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Regulation and Compliance > Legislation

New Bill Expands REIT Pass-Through Deduction to BDCs

By Melanie Waddell

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New legislation, the Small Business Investor Tax Parity Act of 2023, expands the 199a deduction available to real estate investment trusts, or REITs, to business development companies.

BDCs, according to Garrett Watson, senior policy analyst at the Tax Foundation in Washington, are organizations “that must invest at least 70% of their assets in small businesses.”

Since the 2017 tax overhaul, dividends from REITS “qualify for the Section 199A passthrough deduction of 20% of qualified REIT dividends, along with S-corporation bank interest income that comes from direct lending,” Watson explained in an email Thursday to ThinkAdvisor.

“Some argue that it does not make sense to provide 199A benefits to S-Corp banks but not to BDCs as they also have direct lending activities that are similar to qualified income earned by the S-Corp banks,” Watson said.

H.R. 5225, introduced on Aug. 18 by Rep. Jodey Arrington, R-Texas, “would allow 199A to apply to this type of income for BDCs,” Watson continued, adding that he has not seen a revenue estimate for the bill yet, “but I imagine it is not a large revenue change relative to the size of the deduction overall.”

From a bigger picture perspective, Watson relayed, “these types of policy debates illustrate the complexity of the 199A pass through deduction and the many decisions policymakers and regulators must make on which types of income should qualify for this deduction. This will inspire further policy and political debate in 2025 as 199A gets closer to expiring along with the broader individual tax provisions.”

The 199A deduction “expires along with the broader individual tax provisions associated with the 2017 tax law at the end of 2025,” Watson said.

Jeff Bush of The Washington Update added in another email on Thursday that the 2017 tax law “specifically left out” Arrington’s 199A expansion regarding BDCs.

“As far as a year-end tax bill paired with a budget deal, this could be attached,” Bush said. “Absent such pairing, I don’t see it passing.”

The U.S. Capitol in Washington, D.C. Photo: Bloomberg

Melanie Waddell

@Think_MelanieW

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