If you own a business that is taxed as a sole proprietorship, partnership or S corporation, one of the largest deductions on your federal return may not appear anywhere in your books. The qualified business income (QBI) deduction can let you deduct up to 20 percent of your business profit, and a new federal law changed how it works starting in 2026. This QBI deduction Union City guide explains the 2026 rules, the new income thresholds, why California does not follow them, and the year-end moves that can raise or lower your deduction before December 31, 2026.
It is written for freelancers, contractors, retailers, restaurant owners, landlords, consultants and other pass-through business owners in Union City, Fremont, Newark, Hayward, San Leandro, Castro Valley and the wider Bay Area. The rules are federal, but the planning is local: Bay Area incomes often land near the thresholds where the deduction starts to shrink.
What the QBI Deduction Is and Who Can Claim It
According to the IRS page on the qualified business income deduction, many owners of sole proprietorships, partnerships, S corporations and some trusts and estates may deduct up to 20 percent of their QBI, plus 20 percent of qualified REIT dividends and qualified publicly traded partnership income. The deduction is taken on your personal return, and it is available whether you itemize deductions or take the standard deduction.
Two groups are left out. Income earned through a C corporation does not qualify, and neither does income you earn as an employee. That means W-2 wages from a job at a Bay Area tech company are not QBI, even if you also run a side business.
S corporations and partnerships do not take the deduction themselves. The IRS Section 199A FAQs explain that they report each owner’s share of QBI, W-2 wages, the unadjusted basis of qualified property and whether the business is a specified service trade or business on a statement attached to the Schedule K-1. Each owner then figures the deduction on their own Form 1040. If a K-1 arrives without that information, the IRS says the missing amounts can be presumed to be zero, so it pays to make sure your entity reports it.
What Changed for 2026 Under the One Big Beautiful Bill Act
The QBI deduction began in 2018 and was scheduled to expire after 2025. In its explanation of the new law’s business tax provisions, the IRS says the One Big Beautiful Bill Act (OBBBA) makes the deduction permanent and makes three practical changes:
- Permanent deduction. Owners can plan on the 20 percent deduction for 2026 and later years instead of planning around an expiration date.
- Wider phase-in ranges. The range over which the limits phase in increases from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for married couples filing jointly. More owners now get a partial deduction instead of losing it quickly.
- A $400 minimum deduction. Rev. Proc. 2025-32 confirms that, for taxable years beginning after December 31, 2025, a taxpayer with at least $1,000 of qualified business income from active businesses can claim a minimum deduction of $400. Both amounts will be adjusted for inflation for years beginning after 2026.
For the minimum deduction, the IRS says an active qualified trade or business is one in which the taxpayer materially participates under the passive activity rules, and you need to meet only one of the material participation tests. That is good news for owners of small side businesses. For example, a Newark resident with a part-time bookkeeping or photography business that earns $1,500 of QBI would normally get a 20 percent deduction of $300, but the minimum can raise it to $400 if they materially participate. (This is Accountico’s own arithmetic, not an IRS example.)
What Counts as Qualified Business Income
QBI is the net amount of qualified income, gain, deduction and loss from a qualified trade or business. It is not the same as your gross sales, and it is often not the same as the bottom line on Schedule C. The IRS lists items that are excluded from QBI, including:
- Capital gains and losses and most interest income not allocable to the business.
- Wage income.
- Amounts received as reasonable compensation from an S corporation.
- Guaranteed payments from a partnership.
- Tip income excluded from the business’s net profit under the new tips deduction for 2025 through 2028.
The IRS also says QBI generally includes, as reductions, the deductible part of self-employment tax, the self-employed health insurance deduction and deductions for contributions to qualified retirement plans such as SEP and SIMPLE plans. In plain terms: if you deduct a SEP IRA contribution for your Union City business, your QBI goes down too. That is not a reason to skip the retirement contribution, but it should be in the projection.
Losses matter as well. The IRS FAQs say that if your total QBI from all businesses is below zero, the QBI component is zero and the negative amount carries forward to the next year. A Hayward owner with one profitable business and one start-up losing money will see the loss reduce the deduction from the profitable one.
2026 Income Thresholds and Phase-In Ranges
Most of the complexity in the QBI deduction depends on your taxable income before the deduction. Rev. Proc. 2025-32 sets the 2026 amounts:
- Married filing jointly: threshold $403,500; phase-in range ends at $553,500.
- Married filing separately: threshold $201,775; phase-in range ends at $276,775.
- All other returns: threshold $201,750; phase-in range ends at $276,750.
At or below the threshold
The IRS says that if your taxable income before the QBI deduction is at or below the threshold, the specified service, W-2 wage and property limits do not apply. Your deduction is generally the lesser of 20 percent of your QBI (plus the REIT and PTP component) or 20 percent of your taxable income after subtracting net capital gain. Most Union City sole proprietors and small S corporation owners fall in this group.
Specified service businesses
A specified service trade or business (SSTB) includes services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, and certain trading, as well as businesses whose principal asset is the reputation or skill of the owners or employees. Above the threshold, the deduction for an SSTB phases down across the range. The IRS says that if your taxable income is above the top of the phase-in range, no deduction is allowed for an SSTB. That matters in the Bay Area, where a consultant, physician or financial adviser married to a high-earning spouse can cross $553,500 of joint taxable income.
W-2 wage and property limits
For owners above the threshold, the Instructions for Form 8995-A explain that QBI for each business may be partially or fully limited to the greater of 50 percent of the W-2 wages paid by the business, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of qualified property. A profitable business with no employees and little equipment can lose much of its deduction once the owner’s income passes the phase-in range, even if it is not an SSTB.
The forms follow the same lines. The IRS FAQs say Form 8995-A must be used if taxable income is over the threshold, and the simpler Form 8995 can be used in other cases.
A Simple 2026 Example for a Union City Owner
Here is a simplified illustration. It is Accountico’s own arithmetic, not an IRS example, and real returns have more moving parts.
Assume a single owner of a Union City landscaping business (not an SSTB) has $90,000 of QBI after subtracting the deductible part of self-employment tax and a retirement contribution. After the $16,100 standard deduction for 2026 and other items, the owner’s taxable income before the QBI deduction is $85,000, which is well under the $201,750 threshold.
- 20 percent of QBI: $90,000 x 20% = $18,000.
- 20 percent of taxable income: $85,000 x 20% = $17,000.
- The deduction is the lesser amount: $17,000.
- At a 22 percent federal marginal rate, that is roughly $3,740 of federal income tax.
The same owner’s California return gets no QBI deduction at all, which is covered next. And the deduction does not change self-employment tax: the IRS FAQs say it does not reduce net earnings from self-employment or net investment income.
California Does Not Allow the QBI Deduction
This is the local twist many owners in Fremont, Hayward and Union City miss when they compare a federal estimate to their California bill. California Revenue and Taxation Code section 17201.6 says Section 199A of the Internal Revenue Code, relating to qualified business income, shall not apply. The section was amended by SB 711, effective October 1, 2025, so the 2026 federal changes do not carry over. The Franchise Tax Board’s 2025 Schedule K-1 (565) instructions also state that California does not conform to the deduction for qualified business income of pass-through entities.
In practice, that means:
- Your California taxable income will be higher than your federal taxable income by roughly the amount of the federal QBI deduction (along with other differences).
- A federal tax projection that includes the QBI deduction will understate your California tax if you simply apply a state rate to federal taxable income.
- California estimated payments for January 15, 2027 should be based on California numbers, not a percentage of your federal estimate.
Year-End Moves That Can Change Your QBI Deduction
The QBI deduction is calculated on your 2026 return, but most of what drives it is set by December 31, 2026. These are the planning points we review with business owners each fall. They are general ideas, not recommendations for any specific taxpayer.
1. Know where your taxable income will land
If your income is close to $201,750 (single) or $403,500 (joint), every deduction you take before year-end matters twice: once for the deduction itself and again if it keeps you under the threshold. Retirement plan contributions are a common tool; our Solo 401(k) vs. SEP IRA 2026 guide covers the deadlines. Remember that the IRS treats those contributions as a reduction to QBI, so model both effects.
2. Review S corporation salary
Reasonable compensation paid to an S corporation owner is not QBI, but the IRS FAQs say those wages can count as W-2 wages for the wage limit if they are properly reported. Below the threshold, a higher salary generally reduces QBI. Above the threshold, wages may increase the allowable deduction. The salary must still be reasonable for the work you do. Our S corp election and reasonable salary guide explains how the IRS looks at that number, and our payroll services team can run a December owner payroll.
3. Time equipment purchases with the deduction in mind
Expensing equipment lowers both QBI and taxable income, and qualified property you keep in service can also count toward the 2.5 percent UBIA limit for owners above the threshold. Our Section 179 year-end equipment guide explains the federal and California placed-in-service rules.
4. Document material participation
To use the new $400 minimum, you must materially participate in the business. Keep a simple log of hours and tasks for side businesses, especially if a spouse or employee does most of the day-to-day work.
5. Clean up the books before you project
QBI is only as accurate as your bookkeeping. Misclassified personal expenses, missing 1099 income or unrecorded payroll can move your QBI and taxable income in different directions. Our bookkeeping services can close your books through November so the projection uses real numbers.
6. Update your estimated tax
Once you have a projection, compare it with what you paid in April, June and September. Our Q4 estimated tax guide walks through the January 15, 2027 payment for both the IRS and the Franchise Tax Board.
QBI Deduction Union City Checklist Before December 31, 2026
- Confirm how each business is taxed: sole proprietorship, partnership, S corporation or C corporation (C corporation income does not qualify).
- Close your books through November and project 2026 QBI for each business, net of the deductible part of self-employment tax, self-employed health insurance and retirement contributions.
- Estimate 2026 taxable income before the QBI deduction and compare it with the $201,750 / $403,500 thresholds and the $276,750 / $553,500 phase-in limits.
- Decide whether any business is a specified service trade or business, especially consulting, health, financial services or other professional services.
- If you are above the threshold, total each business’s W-2 wages and the UBIA of its qualified property.
- S corporation owners: review reasonable salary and schedule any year-end payroll before December 31, 2026.
- Side business owners: check whether you have at least $1,000 of QBI and keep a record of your material participation for the $400 minimum.
- Plan separate federal and California projections, because California does not allow the deduction.
- Ask each partnership or S corporation you own to include complete Section 199A information with its 2026 Schedule K-1.
- Update your January 15, 2027 estimated payments based on the new projection.
QBI Deduction Union City FAQs
What is the QBI deduction?
The qualified business income (QBI) deduction, also called the Section 199A deduction, lets many owners of sole proprietorships, partnerships, S corporations and some trusts and estates deduct up to 20 percent of their qualified business income on their federal return. It is available whether you itemize or take the standard deduction. Income earned through a C corporation or as an employee does not qualify.
Is the QBI deduction still available in 2026?
Yes. The One Big Beautiful Bill Act made the deduction permanent, according to IRS guidance on the business provisions of the new law. It also widened the phase-in ranges to $75,000 for most filers and $150,000 for joint filers, and added a $400 minimum deduction starting with tax years beginning after December 31, 2025.
What are the 2026 QBI income thresholds?
Rev. Proc. 2025-32 sets the 2026 threshold at $403,500 for married couples filing jointly, $201,775 for married filing separately and $201,750 for all other returns. The phase-in range ends at $553,500, $276,775 and $276,750, respectively. Below the threshold, the specified service business, W-2 wage and property limits do not apply.
Who gets the new $400 minimum QBI deduction?
Starting with 2026, a taxpayer with at least $1,000 of qualified business income from one or more active businesses in which they materially participate can claim at least $400. The IRS says the deduction for tax years beginning after 2025 is the greater of the regular computation or this minimum. Both amounts will be adjusted for inflation after 2026.
Does California allow the QBI deduction?
No. California Revenue and Taxation Code section 17201.6 says Section 199A does not apply, and Franchise Tax Board instructions state that California does not conform to the deduction. Union City owners get the deduction only on their federal return, so California taxable income will be higher.
Does the QBI deduction lower self-employment tax?
No. The IRS says the QBI deduction does not reduce net earnings from self-employment or net investment income. It reduces federal taxable income only, which is why it is claimed on the Form 1040 after adjusted gross income is figured.
Plan Your QBI Deduction Union City Strategy With Accountico
The QBI deduction rewards owners who know their numbers before the year ends. Accountico helps sole proprietors, partnerships and S corporation owners in Union City, Fremont, Newark, Hayward, San Leandro, Castro Valley and across the Bay Area project QBI, compare federal and California results, set owner salaries and plan year-end moves. Learn more about our tax strategy and planning and tax preparation services, or book a free 30-minute consultation.
Accountico Inc
33476 Alvarado Niles Rd, Ste A007, Union City, CA 94587
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Disclaimer: This article is general information based on IRS, Franchise Tax Board and California statutory guidance available as of October 26, 2026. It is not tax, legal or accounting advice for your specific situation. Thresholds, limits and conformity rules can change, and your results depend on your full return. Talk with a qualified tax professional before acting on this information.
