On May 14, 2025, the House Ways and Means Committee approved the so-called “One Big Beautiful Bill” (Bill). We have issued several other alerts regarding the Bill. Among other tax provisions, the Bill includes two provisions that, if enacted, would affect the tax consequences of individuals investing in business development companies (BDCs) that are treated as regulated investment companies for US federal income tax purposes.
Pass-through Treatment of Qualified Business Income
The Bill would allow a BDC that is treated as a regulated investment company for US federal income tax purposes (RIC) to pass through its “qualified business income” (defined below) to certain of its non-corporate shareholders under section 199A of the Internal Revenue Code of 1986, as amended (Code)1 in the same way the law currently permits real estate investment trusts (REITs) to pass through their income to certain non-corporate shareholders.
Section 199A of the Code currently allows a non-corporate taxpayer a deduction equal to the lesser of (i) its “qualified business income” or (ii) its taxable income less its net capital gain. For this purpose, “qualified business income” generally is the lesser of either 20% of the taxpayer’s net income from any trades or businesses conducted by the taxpayer or certain wages paid with respect to the trade or business, subject to certain phase-in thresholds. (Certain trades or businesses are excluded.) In addition “qualified business income” generally includes 20% of a dividend from a REIT that is comprised of neither capital gain nor a qualified dividend income (i.e., dividend income earned by the REIT). Section 199A currently provides that it does not apply to taxable years beginning after December 31, 2025.
The Bill would amend the definition of “qualified business income” to include dividends from a BDC that is treated as a RIC to the extent that such dividends are attributable to net interest income of the BDC allocable to a qualified trade or business of the BDC. Therefore, distributions of RIC income to shareholders should qualify for the 199A deduction to the extent that the RIC derives income from passive investment activities, and as a result, this provision may reduce the net US federal income tax payable by such shareholder with respect to the distribution.
The Bill would also (i) permanently extend the application of section 199A (so that it no longer sunsets after 2025), and (ii) increase the deduction for distributions of qualified business income from a BDC or REIT from 20% to 23%.
Termination of Miscellaneous Itemized Deduction
To the extent that a BDC is treated as a RIC but does not qualify as a “publicly offered” RIC,2 a non-corporate shareholder of the BDC is treated as (i) having received, as a dividend from the BDC, its allocable share of certain expenses of the BDC, which include management and incentive fees paid by the BDC, and (ii) paid its allocable share of such expenses.
Prior to 2018, an individual shareholder had been able to deduct such deemed expenses under section 67 of the Code to the extent that the aggregate of such deductions exceeded 2% of adjusted taxable income, which should have offset the income from the deemed dividend by the RIC.
The 2017 Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for individuals for taxable years beginning before 2026. The miscellaneous itemized deduction would have been available beginning in 2026. The Bill would permanently remove the miscellaneous itemized deduction.
1 Unless otherwise stated, all section references are to the Code.
2 Generally, a RIC is “publicly offered” if its shares are (i) continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)), (ii) regularly traded on an established securities market, or (iii) held by or for no fewer than 500 persons at all times during the taxable year. Section 67(c)(2).
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