The New $400 Floor Under Your QBI Deduction

#This article is about the floor, not the ceiling

If you already know QBI well, you know the deduction has a lot of moving parts above certain income levels: a wage limit, a phase-out for specified service businesses, thresholds that change every year. Those rules are the ceiling on the deduction. They cap how big it can get.

This article covers something different: a brand-new floor. It sets a guaranteed minimum, no matter how small the regular calculation comes out to be.

If you want the full picture on how QBI works and what else changed under OBBBA, start with our OBBBA QBI overview. If your question is about the wage cap for a higher-income S-corp owner, see S-corp QBI wage limit optimization. This guide stays narrowly on the new floor.

#What the $400 floor actually says

A new law called the One Big Beautiful Bill Act (OBBBA) added a rule to the tax code, at IRC §199A(i). In plain words, it says:

If you qualify, your QBI deduction is whichever is bigger: your normal 20% deduction, or $400.

That’s the whole idea. You never lose money by qualifying. The floor only ever helps you, and only when your regular deduction would otherwise be small or zero.

This is new. Before this law, if your regular 20% calculation came out to $150, your deduction was $150. Starting with tax years that begin in 2026, that same taxpayer gets bumped up to $400 instead, as long as they meet the two tests below.

#Who qualifies: the two-part test

To be an “applicable taxpayer” who can claim the floor, the law asks two questions.

#Test 1: Do you have at least $1,000 of active QBI?

You need at least $1,000 of qualified business income (QBI) from businesses you actively work in. QBI is generally your net business profit, figured the same way it’s figured for the regular 20% deduction.

This is an aggregate test, not a per-business test. The law is specific here: it looks at your “aggregate qualified business income with respect to all active qualified trades or businesses” you own. If you run two side businesses and one makes $600 of QBI while the other makes $500, you add them together. $1,100 combined clears the $1,000 bar, even though neither business clears it alone.

The flip side matters too: a loss in one business reduces the combined total. If Business A makes $2,000 of QBI and Business B loses $1,500, your aggregate QBI is only $500, and you don’t clear the floor.

#Test 2: Do you materially participate?

The business has to be one where you “materially participate.” The law borrows this test directly from IRC §469(h), the same material participation standard used to decide whether a business is passive or active for other tax purposes.

In practice, this usually means you’re regularly, continuously, and substantially involved in running the business. Common ways to meet it:

• You work more than 500 hours a year in the business, or
• You do substantially all the work the business needs, or
• You work more than 100 hours and nobody else works more than you do

An S-corp owner-employee who runs the day-to-day business is the textbook case. But being on payroll is not itself one of the tests. What counts is hours and involvement, so you still have to land on one of the three lines above. A full-time owner-operator normally clears the 500-hour test without difficulty. A part-time owner, or one who has handed daily operations to a manager, may not, and should count actual hours rather than assume.

This test exists to exclude truly passive income, a silent investor’s K-1 share for instance, rather than to create a hurdle for working owners.

#The one group this floor probably does NOT rescue (our reading, not yet confirmed)

Here’s the most important thing this article can tell you, and it’s the detail most summaries skip. Read the caveat in the next paragraph before you rely on it: on our reading, the $400 floor does not save a specified service trade or business (SSTB) owner whose income is high enough to be fully phased out of the regular QBI deduction.

Two things to be clear about before we walk through it. First, this is not a special exception written into the new law. Second, and more important: the IRS has not yet issued guidance addressing this specific interaction. The floor is brand new for 2026. What follows is our reading of how the two existing rules fit together, not a position the IRS has confirmed. If your situation turns on it, get it looked at rather than relying on any article, including this one.

Here is the reasoning. Above the top of the phase-out range, existing tax law (unchanged by this new floor) says an SSTB’s income simply isn’t counted as qualified business income at all for that owner. Not “limited to zero,” but excluded from the QBI calculation entirely.

That distinction matters for the floor’s math. Remember, Test 1 asks whether your aggregate QBI is at least $1,000. If your only business is an SSTB and none of its income counts as QBI in the first place, your aggregate QBI is $0. You never reach the $1,000 line, so you never become an “applicable taxpayer,” so there’s no floor to fall back on.

For 2026, SSTB income is fully excluded once taxable income clears $553,500 (married filing jointly) or $276,750 (single / head of household). If that’s you, this new floor doesn’t change anything about your QBI deduction. What actually moves the needle at that income level is a different conversation, and it belongs to our SSTB phase-out coverage rather than this article.

If your business is not an SSTB, or your income is below the SSTB phase-out range, none of this applies to you. Your QBI counts normally and the floor test above is all you need.

#Worked example: a brand-new S-corp claiming the floor

This is exactly the situation the floor was built for: a new business where paying a reasonable owner salary eats almost all of the profit, leaving very little QBI behind.

The setup. Priya formed an S-corp for her consulting practice last year. Here is her first full year, line by line:

• Revenue: $75,000
• Less her salary: $60,000 (documented against the benchmarks in our reasonable compensation guide)
• Less the employer half of payroll tax: $4,590, which is 7.65% of that salary
• Less other deductible expenses: $8,610
• Net income left over: $1,800. That is her QBI.

Note the employer payroll tax line. It is easy to forget, and on a small S-corp it is often the difference between a little QBI and none at all. The company pays 7.65% on top of the salary itself, up to the Social Security wage base. Above that base the employer rate drops to the 1.45% Medicare piece. Priya’s salary is well under the base, so her rate is the full 7.65%. A business paying a much larger salary can still land in floor territory, since what matters is the profit left after the salary, not the size of the salary itself.

Priya works in the business full time, so she clearly materially participates under §469(h). She’s well under the $201,750 single-filer QBI threshold for 2026, so none of the wage-cap or SSTB-phase-out mechanics discussed elsewhere even apply to her. This is a clean, low-income calculation.

Step 1: the regular 20% calculation.

• QBI: $1,800
• Regular QBI deduction: $1,800 × 20% = $360

$360 is less than the $400 floor.

Step 2: check the floor test.

• Aggregate active QBI: $1,800 (her only business)
• Is that at least $1,000? Yes.
• Does she materially participate? Yes.

She’s an applicable taxpayer.

Step 3: take the greater of the two.

• Regular deduction: $360
• Minimum floor: $400
• Priya’s actual QBI deduction: $400

The floor added $40 to her deduction ($400 minus $360). That’s not a large number, and it won’t move her tax bill dramatically. But it’s $40 she wouldn’t have had access to under the old rules, and it required no extra paperwork or election. The deduction is simply computed the greater of the two ways.

Where this shows up most. The math above is common in a first-year S-corp, a side business that’s just getting off the ground, or any small operation where a reasonable owner salary consumes most of what the business earns. If your S-corp’s net income after salary regularly lands between $1,000 and about $2,000, it is worth checking whether the floor is quietly kicking in on your return. Below $1,000, or in a loss year, you do not qualify at all.

#Does the floor change any S-corp election decisions?

Not directly. This floor is small and it doesn’t move the math on whether to elect S-corp status in the first place. That decision still turns on self-employment tax savings and reasonable compensation, not a $400 deduction. But it’s worth knowing about for two reasons:

1. It’s automatic. You don’t elect into it or check a box. If you clear both tests, the greater-of computation applies on its own. The main risk is a tax software or preparer missing it on a very small return where nobody bothered to check the alternative.
2. It’s a small but real reason not to write off a slow first year. A brand-new business with a thin profit after salary still gets a guaranteed floor deduction, rather than a QBI benefit that rounds to nothing. A business that actually loses money gets neither, because there is no QBI to clear the $1,000 test.

#Common questions

Do I need to elect or check a box to get the $400 floor? No. It’s computed automatically as the greater of your regular deduction or $400, once you meet the $1,000 aggregate QBI test and the material participation test.

Is the $1,000 QBI test per business or combined? Combined. The law defines it as your “aggregate qualified business income with respect to all active qualified trades or businesses.” Every active business you materially participate in gets added together, including losses, before checking against the $1,000 line.

I have a rental property that generates QBI. Does that count toward the floor? It can, but only if the rental activity rises to the level of an active trade or business in which you materially participate. That’s a higher bar than most passive landlords clear. A rental that already qualifies for QBI under the existing safe harbor still needs to pass the material participation test separately to count toward this floor. If you’re not sure your rental clears that bar, that’s a return-specific question worth confirming with your preparer rather than assuming either way.

Does this help me if I’m an SSTB owner in the phase-out range, but not fully phased out yet? Possibly, but check the numbers carefully, and remember the caveat above that the IRS has not confirmed how the floor interacts with a full SSTB phase-out. Inside the phase-out range, you still have some QBI (a partial amount, shrinking as your income rises), so you could still clear the $1,000 aggregate test and get the floor. It’s only once you’re fully above the top of the phase-out range that your SSTB QBI hits zero and the floor test can’t be met from that business alone.

What if I have a W-2 job and a small side business? Only the side business’s income matters here. W-2 wages are never QBI. If your side business alone (or combined with any other active businesses) produces at least $1,000 of QBI and you materially participate in it, you can qualify for the floor. There is one caveat if your side business is an SSTB. Your day-job wages count toward the taxable income that the SSTB phase-out is measured against, so a large salary can push you over that ceiling and, under the reading described above, leave you with no qualifying QBI.

Do the $400 and $1,000 change every year? Not until 2027. The law states both amounts stay fixed through 2026 and then begin adjusting for inflation for taxable years beginning after 2026, rounded to the nearest $5.

Is this the same as the QBI deduction being made permanent? No, those are two separate OBBBA changes bundled into the same law section. Permanence means the 20% deduction itself no longer expires. The minimum floor is a new, separate guarantee layered on top. See the OBBBA QBI overview for the permanence piece and the other changes that came with it.

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Whether the floor actually applies to your return depends on your specific QBI, your participation in the business, and, if you’re in a specified service field, exactly where your income lands relative to the phase-out range. A Tax Discovery call is a free, no-pitch way to get those numbers checked against your actual return rather than a general rule of thumb.