Colorado Qualified Business Income Deduction Addback

Colorado’s Qualified Business Income (QBI) Add-Back: 2026 and Beyond

01/15/2026|John R. Dundon II, EA|Colorado Department of Revenue, Colorado Department of Revenue|Colorado Income Tax, Colorado Income Tax

Starting in tax year 2026, Colorado’s Qualified Business Income (QBI) Add-Back: 2026 and Beyond has made permanent its policy requiring certain taxpayers to add back their federal Qualified Business Income (QBI) deduction when calculating state taxable income. Here are the key details.

What Is the QBI Deduction?

Under IRC §199A, the Qualified Business Income (QBI) deduction allows eligible pass-through entity owners (sole proprietors, partnerships, S corporations) to deduct up to 20% of their qualified business income from federal taxable income.

Colorado Add-Back Rule:

If you claim the federal QBI deduction, you must add that amount back when filing your Colorado state income tax return.

Effective Dates:

Originally enacted for tax years 2021–2022 under HB20-1420
Extended through 2025
Now permanent, starting in 2026, via HB25B-1001 (passed during the August 2025 special session)
Example: If your federal return includes a $10,000 QBI deduction, you must add $10,000 back to your federal taxable income to calculate your Colorado taxable income.

Who Is Affected?

Individuals, trusts, and estates claiming a QBI deduction on their federal return
Typically applies to owners of pass-through businesses (e.g., sole proprietors, partnerships, S corps)

Reporting the Add-Back

Reported on Colorado Form DR 0104 (individual income tax return)
The QBI add-back appears as a modification to federal taxable income

Planning Tip:

If you’re a business owner benefitting from the federal QBI deduction, your Colorado tax liability may be higher due to this add-back. Be sure to:

Adjust estimated tax payments accordingly
Work with a tax professional to evaluate entity structure or income strategies

Resources:

Colorado Revised Statutes §39-22-104
Colorado Department of Revenue: https://tax.colorado.gov

Bottom Line:

The QBI deduction is not allowed for Colorado income tax purposes starting in 2026.
Plan for this permanent add-back to avoid surprises at filing time.

Where to Report the QBI Add-Back:

The Qualified Business Income (QBI) deduction addback is reported on Line 3 of the Colorado Individual Income Tax Return (DR 0104).
The amount entered on this line should be the total QBI deduction claimed on your federal income tax return (IRS Form 1040, 1040-SR, etc.).

Official Source:

You can download the forms and instructions from the Colorado Department of Revenue: https://tax.colorado.gov/individual-income-tax-forms
For further information on Colorado’s Qualified Business Income (QBI) Add-Back: 2026 and Beyond, contact me today.