Access to Capital for Entrepreneurs Act of 2006 - Amends the Internal Revenue Code to allow certain investors a business tax credit for 25% of equity investments made in small businesses, up to an annual limit of $500,000. Terminates such credit after 2011.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5198 Introduced in House (IH)]
109th CONGRESS
2d Session
H. R. 5198
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
April 26, 2006
Mr. Manzullo (for himself and Mr. Pomeroy) 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 2006''.
SEC. 2. EQUITY INVESTMENT IN SMALL BUSINESS TAX CREDIT.
(a) In General.--Subpart D of part IV of subchapter A of chapter 1
(relating to business related credits) is amended by adding at the end
the following new section:
``SEC. 45N. 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).
``(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,
2011.''.
(b) Credit Made Part of General Business Credit.--Subsection (b) of
section 38 is amended by striking ``and'' at the end of paragraph (25),
by striking the period at the end of paragraph (26) and inserting ``,
and'', and by adding at the end the following new paragraph:
``(27) in the case of a taxpayer, the equity investment in
small business tax credit determined under section 45N(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. 45N. 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, 2006, in
taxable years beginning after such date.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
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