2014 -- S 2795

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LC004924

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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: Senator Ryan W.Pearson

     Date Introduced: March 25, 2014

     Referred To: Senate Finance

     It is enacted by the General Assembly as follows:

     SECTION 1. Sections 44-43-1, 44-43-2, 44-43-3 and 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:

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

Commission; or

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

by the United States Securities and Exchange Commission that:

     (i) 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

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

requirements imposed by the department.

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

     (4)(5) "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)(6) "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

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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%

5 30%

6 and subsequent years 20%

      (6)(7) "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)(8) "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.

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

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

taxpayer or 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

      (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

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

angel investor'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

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($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

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 a certified angel investor 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)(4) The long-term capital gain recognized by an entrepreneur 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 modify the law regarding tax incentives for capital investments in small

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

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

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

statute.

     This act would take effect upon passage.

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