The QBI Deduction Is Now Permanent — But Colorado Still Wants Its Cut Back: What Houston and Denver Business Owners Should Know

The One Big Beautiful Bill Act made the Section 199A qualified business income deduction permanent, removing a sunset date that had pass-through owners bracing for a tax increase at the end of 2025. For partnerships, S corporations, and sole proprietors, a deduction worth up to 20% of qualified business income is no longer a temporary benefit on borrowed time. But in the same window that the federal government locked that deduction in for good, Colorado locked in a rule that takes a slice of it back — permanently. Texas has no equivalent rule at all.

What the OBBBA Actually Changed for Pass-Through Owners

The One Big Beautiful Bill Act (Public Law 119-21) made the Section 199A deduction permanent for noncorporate taxpayers, so partnerships, S corporations, and sole proprietors no longer need to plan around its scheduled expiration. The deduction still allows eligible owners to deduct up to 20% of qualified business income, and two technical changes sweeten it further: the phase-in window for the specified-service-trade-or-business, W-2 wage, and qualified-property limitations widened from $50,000 to $75,000 over the income threshold for single filers and from $100,000 to $150,000 for joint filers, and a new $400 minimum deduction now applies to taxpayers with qualified active business income. The core limitations — insufficient W-2 wages, insufficient qualified property, or SSTB classification — are unchanged for owners above the phase-in window.

Houston and The Woodlands: The Deduction Flows Straight Through

Texas has no state income tax, so a Texas business owner’s federal QBI deduction is not touched by any state-level add-back, phase-out, or recalculation — the full value of the permanent 20% deduction simply flows through to the bottom line. For owners who were holding off on entity-structure or compensation decisions until they knew whether the deduction would survive past 2025, that uncertainty is now gone. S-corp owners should revisit reasonable-compensation levels and partnerships should revisit guaranteed-payment structures with the expanded phase-in thresholds and the new permanence in mind, since those decisions can now be made on a multi-year horizon instead of a one-year-at-a-time basis.

Denver Owners: Colorado Wants Its Cut Back, Permanently

Colorado is a rolling-conformity state, meaning it automatically adopts federal Internal Revenue Code changes into its own tax base unless the legislature acts to decouple. Since 2021, Colorado has required certain taxpayers to add back their federal Section 199A deduction when calculating Colorado taxable income under Colo. Rev. Stat. §39-22-104(3)(o) — specifically, single filers with adjusted gross income over $500,000 and joint filers over $1,000,000. That add-back was originally set to expire for tax years beginning on or after January 1, 2026, which would have let higher-earning Colorado pass-through owners finally keep the full federal benefit starting this year. Instead, during an August 2025 special legislative session called specifically to offset the OBBBA’s fiscal impact on the state budget, Colorado Gov. Jared Polis signed H.B. 25B-1001, which removed that sunset date and made the add-back requirement indefinite. In practical terms: Colorado business owners above those AGI thresholds get the federal government’s newly permanent 20% deduction with one hand, and add an equivalent amount back on their Colorado return with the other — not just for a few more years, but for good, unless the legislature changes course again. Owners below those AGI thresholds are not subject to the add-back and keep the state-level benefit along with the federal one.

If you’re a Houston or Woodlands pass-through owner, revisit your entity structure and W-2 wage or guaranteed-payment strategy now that the 20% QBI deduction is permanent rather than year-to-year.
If you’re a Colorado pass-through owner with AGI near or above $500,000 (single) or $1,000,000 (joint), build the Colorado QBI add-back into your 2026 and 2027 Colorado estimated tax payments — it is no longer going away on its own.
If you’re a Colorado owner below those AGI thresholds, confirm your preparer isn’t applying the add-back to your return by mistake; it only applies above the statutory floor.
If you haven’t evaluated Colorado’s elective pass-through entity tax (the SALT Parity Act workaround), ask whether it still makes sense for your situation alongside this now-permanent add-back.
If you operate in both states, keep a Colorado-specific adjustments worksheet separate from your federal projections so this add-back doesn’t get missed now that it isn’t tied to an expiring provision anymore.

At Petry Tax & Advisory, we help business owners across Houston, The Woodlands, and Denver build tax projections that account for both what Washington changes and how states like Colorado respond to it — contact us for a consultation to review your 2026 and 2027 numbers.

This post is for general informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional about your specific situation.

Source: Congress.gov — H.R.1, the One Big Beautiful Bill Act (Public Law 119-21) | Colorado General Assembly — H.B. 25B-1001, Qualified Business Income Deduction Add-Back