110th CONGRESS
1st Session
H. R. 578
To amend the Internal Revenue Code of 1986 to allow a credit against
income tax for qualified equity investments in certain small businesses.
IN THE HOUSE OF REPRESENTATIVES
January 19, 2007
Mr. POMEROY (for himself, Mr. MANZULLO, Mr. SOUDER, Mr. MOORE of Kansas,
and Mr. BARTLETT of Maryland) 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.
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 `Access to Capital for Entrepreneurs Act of
2007'.
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. 45O. EQUITY INVESTMENT IN SMALL BUSINESS TAX CREDIT.
`(a) General Rule- 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 25 percent
of the amount of each qualified equity investment made by the qualified
investor during the taxable year.
`(b) Credit Amount- For purposes of determining the small business tax credit
under subsection (a)--
`(1) LIMITATION PER QUALIFIED INVESTOR- The amount of qualified equity
investments made by the qualified investor during the taxable year shall
not exceed $500,000.
`(2) LIMITATION PER QUALIFIED SMALL BUSINESS- The amount of qualified
equity investments made by the qualified investor in a qualified small
business during the taxable year shall not exceed $250,000.
`(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).
`(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.
`(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.
`(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, 2011.'.
(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 (29),
by striking the period at the end of paragraph (30) and inserting `, and',
and by adding at the end the following new paragraph:
`(31) in the case of a taxpayer, the equity investment in small business
tax credit determined under section 45O(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. 45O. Equity investment in small business tax credit.'.
(d) Effective Date- The amendments made by this section shall apply to qualified
equity investments made after the date of the enactment of this Act.
END
