HR-652-119
Referred to the House Committee on Ways and Means.
Sponsored by Jodey Arrington (R-TX)
What it does
This bill would amend the Internal Revenue Code to allow investors who receive interest dividends from qualifying Business Development Companies (BDCs) to claim the same 20% pass-through income deduction (Section 199A) that is currently available to investors in Real Estate Investment Trusts (REITs). A BDC must elect to be treated as a regulated investment company to qualify. The change would take effect for tax years beginning after December 31, 2026.
Who benefits
Individual investors who receive dividends from BDCs, particularly retail investors who use BDCs as a vehicle to access private credit and small business lending markets. BDC fund managers and sponsors, who may attract more capital if their dividend income becomes more tax-advantaged. Small and mid-sized businesses that borrow from BDCs, which could benefit if the tax change encourages more capital to flow into BDCs and lowers their cost of funding. Tax professionals and financial advisors who serve BDC investors.
Who is hurt
The federal government would collect less tax revenue from BDC dividend income, shifting the fiscal burden to other taxpayers or increasing the deficit. REIT investors currently hold a tax advantage over BDC investors; this bill would reduce that relative advantage, potentially making REITs marginally less competitive for investor dollars. Higher-income investors who are already subject to the existing Section 199A income thresholds and phase-outs may see limited benefit. Taxpayers broadly, to the extent the revenue loss is not offset.
Supporters argue
Supporters argue that BDCs and REITs serve structurally similar roles — both are pass-through vehicles that channel capital to specific sectors of the economy — and that there is no principled tax policy reason to treat their dividends differently. They contend that BDCs are a primary source of financing for small and mid-sized businesses that lack access to public capital markets, and that extending the 20% deduction would encourage more investment in these companies, supporting job creation and economic growth in underserved segments of the economy.
Opponents argue
Opponents argue that the Section 199A deduction was designed for active business owners, not passive investors in financial vehicles, and that expanding it to BDC interest dividends stretches the provision beyond its original intent. They contend that BDC interest income — derived from lending, not equity ownership — is economically more similar to bond interest, which does not qualify for the deduction, and that the change would primarily benefit wealthy investors who hold large BDC positions rather than the small businesses the bill claims to support.
Constitutional context
This bill falls squarely within Congress's taxing power under the Taxing and Spending Clause (Art. I, §8, cl. 1) and the Sixteenth Amendment, which authorizes an income tax without apportionment. As a revenue-related bill introduced in the House, it also satisfies the Origination Clause (Art. I, §7, cl. 1). No significant constitutional tension is present.
Checks and balances
Congress modifies the tax code; the IRS and Treasury Department implement regulations defining qualifying dividends and elections; taxpayers and BDCs may challenge specific IRS interpretations through the federal court system.
Historical precedent
The Section 199A deduction for qualified REIT dividends was established by the Tax Cuts and Jobs Act of 2017, and this bill would extend that same treatment to BDCs using the REIT provision as a direct template.