitation would be $0 (50% of $0 in wages). Their actual QBI deduction: $0.
Now change the structure. Same $700,000 taxable income, but $200,000 comes as W-2 wages and $500,000 as QBI. The tentative QBI deduction is $100,000 (20% of $500,000). The wage limitation is $100,000 (50% of $200,000). The actual QBI deduction: $100,000.
But keep pushing salary higher and the math starts working against you. $300,000 as W-2 wages and $400,000 as QBI: tentative QBI deduction is $80,000 (20% of $400,000). Wage limitation is $150,000 (50% of $300,000). Actual QBI deduction drops to $80,000 — less than the second example, because higher wages mean less QBI to deduct from.
The optimization is complex because higher salary means more FICA taxes AND potentially lower QBI deduction past a certain point, but too-low salary means no QBI deduction at all. The right balance depends on income level, industry, property investments, and state of residence. In Texas specifically, the FICA side of the equation gets more weight because there's no state income tax eating into the salary benefit.
This is why determining “reasonable compensation” for an S-Corp owner isn't just a compliance issue — it's a genuine tax optimization problem, and OBBBA's changes make the analysis worth revisiting for 2026.
Who Benefits Most From the Changes
The expanded phase-in ranges primarily benefit higher-income business owners. If your taxable income sits between $201,750 and $553,500 (joint filer), you're more likely to capture a larger partial deduction in 2026 than you would have under the old rules. The taxpayers most affected:
Higher-income non-SSTB business owners. Manufacturers, contractors, wholesalers, retailers, rental real estate owners with real estate professional status, and other non-service businesses benefit from the wider phase-in zone. The deduction phases down to the WDP limit rather than disappearing entirely, so wider phase-in ranges mean a smoother transition.
SSTB owners near the phaseout cliff. Professionals in service businesses — law, medicine, consulting, financial services, performing arts — lose the deduction entirely above the phase-out range. The expanded ranges give these owners more room before the benefit disappears. A financial advisor with $450,000 of joint taxable income in 2025 would have been well past the phase-out. In 2026, they're still inside the partial-deduction range.
Active small business owners. The $400 minimum deduction mostly matters for taxpayers with modest QBI — those who might otherwise have been phased out of meaningful benefit due to wage limitations. Material participation is the key requirement. Passive investors and limited partners generally won't qualify.
What to Think About Heading Into 2026
Rather than specific advice, here are the questions worth asking as the new rules take effect.
What's the current picture?
Are you operating as a sole proprietor, S-Corp, LLC, or partnership? What's your taxable income trending toward for 2026? Where does it sit relative to the phase-in thresholds?
Is your business structure still the right one?
OBBBA didn't just affect QBI — it also expanded Qualified Small Business Stock exclusions, made bonus depreciation permanent, and retained the 21% corporate rate. For some founders, particularly those building companies they plan to sell, C-Corporation status may now be more attractive than S-Corporation status. Others will find their existing pass-through structure still optimal. The analysis is genuinely case-specific.
How are W-2 wages being structured?
For S-Corp owners specifically, the balance between salary and distribution has implications for both FICA tax and QBI deduction capacity. OBBBA's changes may shift the optimal point.
Is QBI fully integrated with your broader tax strategy?
The deduction interacts with retirement contributions, charitable giving timing, Roth conversions, and estate planning. Small changes in one area can materially affect QBI qualification in another.
None of these questions have universal answers. But they're the questions that make the difference between claiming the deduction that happens to fall out of the year and structuring to maximize it.
Common Questions
Does the QBI deduction apply to rental real estate income?
Generally yes, if the rental activity rises to the level of a trade or business. The IRS provides a safe harbor (Revenue Procedure 2019-38) for rental real estate enterprises meeting specific requirements — including at least 250 hours of rental services per year. Owners with Real Estate Professional Status and active involvement often qualify. Purely passive investors with small rental portfolios may not.
If I'm a physician or attorney, can I still claim any QBI deduction?
It depends on your taxable income. SSTB owners fully lose the deduction above the phase-out range — $276,750 (single) or $553,500 (joint) in 2026. Below the phase-in threshold ($201,750 single / $403,500 joint), you can claim the full 20% deduction just like any other business owner. Between those thresholds, you get a partial deduction.
Does the $400 minimum deduction apply to me if I'm a passive investor?
No. The minimum requires material participation — regular, continuous, and substantial involvement in business operations. Passive limited partnership interests, fund investments, and similar passive positions don't qualify.
How does the QBI deduction affect my retirement plan contributions?
QBI contributions don't directly limit retirement plan contributions, but the interaction matters. Retirement plan contributions reduce taxable income, which can bring an SSTB owner's income below the phase-out threshold and preserve the full QBI deduction. For some owners, the sequencing of retirement contributions, charitable giving, and income recognition makes a material difference.
The Core Idea
OBBBA made the QBI deduction permanent, expanded who qualifies, and created a new minimum benefit for active small business owners. For Texas business owners operating as pass-through entities, the 2026 rules create planning opportunities — particularly for higher-income owners who were previously phased out or facing reduced deductions.
But QBI is one piece of a larger picture. Entity structure, compensation strategy, retirement planning, and state tax considerations all interact with how the deduction plays out in practice. The business owners who capture the most value from these changes are the ones who think about QBI in the context of their broader financial plan — not as a standalone line item on a tax return.
Every business owner's situation is different. The rules are the rules, but how they apply to your specific business, income, and goals requires analysis. If you're a Texas business owner navigating these changes, the next step is understanding where you sit relative to the thresholds — and what planning moves might meaningfully affect your 2026 tax picture.
Learn more about how we work with business owners →
Or explore our approach to comprehensive tax planning →