Angel Tax Credit Act

II 116TH CONGRESS 2D SESSION S. 4637 To amend the Internal Revenue Code of 1986 to allow a credit against income tax for equity investments by angel investors. IN THE SENATE OF THE UNITED STATES SEPTEMBER 22, 2020 Mr. MURPHY introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to allow a credit against income tax for equity investments by angel investors. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Angel Tax Credit Act’’. 4 SEC. 2. ANGEL INVESTMENT TAX CREDIT. 5 (a) IN GENERAL.—Subpart B of part IV of sub- 6 chapter A of chapter 1 of the Internal Revenue Code of 7 1986 is amended by adding at the end the following new 8 section: 9 VerDate Sep 11 2014 04:04 Oct 07, 2020 Jkt 019200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 2 •S 4637 IS ‘‘SEC. 30E. ANGEL INVESTMENT TAX CREDIT. 1 ‘‘(a) ALLOWANCE OF CREDIT.—There shall be al- 2 lowed as a credit against the tax imposed by this chapter 3 for the taxable year an amount equal to 25 percent of the 4 qualified equity investments made by a qualified investor 5 during the taxable year. 6 ‘‘(b) LIMITATION.—The amount of the credit allowed 7 under subsection (a) for any taxpayer for any taxable year 8 shall not exceed $250,000. 9 ‘‘(c) QUALIFIED EQUITY INVESTMENT.—For pur- 10 poses of this section— 11 ‘‘(1) IN GENERAL.—The term ‘qualified equity 12 investment’ means any equity investment in a quali- 13 fying business entity if— 14 ‘‘(A) the aggregate amount of such invest- 15 ments made by the taxpayer during the taxable 16 year is $25,000 or more, 17 ‘‘(B) such investment is acquired by the 18 taxpayer at its original issue (directly or 19 through an underwriter) solely in exchange for 20 cash, and 21 ‘‘(C) such investment is designated for 22 purposes of this section by the qualifying busi- 23 ness entity. 24 ‘‘(2) EQUITY INVESTMENT.—The term ‘equity 25 investment’ means— 26 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 3 •S 4637 IS ‘‘(A) any form of equity, including a gen- 1 eral or limited partnership interest, common 2 stock, preferred stock (other than nonqualified 3 preferred stock as defined in section 351(g)(2)), 4 with or without voting rights, without regard to 5 seniority position and whether or not convert- 6 ible into common stock or any form of subordi- 7 nate or convertible debt, or both, with warrants 8 or other means of equity conversion, and 9 ‘‘(B) any capital interest in an entity 10 which is a partnership. 11 ‘‘(3) REDEMPTIONS.—A rule similar to the rule 12 of section 1202(c)(3) shall apply for purposes of this 13 subsection. 14 ‘‘(d) QUALIFYING BUSINESS ENTITY.—For purposes 15 of this section— 16 ‘‘(1) IN GENERAL.—The term ‘qualifying busi- 17 ness entity’ means any domestic corporation or part- 18 nership if such corporation or partnership— 19 ‘‘(A) has its headquarters in the United 20 States, 21 ‘‘(B) has gross revenues for the taxable 22 year preceding the date of the qualified equity 23 investment of less than $1,000,000, 24 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 4 •S 4637 IS ‘‘(C) employs less than 25 full-time equiva- 1 lent employees as of the date of such invest- 2 ment, 3 ‘‘(D) has been in existence for less than 7 4 years as of the date of the qualified equity in- 5 vestment, 6 ‘‘(E) has more than 50 percent of the em- 7 ployees performing substantially all of their 8 services in the United States as of the date of 9 such investment, 10 ‘‘(F) is engaged in a high technology trade 11 or business related to— 12 ‘‘(i) advanced materials, nanotechnol- 13 ogy, or precision manufacturing, 14 ‘‘(ii) aerospace, aeronautics, or de- 15 fense, 16 ‘‘(iii) biotechnology or pharma- 17 ceuticals, 18 ‘‘(iv) electronics, semiconductors, soft- 19 ware, or computer technology, 20 ‘‘(v) energy, environment, or clean 21 technologies, 22 ‘‘(vi) forest products or agriculture, 23 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 5 •S 4637 IS ‘‘(vii) information technology, commu- 1 nication technology, digital media, or 2 photonics, 3 ‘‘(viii) life sciences or medical 4 sciences, 5 ‘‘(ix) marine technology or aqua- 6 culture, 7 ‘‘(x) transportation, or 8 ‘‘(xi) any other high technology trade 9 or business, as determined by the Sec- 10 retary of the Treasury, and 11 ‘‘(G) has equity investments designated for 12 purposes of this paragraph. 13 ‘‘(2) DESIGNATION OF EQUITY INVEST- 14 MENTS.—For purposes of paragraph (1)(G), an eq- 15 uity investment shall not be treated as designated if 16 such designation would result in the aggregate 17 amount which may be taken into account under this 18 section with respect to equity investments in such 19 corporation or partnership exceeds $2,000,000, tak- 20 ing into account the total amount of all qualified eq- 21 uity investments made by all taxpayers for the tax- 22 able year and all preceding taxable years. 23 ‘‘(e) QUALIFIED INVESTOR.—For purposes of this 24 section— 25 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 6 •S 4637 IS ‘‘(1) IN GENERAL.—The term ‘qualified inves- 1 tor’ means an accredited investor, as defined by the 2 Securities and Exchange Commission. 3 ‘‘(2) EXCLUSION.—The term ‘qualified investor’ 4 does not include— 5 ‘‘(A) a person controlling at least 50 per- 6 cent of the qualifying business entity, 7 ‘‘(B) any venture capital fund (within the 8 meaning of section 203(l) of the Investment 9 Advisers Act of 1940 (15 U.S.C. 80b–3(l))), or 10 ‘‘(C) any bank, savings association, loan 11 association, trust company, insurance company, 12 or similar entity whose business activities in- 13 clude making similar investments to invest- 14 ments of a venture capital fund (as so defined). 15 ‘‘(f) NATIONAL LIMITATION ON AMOUNT OF INVEST- 16 MENTS DESIGNATED.— 17 ‘‘(1) IN GENERAL.—There is an angel invest- 18 ment tax credit limitation of $500,000,000 for each 19 of calendar years 2020 through 2024. 20 ‘‘(2) ALLOCATION OF LIMITATION.—The limita- 21 tion under paragraph (1) shall be allocated by the 22 Secretary among qualified business entities selected 23 by the Secretary. 24 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 7 •S 4637 IS ‘‘(3) CARRYOVER OF UNUSED LIMITATION.—If 1 the angel investment tax credit limitation for any 2 calendar year exceeds the aggregate amount allo- 3 cated under paragraph (2) for such year, such limi- 4 tation for the succeeding calendar year shall be in- 5 creased by the amount of such excess. No amount 6 may be carried under the preceding sentence to any 7 calendar year after 2029. 8 ‘‘(g) APPLICATION WITH OTHER CREDITS.— 9 ‘‘(1) BUSINESS CREDIT TREATED AS PART OF 10 GENERAL BUSINESS CREDIT.—Except as provided in 11 paragraph (2), the credit which would be allowed 12 under subsection (a) for any taxable year (deter- 13 mined without regard to this subsection) shall be 14 treated as a credit listed in section 38(b) for such 15 taxable year (and not allowed under subsection (a)). 16 ‘‘(2) PERSONAL CREDIT.— 17 ‘‘(A) IN GENERAL.—In the case of an indi- 18 vidual who elects the application of this para- 19 graph, for purposes of this title, the credit al- 20 lowed under subsection (a) for any taxable year 21 (determined after application of paragraph (1)) 22 shall be treated as a credit allowable under sub- 23 part A for such taxable year. 24 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 8 •S 4637 IS ‘‘(B) CARRYFORWARD OF UNUSED CRED- 1 IT.—If the credit allowable under subsection (a) 2 by reason of subparagraph (A) exceeds the limi- 3 tation imposed by section 26(a) for such taxable 4 year, reduced by the sum of the credits allow- 5 able under subpart A (other than this section) 6 for such taxable year, such excess shall be car- 7 ried to each of the succeeding 20 taxable years 8 to the extent that such unused credit may not 9 be taken into account under subsection (a) by 10 reason of subparagraph (A) for a prior taxable 11 year because of such limitation. 12 ‘‘(h) SPECIAL RULES.— 13 ‘‘(1) RELATED PARTIES.—For purposes of this 14 section— 15 ‘‘(A) IN GENERAL.—All related persons 16 shall be treated as 1 person. 17 ‘‘(B) RELATED PERSONS.—A person shall 18 be treated as related to another person if— 19 ‘‘(i) the relationship between such per- 20 sons would result in the disallowance of 21 losses under section 267 or 707(b), or 22 ‘‘(ii) for purposes of subsection (e), 23 the person is an individual who is the 24 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 9 •S 4637 IS spouse of a lineal descendant of an indi- 1 vidual described in subsection (e)(2)(A). 2 ‘‘(2) BASIS.—For purposes of this subtitle, the 3 basis of any investment with respect to which a cred- 4 it is allowable under this section shall be reduced by 5 the amount of such credit so allowed. This sub- 6 section shall not apply for purposes of sections 1202 7 and 1397B. 8 ‘‘(3) RECAPTURE.—The Secretary shall, by reg- 9 ulations, provide for recapturing the benefit of any 10 credit allowable under subsection (a) with respect to 11 any qualified equity investment which is held by the 12 taxpayer less than 3 years, except that no benefit 13 shall be recaptured in the case of— 14 ‘‘(A) transfer of such investment by reason 15 of the death of the taxpayer, 16 ‘‘(B) transfer between spouses, 17 ‘‘(C) transfer incident to the divorce (as 18 defined in section 1041) of such taxpayer, or 19 ‘‘(D) a transaction to which section 381(a) 20 applies (relating to certain acquisitions of the 21 assets of one corporation by another corpora- 22 tion). 23 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 10 •S 4637 IS ‘‘(i) REGULATIONS.—The Secretary shall prescribe 1 such regulations as may be appropriate to carry out this 2 section, including regulations— 3 ‘‘(1) which prevent the abuse of the purposes of 4 this section, 5 ‘‘(2) which impose appropriate reporting re- 6 quirements, and 7 ‘‘(3) which apply the provisions of this section 8 to newly formed entities.’’. 9 (b) CREDIT MADE PART OF GENERAL BUSINESS 10 CREDIT.—Subsection (b) of section 38 of the Internal 11 Revenue Code of 1986 is amended— 12 (1) in paragraph (32), by striking ‘‘plus’’; 13 (2) in paragraph (33), by striking the period at 14 the end and inserting ‘‘, plus’’; and 15 (3) by adding at the end the following new 16 paragraph: 17 ‘‘(34) the portion of the angel investment tax 18 credit to which section 30E(g)(1) applies.’’. 19 (c) CONFORMING AMENDMENTS.— 20 (1) Section 1016(a) of the Internal Revenue 21 Code of 1986 is amended by striking ‘‘and’’ at the 22 end of paragraph (37), by striking the period at the 23 end of paragraph (38) and inserting ‘‘, and’’, and by 24 VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS 11 •S 4637 IS inserting after paragraph (38) the following new 1 paragraph: 2 ‘‘(39) to the extent provided in section 3 30E(h)(2).’’. 4 (2) The table of sections for subpart B of part 5 IV of subchapter A of chapter 1 of the Internal Rev- 6 enue Code of 1986 is amended by adding at the end 7 the following new item: 8 ‘‘Sec. 30E. Angel investment tax credit.’’. (d) EFFECTIVE DATE.—The amendments made by 9 this section shall apply to investments made after Decem- 10 ber 31, 2019, in taxable years ending after such date. 11 Æ VerDate Sep 11 2014 19:32 Oct 05, 2020 Jkt 019200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6301 E:\BILLS\S4637.IS S4637 dlhill on DSK120RN23PROD with BILLS