[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5864 Introduced in House (IH)]

111th CONGRESS
  2d Session
                                H. R. 5864

 To amend the Internal Revenue Code of 1986 to allow a credit against 
     income tax for qualified equity investments in certain small 
                  businesses, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 26, 2010

  Mr. Sestak introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to allow a credit against 
     income tax for qualified equity investments in certain small 
                  businesses, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Innovation through 
Investment Act of 2010''.

SEC. 2. EQUITY INVESTMENT IN SMALL BUSINESS TAX CREDIT.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to business related 
credits) is amended by adding at the end the following new section:

``SEC. 45R. EQUITY INVESTMENT IN SMALL BUSINESS TAX CREDIT.

    ``(a) General Rule.--
            ``(1) In general.--For purposes of section 38, in the case 
        of a qualified investor, the equity investment in small 
        business tax credit determined under this section for the 
        taxable year is an amount equal to 30 percent of the amount of 
        each qualified equity investment made by the qualified investor 
        during the taxable year.
            ``(2) Years in which credit allowable.--The credit under 
        paragraph (1) shall be allowable as follows:
                    ``(A) Fifty percent of such credit shall be allowed 
                in the taxable year in which the qualified equity 
                investment is made.
                    ``(B) Twenty-five percent of such credit shall be 
                allowed in the taxable year after the taxable described 
                in subparagraph (A).
                    ``(C) Twenty-five percent of such credit shall be 
                allowed in the second taxable year after the taxable 
                described in subparagraph (A).
    ``(b) Credit Amount.--For purposes of determining the small 
business tax credit under subsection (a), the amount of qualified 
equity investments made by the qualified investor during the taxable 
year shall not exceed $500,000, reduced by so much of $250,000 that is 
not an investment in--
            ``(1) small business concerns in manufacturing and 
        biotechnology,
            ``(2) minority and women-owned small businesses, or
            ``(3) a qualified HUBzone small business concern (as 
        defined in section 3(p)(5) of the Small Business Act (15 U.S.C. 
        632(p)(5))).
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified investor.--The term `qualified investor' 
        means--
                    ``(A) an individual who qualifies as an accredited 
                investor under rules and regulations prescribed by the 
                Commissioner of the Securities and Exchange Commission, 
                or
                    ``(B) a partnership with respect to which all of 
                the partners are individuals who qualify as accredited 
                investors under rules and regulations prescribed by the 
                Commissioner of the Securities and Exchange Commission.
            ``(2) Qualified equity investment.--The term `qualified 
        equity investment' means the transfer of cash or cash 
        equivalents in exchange for stock or capital interest in a 
        qualified small business.
            ``(3) Qualified small business.--The term `qualified small 
        business' means a private small business concern (within the 
        meaning of section 3 of the Small Business Act)--
                    ``(A) that meets the applicable size standard (as 
                in effect on January 1, 2005) established by the 
                Administrator of the Small Business Administration 
                pursuant to subsection (a)(2) of such section, and
                    ``(B) has its principal place of business in the 
                United States.
        For purposes of this section, all members of the same 
        controlled group of corporations (within the meaning of section 
        267(f)) and all persons under common control (within the 
        meaning of section 52(b)) shall be treated as 1 qualified small 
        business.
    ``(d) Active Business Requirement.--
            ``(1) In general.--Holding stock in a qualified small 
        business shall not be treated as a qualified equity investment 
        unless, during substantially all of the qualified investor's 
        holding period for such stock, such qualified small business 
        meets the active business requirements of paragraph (2).
            ``(2) Requirements.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the requirements of this paragraph are met by a 
                qualified small business for any period if during such 
                period at least 80 percent (by value) of the assets of 
                such qualified small business are used by such 
                qualified small business in the active conduct of 1 or 
                more qualified trades or businesses.
                    ``(B) Special rule for certain activities.--For 
                purposes of subparagraph (A), if, in connection with 
                any future qualified trade or business, a qualified 
                small business is engaged in--
                            ``(i) start-up activities described in 
                        section 195(c)(1)(A),
                            ``(ii) activities resulting in the payment 
                        or incurring of expenditures which may be 
                        treated as research and experimental 
                        expenditures under section 174, or
                            ``(iii) activities with respect to in-house 
                        research expenses described in section 
                        41(b)(4),
                assets used in such activities shall be treated as used 
                in the active conduct of a qualified trade or business. 
                Any determination under this subparagraph shall be made 
                without regard to whether a qualified small business 
                has any gross income from such activities at the time 
                of the determination.
                    ``(C) Qualified trade or business.--For purposes of 
                this paragraph, the term `qualified trade or business' 
                is as defined in section 1202(e)(3).
                    ``(D) Stock in other entities.--
                            ``(i) Look-thru in case of subsidiaries.--
                        For purposes of this subsection, stock and debt 
                        in any subsidiary entity shall be disregarded 
                        and the parent qualified small business shall 
                        be deemed to own its ratable share of the 
                        subsidiary's assets, and to conduct its ratable 
                        share of the subsidiary's activities.
                            ``(ii) Portfolio stock or securities.--A 
                        qualified small business shall be treated as 
                        failing to meet the requirements of 
                        subparagraph (A) for any period during which 
                        more than 10 percent of the value of its assets 
                        (in excess of liabilities) consists of stock or 
                        securities in other entities which are not 
                        subsidiaries of such qualified small business 
                        other than assets described in subparagraph 
                        (E)).
                            ``(iii) Subsidiary.--For purposes of this 
                        subparagraph, an entity shall be considered a 
                        subsidiary if the parent owns more than 50 
                        percent of the combined voting power of all 
                        classes of stock entitled to vote, or more than 
                        50 percent in value of all outstanding stock, 
                        of such entity.
                    ``(E) Working capital.--For purposes of 
                subparagraph (A), any assets which--
                            ``(i) are held as a part of the reasonably 
                        required working capital needs of a qualified 
                        trade or business of the qualified small 
                        business, or
                            ``(ii) are held for investment and are 
                        reasonably expected to be used within 2 years 
                        to finance research and experimentation in a 
                        qualified trade or business or increases in 
                        working capital needs of a qualified trade or 
                        business,
                shall be treated as used in the active conduct of a 
                qualified trade or business. For periods after the 
                qualified small business has been in existence for at 
                least 2 years, in no event may more than 50 percent of 
                the assets of the qualified small business qualify as 
                used in the active conduct of a qualified trade or 
                business by reason of this subparagraph.
                    ``(F) Maximum real estate holdings.--A qualified 
                small business shall not be treated as meeting the 
                requirements of subparagraph (A) for any period during 
                which more than 10 percent of the total value of its 
                assets consists of real property which is not used in 
                the active conduct of a qualified trade or business. 
                For purposes of the preceding sentence, the ownership 
                of, dealing in, or renting of real property shall not 
                be treated as the active conduct of a qualified trade 
                or business.
                    ``(G) Computer software royalties.--For purposes of 
                subparagraph (A), rights to computer software which 
                produces active business computer software royalties 
                (within the meaning of section 543(d)(1)) shall be 
                treated as an asset used in the active conduct of a 
                trade or business.
    ``(e) Certain Purchases by Qualified Investor of Its Own Stock.--
            ``(1) Redemptions from qualified investor or related 
        person.--Stock acquired by the qualified investor shall not be 
        treated as a qualified equity investment if, at any time during 
        the 4-year period beginning on the date 2 years before the 
        issuance of such stock, the qualified small business issuing 
        such stock purchased (directly or indirectly) any of its stock 
        from the qualified investor or from a person related (within 
        the meaning of section 267(b) or 707(b)) to the qualified 
        investor.
            ``(2) Significant redemptions.--Stock issued by a qualified 
        small business to a qualified investor shall not be treated as 
        a qualified equity investment if, during the 2-year period 
        beginning on the date 1 year before the issuance of such stock, 
        such qualified small business made 1 or more purchases of its 
        stock with an aggregate value (as of the time of the respective 
        purchases) exceeding 5 percent of the aggregate value of all of 
        its stock as of the beginning of such 2-year period.
            ``(3) Treatment of certain transactions.--If any 
        transaction is treated under section 304(a) as a distribution 
        in redemption of the stock of any qualified small business, for 
        purposes of subparagraphs (A) and (B), such qualified small 
        business shall be treated as purchasing an amount of its stock 
        equal to the amount treated as such a distribution under 
        section 304(a).
    ``(f) Special Rule for Related Parties.--
            ``(1) In general.--No credit shall be allowed under 
        subsection (a) with respect to a qualified equity investment 
        made by a qualified investor in a qualified small business that 
        is a related party to the qualified investor.
            ``(2) Related party.--For purposes of paragraph (1), a 
        person is a related party with respect to another person if 
        such person bears a relationship to such other person described 
        in section 267(b) or 707(b), or if such persons are engaged in 
        trades or businesses under common control (within the meaning 
        of subsections (a) and (b) of section 52).
    ``(g) Recapture of Credit in Certain Cases.--
            ``(1) In general.--If, at any time during the 3-year period 
        beginning on the date that the qualified equity investment is 
        made by the qualified investor, there is a recapture event with 
        respect to such investment, then the tax imposed by this 
        chapter for the taxable year in which such event occurs shall 
        be increased by the credit recapture amount.
            ``(2) Credit recapture amount.--For purposes of paragraph 
        (1), the credit recapture amount is an amount equal to the sum 
        of--
                    ``(A) the aggregate decrease in the credits allowed 
                to the taxpayer under section 38 for all prior taxable 
                years which would have resulted if no credit had been 
                determined under this section with respect to such 
                investment, plus
                    ``(B) interest at the underpayment rate established 
                under section 6621 on the amount determined under 
                subparagraph (A) for each prior taxable year for the 
                period beginning on the due date for filing the return 
                for the prior taxable year involved.
        No deduction shall be allowed under this chapter for interest 
        described in subparagraph (B).
            ``(3) Recapture event.--For purposes of paragraph (1), 
        there is a recapture event with respect to a qualified equity 
        investment if such investment is sold, transferred, or 
        exchanged by the qualified investor, but only to the extent 
        that such sale, transfer, or exchange is not the direct result 
        of a complete or partial liquidation of the qualified small 
        business in which such qualified equity investment is made.
            ``(4) Special rules.--
                    ``(A) Tax benefit rule.--The tax for the taxable 
                year shall be increased under paragraph (1) only with 
                respect to credits allowed by reason of this section 
                which were used to reduce tax liability. In the case of 
                credits not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 shall be 
                appropriately adjusted.
                    ``(B) No credits against tax.--Any increase in tax 
                under this subsection shall not be treated as a tax 
                imposed by this chapter for purposes of determining the 
                amount of any credit under this chapter or for purposes 
                of section 55.
    ``(h) Basis Reduction.--The basis of any qualified equity 
investment shall be reduced by the amount of any credit determined 
under this section with respect to such investment.
    ``(i) Regulations.--
            ``(1) In general.--The Secretary shall prescribe such 
        regulations as necessary to carry out the provisions of this 
        section.
            ``(2) Certification of qualified equity investment.--Such 
        regulations shall require that a qualified investor--
                    ``(A) certify that the small business in which the 
                equity investment is made meets the requirements 
                described in subsection (c)(3), and
                    ``(B) include the name, address, and taxpayer 
                identification number of such small business on the 
                return claiming the credit under subsection (a).
    ``(j) Termination.--This section shall not apply to qualified 
equity investments made in taxable years beginning after December 31, 
2016.''.
    (b) Credit Made Part of General Business Credit.--Subsection (b) of 
section 38 of such Code is amended by striking ``and'' at the end of 
paragraph (34), by striking the period at the end of paragraph (35) and 
inserting ``, and'', and by adding at the end the following new 
paragraph:
            ``(36) in the case of a taxpayer, the equity investment in 
        small business tax credit determined under section 45R(a).''.
    (c) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 of such Code is amended by adding 
at the end the following new item:

``Sec. 45R. Equity investment in small business tax credit.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to qualified equity investments made after December 31, 2010, in 
taxable years beginning after such date.

SEC. 3. ADMINISTRATOR OF SMALL BUSINESS ADMINISTRATION.

    (a) Data Collection.--The Secretary of the Treasury shall provide 
to the Administrator of the Small Business Administration any data--
            (1) available to the Secretary on the implementation and 
        use of the equity investment in small business tax credit 
        determined under section 45R of the Internal Revenue Code of 
        1986; and
            (2) requested by the Administrator for analysis purposes.
    (b) Report.--Not later than 1 year after the date of enactment of 
this Act and annually thereafter during the 5-year period beginning on 
such date, the Administrator of the Small Business Administration shall 
submit to Congress a report describing the implementation and use of 
the equity investment in small business tax credit determined under 
section 45R of the Internal Revenue Code of 1986.
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