New Bill Expands REIT Pass-Through Deduction to BDCs

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.”