This bill allows investors in small business development companies to deduct qualified business income from certain interest dividends, similar to real estate investment trusts, starting in 2027.
Jodey Arrington
Representative
TX-19
The "Small Business Investor Tax Parity Act of 2025" extends the qualified business income deduction to include certain interest dividends from qualified business development companies (BDCs), treating them similarly to real estate investment trust (REIT) dividends. This change allows investors in these BDCs to deduct a portion of their dividend income, provided the BDC elects to be treated as a regulated investment company. This provision is applicable for taxable years starting after December 31, 2026.
Tax Break for Small Business Investors: New Bill Lets You Deduct BDC Dividends Starting 2027
The Small Business Investor Tax Parity Act of 2025 levels the playing field for everyday investors looking to back small businesses. This bill, effective for tax years after December 31, 2026, lets investors deduct certain interest dividends received from Business Development Companies (BDCs) – think of them as specialized investment firms that focus on small and mid-sized companies.
Leveling the Investment Playing Field
This act amends the Internal Revenue Code by adding "qualified BDC interest dividends" to the list of income eligible for the qualified business income deduction (Section 2). Previously, this deduction was primarily for business owners and certain real estate investors. Now, it extends to those investing in small businesses through BDCs. A "qualified BDC interest dividend" is essentially any dividend you get from a BDC that comes from their net interest income, as long as that income is tied to a "qualified trade or business." To be eligible, the BDC must elect to be treated as a regulated investment company.
Real-World Rollout
Imagine you invest in a BDC that, in turn, provides capital to a local manufacturing startup or a growing tech company in your city. Under this new law, the interest dividends you receive from that BDC investment could be partially deductible, reducing your tax bill. This is a significant shift, potentially making BDC investments more attractive. For the small businesses themselves, this could mean increased access to capital, which could be used to purchase new equipment, increase production, or expand operations.
What to Watch
While the bill aims to boost small business investment, there are a few practical considerations. BDCs could try to reclassify income to maximize this tax advantage, so the IRS will likely be watching closely. There's also the potential for some complex accounting to ensure dividends qualify, which might add a layer of paperwork. However, the overall intent is clear: to make it easier and more financially rewarding for regular folks to invest in the growth of small businesses across the country.