HR 652119th CongressIn Committee

Small Business Investor Tax Parity Act of 2025

Introduced: Jan 23, 2025

Standard Summary

Comprehensive overview in 1-2 paragraphs

The Small Business Investor Tax Parity Act of 2025 would extend the 199A deduction (the 20% deduction for qualified business income) to a new category: qualified BDC (business development company) interest dividends. Specifically, the bill adds “qualified BDC interest dividends” to the list of income types that can receive the same 199A treatment as qualified REIT dividends. A “qualified BDC interest dividend” is a dividend from an electing BDC (an investment company defined by the Investment Company Act of 1940 that has elected under section 851 to be treated as a regulated investment company) and is attributable to the BDC’s net interest income properly allocable to a qualified trade or business of the BDC. The change would apply to taxable years beginning after December 31, 2026 (i.e., starting with the 2027 tax year). The bill was introduced in the House by Representative Arrington and referred to the Ways and Means Committee. In short, the goal is tax parity: investors receiving dividends from electing BDCs would receive the same favorable 199A treatment as investors receiving qualified REIT dividends, potentially enhancing after-tax returns for such investments and supporting financing for small businesses through BDCs.

Key Points

1Adds qualified BDC interest dividends to the 199A framework, so those dividends receive the same tax treatment as qualified REIT dividends.
2Defines a qualified BDC interest dividend as a dividend from an electing BDC (a BDC that has elected under section 851 to be treated as a regulated investment company) that is attributable to the BDC’s net interest income properly allocable to a qualified trade or business of the BDC.
3The term “electing business development company” means a BDC that qualifies as a regulated investment company under section 851 election.
4Effective date: applies to taxable years beginning after December 31, 2026 (beginning with 2027).
5Legislative status: Introduced in the House on January 23, 2025 by Mr. Arrington; referred to the Committee on Ways and Means.

Impact Areas

Primary group/area affected: Individual investors who own shares in electing BDCs (and by extension, BDCs themselves that elect RIC status under Section 851). These investors could see a larger 199A deduction for certain dividends.Secondary group/area affected: Electing BDCs (BDCs choosing RIC treatment) and their fund managers, as well as tax professionals and corporations that rely on BDC financing. Publicly traded BDCs and other investment vehicles structured to qualify as BDCs would need to adjust reporting to identify and characterize qualified BDC interest dividends.Additional impacts:- Tax revenue implications for the federal government due to the expanded 199A-eligible income, potentially reducing receipts from noncorporate taxpayers who receive such dividends.- Increased complexity in tax reporting and compliance for BDCs, including how net interest income is allocated to qualified trades or businesses and how dividends are labeled for 199A purposes.- Potential incentives for BDCs to emphasize net interest income and qualified trades to maximize the portion of dividends that qualify for the deduction.- Possible interaction with existing 199A limitations (e.g., the overall noncorporate deduction phaseouts and other QBI constraints, which may affect the magnitude of the benefit depending on a taxpayer’s income level).199A: A section of the Internal Revenue Code that provides a deduction (commonly up to 20%) of qualified business income for certain noncorporate taxpayers from qualified trades or businesses.Qualified REIT dividends: Dividends from real estate investment trusts that are eligible for the 199A deduction (under current law, REIT-derived income can receive favorable treatment).BDC (Business Development Company): A type of investment company that provides financing to small- to mid-sized private companies, regulated under the Investment Company Act of 1940.Electing BDC / RIC status: A BDC that elects under section 851 to be treated as a regulated investment company (RIC) for tax purposes, which affects how its income is taxed and distributed to shareholders.

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