Bill gives fair and equitable treatment to shareholders in small and medium size American businesses
WASHINGTON, D.C. (April 7, 2020) – The Small Business Investor Alliance (SBIA), the leading association for lower middle market private equity and its investors, today announced that legislation has been introduced by Rep. Brendan Boyle (D-PA) and Rep. Jodey Arrington (R-TX). The bipartisan bill will ensure that shareholders in Business Development Companies (BDCs), a vehicle that invests in small- and medium-sized American businesses, receive the same tax treatment as others.
“The Small Business Investor Tax Parity Act levels the playing field for middle income families and seniors while supporting small businesses with much needed capital. I am excited to work with my colleague, Congressman Boyle, on this win-win solution to address the disparity in the tax code and its adverse impact on main street America,” said Rep. Arrington.
“This legislation would immediately put money back in individual taxpayers’ pockets – in other words, a direct stimulus – while supporting small businesses when they need it most,” said SBIA President Brett Palmer.
- BDCs are operationally similar to S-Corp Banks and BDC retail shareholders have a profile similar to REIT retail shareholders. For this reason, income from BDC and REIT investments have historically been taxed in the same way as those entities.
- By statute, the vast majority of BDC investments must be in U.S. businesses only. BDCs are invested in approximately 3,000 small- and medium-sized business across the country.
- Under the new law, Sec. 199A of the Code generally allows taxpayers a deduction up to 20% of total qualified business income (“QBI”) from a domestic flow-through entity. This 20% deduction was extended to REITS, S-Corp Banks and most other pass-through entity shareholders, with the exception of RICs.
- This bill would rectify this situation and ensure that BDC investors continue to receive the same tax treatment as similar entities.
- In 1980, when the U.S. was dealing with high unemployment and an energy crisis, Congress wanted to boost economic growth by increasing access to capital for American businesses. This was a bi-partisan effort.
- The BDC structure is one of the most transparent, heavily regulated forms of middle market lending in the capital markets.
- BDCs provide funding to middle market companies that are not yet large enough to access broad capital markets, but require more capital for growth than banks can provide.
- The BDC structure also offers retail or Main Street investors the opportunity to invest in smaller U.S. companies that otherwise only high net worth investors can access. This helps to close both the investment opportunity gap and the capital gap.
- BDCs have provided good returns to investors compared to traditional fixed income investments.
- SEC Chairman Jay Clayton told The Wall Street Journal that individual investors need more access to the private markets. In his speech in Nashville, he also said that companies located in the center of the U.S. need more access to capital.
- By law, BDCs must invest at least 70% of their assets in private and small-cap U.S. businesses, creating jobs and helping fill a void in the capital markets. In actuality, 2% of BDC investments are made in U.S. entities.
- BDCs are currently held by the following types of investors:
- 50% Individuals
- 30% IRAs
- 20% Institutions
About the Small Business Investor Alliance (SBIA)
The Small Business Investor Alliance (SBIA) is the premier organization of lower middle market private equity funds and investors. SBIA works on behalf of its members as a tireless advocate for policies that promote competitive markets and robust domestic investment for growing small businesses. SBIA has been playing a pivotal role in promoting the growth and vitality of the private equity industry for over 60 years. For more information, visit www.SBIA.org or call (202) 628-5055.