2014 -- H 7812

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LC004830

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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, Keable, Hearn, and Marshall

     Date Introduced: March 04, 2014

     Referred To: House Finance

     It is enacted by the General Assembly as follows:

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

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

amended to read as follows:

     44-43-1. Definitions. -- For the purpose of this chapter:

     (1) "Average annual gross revenue" means the average of the amounts received or

accrued by a qualifying business entity determined on an annualized basis from the sale of goods

or services prior to diminution by the cost of those sales or services. The determination is limited

to amounts, if any, received or accrued during the four (4) taxable years of the business entity, or

a lesser period as may be applicable, immediately preceding the taxable year during which the

entity applied to the department for certification as a qualifying business entity.

     (2) "Certified venture capital partnership" means any partnership formed under the laws

of Rhode Island that:

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

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

dollars ($250,000) to the partnership;

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

venture capital funds;

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

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

under the securities laws of Rhode Island;

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

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

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

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

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

and

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

requirements imposed by the department.

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

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

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

value of the entity.

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

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

majority of whose assets are located in Rhode Island;

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

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

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

business in Rhode Island; or

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

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

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

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

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

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

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

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

     Year Portion

     1 50%

     2 40%

     3 30%

     4 30%

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     5 30%

     6 and subsequent years 20%

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

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

corporation, partnership or other business entity:

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

dollars ($2,500,000);

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

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

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

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

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

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

Island; and

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

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

satisfied.

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

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

investment in the partnership that is invested by the partnership in qualifying activities during the

taxpayer's taxable year.

     (8) "Certified Angel Investor" means:

     (i) A bank, insurance company, registered investment company, business development

company, or small business investment company;

     (ii) An employee benefit plan, within the meaning of the employee retirement income

security act, if a bank, insurance company, or registered investment advisor makes the investment

decisions, or if the plan has total assets in excess of five million dollars ($5,000,000);

     (iii) A charitable organization, corporation, or partnership with assets exceeding five

million dollars ($5,000,000);

     (iv) A director, executive officer, or general partner of the company selling the securities;

     (v) A business in which all the equity owners are accredited investors;

     (vi) A natural person who has net worth, or joint net worth with the person's spouse, that

exceeds one million dollars ($1,000,000) at the time of the purchase, excluding the value of the

primary residence of such person;

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     (vii) A natural person with income exceeding two hundred thousand dollars ($200,000) in

each of the two (2) most recent years or joint income with a spouse exceeding three hundred

thousand dollars ($300,000) for those years and a reasonable expectation of the same income

level in the current year; or

     (viii) A trust with assets in excess of five million dollars ($5,000,000), not formed to

acquire the securities offered, whose purposes a sophisticated person makes.

     (9) "Venture Capital Fund" means any private fund that:

     (i) Represents to investors and potential investors that it pursues a venture capital

strategy;

     (ii) Immediately after the acquisition, other than qualifying investments or short-term

holdings, holds no more than twenty percent (20%) of the amount of the fund's aggregate capital

contributions and uncalled committed capital assets (other than short-term holdings) that are not

qualifying investments, valued at cost or fair value, consistently applied by the fund;

     (iii) Does not borrow, issue debt obligations, provide guarantees or otherwise incur

leverage, in excess of fifteen percent (15%) of the private fund's aggregate capital contributions

and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is

for a non-renewable term of no longer than one hundred twenty (120) calendar days, except that

any guarantee by the private fund of a qualifying portfolio company's obligations up to the

amount of the value of the private fund's investment in the qualifying portfolio company is not

subject to the one hundred twenty (120) day calendar limit;

     (iv) Only issues securities the terms of which do not provide a holder with any right,

except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such

securities but may entitle holders to receive distributions made to all holders pro rata; and

     (v) Is not registered under section 8 of the Investment Company Act to 1940 (15 U.S.C.

80a-8), and has not elected to be treated as a business development company pursuant to section

54 of that act (15 U.S.C. 80a-53).

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

angel investor as defined in § 44-43-1 first makes a qualifying investment in a certified venture

capital partnership or the year in which an entrepreneur first makes an investment in a qualifying

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

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

chapter 11 of this title; or

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

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

of this title; or

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

chapter 17 of this title; or

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

of this title.

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

certified angel investors as defined in § 44-43-1 qualifying investment in a certified venture

capital partnership or an entrepreneur's investment in a qualifying business entity and shall be

measured at the year end of the certified venture capital partnership, the year end of the

qualifying business entity, or the year end of the investing taxpayer, whichever comes first.

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

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

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

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

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

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

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

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

any wages:

      (1) Paid to any owner of the entity;

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

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

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

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

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

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

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

($3,000,000).

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

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

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

section 1222(3) which is:

      (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

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

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

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

      (3) The long-term capital gain recognized by an entrepreneur or certified angel investor

as defined in § 44-43-1 from the sale or exchange of an interest in an entity, which at the time the

interest was acquired was a qualifying business entity.

     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

***

     This act would broaden the number and composition of investors eligible for tax

deductions under this chapter by adding a category called "certified angel investors", which

would include certain individuals, employee benefit plans, banks, insurance companies, trusts,

and investment companies who make capital investments in small business, and adds "venture

capital funds" which are private funds with various conditions on acquisition and borrowing and

issuing of securities.

     This act would take effect upon passage.

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