Tax Break Alert: New Bill Extends QBI Deduction to Certain Small Business Investment Dividends Starting in 2027

The Small Business Investor Tax Parity Act of 2025 is all about making a specific type of investment income a little sweeter come tax time. This bill amends the existing tax code (specifically Section 199A, which deals with the Qualified Business Income or QBI deduction) to allow certain dividends received from Business Development Companies (BDCs) to qualify for this deduction. The catch? This change isn't effective until tax years beginning after December 31, 2026, so you won't see this on your 2025 or 2026 returns.

The QBI Deduction Gets a New Friend

Right now, the QBI deduction lets people deduct up to 20% of their qualified business income, plus qualified real estate investment trust (REIT) dividends. This bill adds "qualified BDC interest dividends" to that list. Think of BDCs as investment funds that often focus on lending to or investing in smaller, often private, companies—the kind of companies that drive local economies but might not be big enough for traditional bank loans or public markets. The idea here is to incentivize investment in these BDCs, which in turn funnel money to small businesses.

What Makes a Dividend “Qualified”?

This isn't a blanket deduction for all BDC dividends. For an investor to claim the QBI deduction on a BDC dividend, two things need to happen. First, the BDC itself must have elected to be treated as a Regulated Investment Company (RIC) for tax purposes. Second, the dividend you receive must be specifically traced back to the BDC's net interest income that came from a qualified trade or business. If you're a busy professional who owns a few shares of a BDC in your retirement portfolio, this means you'll need to check the fine print on the tax forms (like Form 1099-DIV) provided by the fund to see what portion, if any, is labeled as a "qualified BDC interest dividend."

The Real-World Impact for Investors and Small Business

For investors who currently hold BDC shares, this change effectively increases the after-tax return on those specific dividends, making them potentially more attractive compared to other investment classes. If you're an investor looking to diversify or boost income, this tax break might make BDCs a more compelling option. The hope is that this increased investor interest leads to more capital flowing into BDCs, which then means more financing options—loans, equity, etc.—for small and mid-sized businesses that need the cash to grow, hire, and expand.

However, it’s worth noting that the U.S. Treasury will take a hit on tax revenue because of this new deduction. Also, the complexity introduced by the "qualified BDC interest dividend" definition means that BDCs and their accountants will need to carefully track and report the source of their income to ensure investors get the correct tax treatment. If the BDC doesn't meet the RIC election requirement or the dividend doesn't originate from net interest income, the investor gets zero benefit from this new rule. It’s a targeted benefit, not a universal one.