2014 -- H 7665

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LC004583

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2014

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A N   A C T

RELATING TO TAXATION -- TAX INCENTIVES FOR CAPITAL INVESTMENT IN

SMALL BUSINESSES

     

     Introduced By: Representatives Finn, Kennedy, Marshall, Keable, and Hearn

     Date Introduced: February 27, 2014

     Referred To: House Finance

     It is enacted by the General Assembly as follows:

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     SECTION 1. Sections 44-43-1, 44-43-2, 44-43-3 and 44-43-5 of the General Laws in

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Chapter 44-43 entitled "Tax Incentives for Capital Investment in Small Businesses" are hereby

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amended to read as follows:

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     44-43-1. Definitions. -- For the purpose of this chapter: (1) "Average annual gross

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revenue" means the average of the amounts received or accrued by a qualifying business entity

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determined on an annualized basis from the sale of goods or services prior to diminution by the

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cost of those sales or services. The determination is limited to amounts, if any, received or

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accrued during the four (4) taxable years of the business entity, or a lesser period as may be

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applicable, immediately preceding the taxable year during which the entity applied to the

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department for certification as a qualifying business entity.

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     (2) "Certified venture capital partnership" means any:

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     (a) "Venture capital fund" as defined by the United States Securities and Exchange

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Commission; or

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     (b) partnership Partnership formed under the laws of Rhode Island that:

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     (i) Has at least three (3) partners each of whom has contributed at least five thousand

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dollars ($5,000) and who have contributed in the aggregate at least two hundred fifty thousand

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dollars ($250,000) to the partnership;

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     (ii) Employs a professional manager who is an individual with prior experience managing

 

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venture capital funds;

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     (iii) Is organized and operated to invest at least ninety percent (90%) of the amounts

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contributed to its capital in qualifying activities and is registered or exempt from registration

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under the securities laws of Rhode Island;

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     (iv) Has bonding of its employees to fully cover all funds received from partners;

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     (v)(iv) Has filed with the department information as may be requested describing its

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organization, operation, and programs and has received certification and annual recertification

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from the department pursuant to rules and regulations promulgated by the department, that its

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organization, operation, and proposed programs comply with the requirements of this chapter;

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and

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     (vi)(v) Has not violated the requirements prescribed in this chapter, or the conditions and

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requirements imposed by the department.

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     (3) "Certified angel investor" means a taxpayer who is an "accredited investor" as defined

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by the United States Securities and Exchange Commission that:

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     (i) Has filed with the department information as may be requested describing its

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organization, operation, and programs and has received certification and annual recertification

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from the department pursuant to rules and regulations promulgated by the department, that its

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organization, operation, and proposed programs comply with the requirements of this chapter;

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and

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     (ii) Has not violated the requirements prescribed in this chapter, or the conditions and

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requirements imposed by the department.

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     (3)(4) "Department" means the Rhode Island economic development corporation.

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     (4)(5) "Entrepreneur" means any individual in the employ on a full-time basis of a

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qualifying business entity who owns an interest in the entity equal to at least five percent (5%) in

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value of the entity.

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     (5)(6) "Qualifying activities" means to provide capital:

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     (i) To invest in one or more qualifying business entities whose principal office and the

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majority of whose assets are located in Rhode Island;

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     (ii) To invest a portion of its funds, as stated in this section, in one or more qualifying

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business entities whose principal office is located outside of Rhode Island and who have entered

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into binding commitments to establish, expand, or increase its operations at a regular place of

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business in Rhode Island; or

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     (iii) To invest a portion of its funds, as stated in this section, in research and experimental

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expenditures (as defined in 26 U.S.C. section 174) conducted in Rhode Island to assist those

 

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qualifying business entities in which the partnership has or would be able to invest. A certified

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venture capital partnership commencing with its first year of operation, or after there has been a

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forty percent (40%) change in ownership or the admission of new partners whose contributions

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have increased the capital of the partnership by at least sixty-five percent (65%), may invest in

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the aggregate up to the following total portion of its investments made during each year in the

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types of investments described in subdivisions (6)(ii) and (6)(iii) of this section.

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     Year Portion

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1 50%

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2 40%

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3 30%

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4 30%

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5 30%

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6 and subsequent years 20%

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      (6)(7) "Qualifying business entity" means any corporation, partnership or other business

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entity that meets all of the following criteria and the predecessors and successors of any

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corporation, partnership or other business entity:

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     (i) Whose average annual gross revenue is less than two million five hundred thousand

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dollars ($2,500,000);

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     (ii) Which has been in business for less than four (4) years; and

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     (iii) Which will expend an amount which is not less than the amounts allowed as a

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deduction under section 44-43-2 to establish, expand or increase its operations at a regular place

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of business in Rhode Island or to purchase the interest of one or more prior owners of the entity if

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the entity has entered into binding commitments to expend an amount not less than the amount

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paid to establish, expand or increase the entity's operations at a regular place of business in Rhode

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Island; and

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     (iv) Has received certification and annual recertification from the department, pursuant to

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rules and regulations promulgated by the department, that the preceding requirements have been

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satisfied.

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     (7)(8) "Qualifying investment" means that portion, determined based on a taxpayer's

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interest in a certified venture capital partnership under 26 U.S.C. section 702(a)(8), of the

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taxpayer's investment in the partnership that is invested by the partnership in qualifying activities

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during the taxpayer's taxable year.

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     44-43-2. Deduction or modification. -- (a) In the year in which a taxpayer first makes a

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qualifying investment in a certified venture capital partnership or the year in which an

 

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entrepreneur or certified angel investor first makes an investment in a qualifying entity, the

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taxpayer or certified angel investor or the entrepreneur shall be allowed:

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      (1) A deduction for purposes of computing net income or net worth in accordance with

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chapter 11 of this title; or

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      (2) A deduction from gross earnings for purposes of computing the public service

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corporation tax in accordance with chapter 13 of this title; or

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      (3) A deduction for the purposes of computing net income in accordance with chapter 14

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of this title; or

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      (4) A deduction for the purposes of computing gross premiums in accordance with

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chapter 17 of this title; or

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      (5) A modification reducing federal adjusted gross income in accordance with chapter 30

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of this title.

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      (b) The deduction or modification shall be in an amount equal to the taxpayer's

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qualifying investment in a certified venture capital partnership or an entrepreneur's or certified

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angel investor's investment in a qualifying business entity and shall be measured at the year end

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of the certified venture capital partnership, the year end of the qualifying business entity, or the

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year end of the investing taxpayer, whichever comes first.

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     44-43-3. Wage credit. -- (a) There shall be allocated among the entrepreneurs of a

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qualifying business entity (based on the ratio of each entrepreneur's interest in the entity to the

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total interest held by all entrepreneurs) with respect to each entity on an annual basis commencing

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with the calendar year in which the entity first qualified as a qualifying business entity a credit

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against the tax imposed by chapter 30 of this title. The credit shall be equal to three percent (3%)

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of the wages (as defined in 26 U.S.C. section 3121(a)) in excess of fifty thousand dollars

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($50,000) one hundred thousand dollars ($100,000) paid during each calendar year to employees

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of the entity; provided, that there shall be excluded from the amount on which the credit is based

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any wages:

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      (1) Paid to any owner of the entity;

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      (2) Paid more than five (5) years after the entity commenced business or five (5) years

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after the purchase of the business entity by new owners, whichever occurs later; or

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      (3) Paid to employees who are not principally employed in Rhode Island and whose

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wages are not subject to withholding pursuant to chapter 30 of this title.

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      (b) The credit authorized by this section shall cease in the taxable year next following

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after the taxable year in which the average annual gross revenue of the business entity equals or

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exceeds one million five hundred thousand dollars ($1,500,000) three million dollars

 

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($3,000,000).

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     44-43-5. Exemption. -- To the extent that a long-term capital gain was included in the

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calculations of taxes imposed by chapters 11, 13, 14 or 30 of this title, that long-term capital gain

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shall be excluded. The long-term capital gain is the long-term capital gain as defined in 26 U.S.C.

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section 1222(3) which is:

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      (1) Recognized by a partner in a certified venture capital partnership from the sale or

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exchange of an interest in the partnership; or

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      (2) A partner's distributive share (in a certified venture capital partnership) of any long-

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term capital gain recognized by the partnership from the sale or exchange of an interest in any

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entity which at the time the interest was acquired was a qualifying business entity; or

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     (3) The long-term capital gain recognized by a certified angel investor from the sale or

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exchange of an interest in any entity which at the time the interest was acquired was a qualifying

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business entity; or

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      (3)(4) The long-term capital gain recognized by an entrepreneur from the sale or

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exchange of an interest in an entity, which at the time the interest was acquired was a qualifying

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business entity.

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     SECTION 2. This act shall take effect upon passage.

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N   A C T

RELATING TO TAXATION -- TAX INCENTIVES FOR CAPITAL INVESTMENT IN

SMALL BUSINESSES

***

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     This act would modify the law regarding tax incentives for capital investments in small

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businesses by including certified angel investors and venture capital funds to the statute. This act

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would also eliminate the requirement for private equity or venture capital funds to be bonded, and

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would also increase the amounts utilized to calculate the applicable wage credit applied under the

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statute.

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     This act would take effect upon passage.

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