Tax treatment across private market structures is covered in depth in BIP Capital's Private Markets Primer. Read the Private Markets Primer. This chapter focuses on credit, where the tax question is unusually consequential because the income is large, regular, and ordinary.

INVESTOR TAKEAWAY
Private credit produces mostly ordinary income, so where a client holds it has a large impact on the after-tax result.

Why is the income ordinary?

A BDC structured as a regulated investment company passes its income through to shareholders without entity-level tax, provided it distributes at least 90% of its investment company taxable income. The income passed through is predominantly loan interest, which is taxed at the shareholder's ordinary marginal rate rather than at qualified dividend rates.

This is structural rather than incidental. The 90% distribution requirement means the income cannot be retained and compounded within the vehicle at the fund level; it must be distributed annually and taxed.

The Section 199A question, now settled

The House version of the 2025 tax legislation would have extended the Section 199A deduction, which currently applies to REIT dividends, to qualified BDC interest dividends. The enacted One Big Beautiful Bill Act did not include that provision.³⁰ REIT dividends still qualify for the deduction; BDC dividends do not. Advisors who encountered the proposal during the legislative process should confirm they are not working from the House draft. This remains an area to monitor for future legislation.

1099 versus K-1

BDCs, interval funds, and tender offer funds generally issue Form 1099-DIV: familiar, timely, and a single form. Partnership drawdown funds issue Schedule K-1s, which typically arrive after the standard filing season, often force extensions, create multi-state filing obligations, and may generate unrelated business taxable income for tax-exempt investors.

For many households, this is the most visible practical difference between structures, and it is one of the reasons evergreen vehicles have scaled within the wealth channel.

Return of capital

When a fund distributes more than it earns, the excess is treated as a return of capital. It is not current income: it reduces the shareholder's cost basis, which increases the eventual taxable gain. Year-end characterization can differ from what interim statements imply, and Rule 19a-1 notices are the documents that tell the truth about it. Chapter 7 covers the disclosure obligation; the point here is that the tax consequence follows the characterization, not the label on the quarterly statement.

Account location

Character drives location. Income-heavy, ordinary-rate structures are natural candidates for tax-advantaged accounts such as IRAs, where ordinary character is neutralized, subject to each custodian's rules for holding alternatives in retirement accounts and to any UBTI considerations in leveraged vehicles. Growth-oriented private equity, with returns weighted toward long-term appreciation, is better suited to taxable accounts than an income strategy.

Nothing in this chapter is tax advice, and client circumstances govern. Coordinate with the client's tax professional.

For an ordinary-income asset, the account it is held in can matter as much as the fund selected.

Key takeaway

Private credit income is predominantly ordinary and is reported annually by regulatory requirement. Decide on the account location at the same time as fund selection, rather than afterward, and set the client's expectation that year-end tax characterization may differ from the quarterly statements.

Sources

Proskauer Tax Talks, analysis of the enacted One Big Beautiful Bill Act, July 2025; confirm against enrolled statute text at congress.gov. https://www.proskauertaxtalks.com/2025/07/president-trump-signs-one-big-beautiful-bill-act-into-law/

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