I 

111TH CONGRESS 

2D SESSION H. R. 5864 

To amend the Internal Revenue Code of 1986 to allow a credit against 

income tax for qualified equity investments in certain small businesses, 

and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

JULY 26, 2010 

Mr. SESTAK 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, and for other purposes. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Inno5 vation through Investment Act of 2010’’. 

6 SEC. 2. EQUITY INVESTMENT IN SMALL BUSINESS TAX 

7 CREDIT. 

8 (a) IN GENERAL.—Subpart D of part IV of sub9 chapter A of chapter 1 of the Internal Revenue Code of 


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1 1986 (relating to business related credits) is amended by 

2 adding at the end the following new section: 

3 ‘‘SEC. 45R. EQUITY INVESTMENT IN SMALL BUSINESS TAX 

4 CREDIT. 

5 ‘‘(a) GENERAL RULE.— 

6 ‘‘(1) IN GENERAL.—For purposes of section 38, 

7 in the case of a qualified investor, the equity invest8 ment in small business tax credit determined under 

9 this section for the taxable year is an amount equal 

10 to 30 percent of the amount of each qualified equity 

11 investment made by the qualified investor during the 

12 taxable year. 

13 ‘‘(2) YEARS IN WHICH CREDIT ALLOWABLE.— 

14 The credit under paragraph (1) shall be allowable as 

15 follows: 

16 ‘‘(A) Fifty percent of such credit shall be 

17 allowed in the taxable year in which the quali18 fied equity investment is made. 

19 ‘‘(B) Twenty-five percent of such credit 

20 shall be allowed in the taxable year after the 

21 taxable described in subparagraph (A). 

22 ‘‘(C) Twenty-five percent of such credit 

23 shall be allowed in the second taxable year after 

24 the taxable described in subparagraph (A). 


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1 ‘‘(b) CREDIT AMOUNT.—For purposes of determining 

2 the small business tax credit under subsection (a), the 

3 amount of qualified equity investments made by the quali4 fied investor during the taxable year shall not exceed 

5 $500,000, reduced by so much of $250,000 that is not 

6 an investment in— 

7 ‘‘(1) small business concerns in manufacturing 

8 and biotechnology, 

9 ‘‘(2) minority and women-owned small busi10 nesses, or 

11 ‘‘(3) a qualified HUBzone small business con12 cern (as defined in section 3(p)(5) of the Small 

13 Business Act (15 U.S.C. 632(p)(5))). 

14 ‘‘(c) DEFINITIONS.—For purposes of this section— 

15 ‘‘(1) QUALIFIED INVESTOR.—The term ‘quali16 fied investor’ means— 

17 ‘‘(A) an individual who qualifies as an ac18 credited investor under rules and regulations 

19 prescribed by the Commissioner of the Securi20 ties and Exchange Commission, or 

21 ‘‘(B) a partnership with respect to which 

22 all of the partners are individuals who qualify 

23 as accredited investors under rules and regula24 tions prescribed by the Commissioner of the Se25 curities and Exchange Commission. 


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1 ‘‘(2) QUALIFIED EQUITY INVESTMENT.—The 

2 term ‘qualified equity investment’ means the trans3 fer of cash or cash equivalents in exchange for stock 

4 or capital interest in a qualified small business. 

5 ‘‘(3) QUALIFIED SMALL BUSINESS.—The term 

6 ‘qualified small business’ means a private small busi7 ness concern (within the meaning of section 3 of the 

8 Small Business Act)— 

9 ‘‘(A) that meets the applicable size stand10 ard (as in effect on January 1, 2005) estab11 lished by the Administrator of the Small Busi12 ness Administration pursuant to subsection 

13 (a)(2) of such section, and 

14 ‘‘(B) has its principal place of business in 

15 the United States. 

16 For purposes of this section, all members of the 

17 same controlled group of corporations (within the 

18 meaning of section 267(f)) and all persons under 

19 common control (within the meaning of section 

20 52(b)) shall be treated as 1 qualified small business. 

21 ‘‘(d) ACTIVE BUSINESS REQUIREMENT.— 

22 ‘‘(1) IN GENERAL.—Holding stock in a quali23 fied small business shall not be treated as a qualified 

24 equity investment unless, during substantially all of 

25 the qualified investor’s holding period for such stock, 


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1 such qualified small business meets the active busi2 ness requirements of paragraph (2). 

3 ‘‘(2) REQUIREMENTS.— 

4 ‘‘(A) IN GENERAL.—For purposes of para5 graph (1), the requirements of this paragraph 

6 are met by a qualified small business for any 

7 period if during such period at least 80 percent 

8 (by value) of the assets of such qualified small 

9 business are used by such qualified small busi10 ness in the active conduct of 1 or more quali11 fied trades or businesses. 

12 ‘‘(B) SPECIAL RULE FOR CERTAIN ACTIVI13 TIES.—For purposes of subparagraph (A), if, in 

14 connection with any future qualified trade or 

15 business, a qualified small business is engaged 

16 in— 

17 ‘‘(i) start-up activities described in 

18 section 195(c)(1)(A), 

19 ‘‘(ii) activities resulting in the pay20 ment or incurring of expenditures which 

21 may be treated as research and experi22 mental expenditures under section 174, or 

23 ‘‘(iii) activities with respect to in24 house research expenses described in sec25 tion 41(b)(4), 


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1 assets used in such activities shall be treated as 

2 used in the active conduct of a qualified trade 

3 or business. Any determination under this sub4 paragraph shall be made without regard to 

5 whether a qualified small business has any 

6 gross income from such activities at the time of 

7 the determination. 

8 ‘‘(C) QUALIFIED TRADE OR BUSINESS.— 

9 For purposes of this paragraph, the term 

10 ‘qualified trade or business’ is as defined in sec11 tion 1202(e)(3). 

12 ‘‘(D) STOCK IN OTHER ENTITIES.— 

13 ‘‘(i) LOOK-THRU IN CASE OF SUBSIDI14 ARIES.—For purposes of this subsection, 

15 stock and debt in any subsidiary entity 

16 shall be disregarded and the parent quali17 fied small business shall be deemed to own 

18 its ratable share of the subsidiary’s assets, 

19 and to conduct its ratable share of the sub20 sidiary’s activities. 

21 ‘‘(ii) PORTFOLIO STOCK OR SECURI22 TIES.—A qualified small business shall be 

23 treated as failing to meet the requirements 

24 of subparagraph (A) for any period during 

25 which more than 10 percent of the value of 


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1 its assets (in excess of liabilities) consists 

2 of stock or securities in other entities 

3 which are not subsidiaries of such qualified 

4 small business other than assets described 

5 in subparagraph (E)). 

6 ‘‘(iii) SUBSIDIARY.—For purposes of 

7 this subparagraph, an entity shall be con8 sidered a subsidiary if the parent owns 

9 more than 50 percent of the combined vot10 ing power of all classes of stock entitled to 

11 vote, or more than 50 percent in value of 

12 all outstanding stock, of such entity. 

13 ‘‘(E) WORKING CAPITAL.—For purposes of 

14 subparagraph (A), any assets which— 

15 ‘‘(i) are held as a part of the reason16 ably required working capital needs of a 

17 qualified trade or business of the qualified 

18 small business, or 

19 ‘‘(ii) are held for investment and are 

20 reasonably expected to be used within 2 

21 years to finance research and experimen22 tation in a qualified trade or business or 

23 increases in working capital needs of a 

24 qualified trade or business, 


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1 shall be treated as used in the active conduct of 

2 a qualified trade or business. For periods after 

3 the qualified small business has been in exist4 ence for at least 2 years, in no event may more 

5 than 50 percent of the assets of the qualified 

6 small business qualify as used in the active con7 duct of a qualified trade or business by reason 

8 of this subparagraph. 

9 ‘‘(F) MAXIMUM REAL ESTATE HOLD10 INGS.—A qualified small business shall not be 

11 treated as meeting the requirements of subpara12 graph (A) for any period during which more 

13 than 10 percent of the total value of its assets 

14 consists of real property which is not used in 

15 the active conduct of a qualified trade or busi16 ness. For purposes of the preceding sentence, 

17 the ownership of, dealing in, or renting of real 

18 property shall not be treated as the active con19 duct of a qualified trade or business. 

20 ‘‘(G) COMPUTER SOFTWARE ROYALTIES.— 

21 For purposes of subparagraph (A), rights to 

22 computer software which produces active busi23 ness computer software royalties (within the 

24 meaning of section 543(d)(1)) shall be treated 


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1 as an asset used in the active conduct of a 

2 trade or business. 

3 ‘‘(e) CERTAIN PURCHASES BY QUALIFIED INVESTOR

4 OF ITS OWN STOCK.— 

5 ‘‘(1) REDEMPTIONS FROM QUALIFIED INVES6 TOR OR RELATED PERSON.—Stock acquired by the 

7 qualified investor shall not be treated as a qualified 

8 equity investment if, at any time during the 4-year 

9 period beginning on the date 2 years before the 

10 issuance of such stock, the qualified small business 

11 issuing such stock purchased (directly or indirectly) 

12 any of its stock from the qualified investor or from 

13 a person related (within the meaning of section 

14 267(b) or 707(b)) to the qualified investor. 

15 ‘‘(2) SIGNIFICANT REDEMPTIONS.—Stock 

16 issued by a qualified small business to a qualified in17 vestor shall not be treated as a qualified equity in18 vestment if, during the 2-year period beginning on 

19 the date 1 year before the issuance of such stock, 

20 such qualified small business made 1 or more pur21 chases of its stock with an aggregate value (as of the 

22 time of the respective purchases) exceeding 5 per23 cent of the aggregate value of all of its stock as of 

24 the beginning of such 2-year period. 


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1 ‘‘(3) TREATMENT OF CERTAIN TRANS2 ACTIONS.—If any transaction is treated under sec3 tion 304(a) as a distribution in redemption of the 

4 stock of any qualified small business, for purposes of 

5 subparagraphs (A) and (B), such qualified small 

6 business shall be treated as purchasing an amount 

7 of its stock equal to the amount treated as such a 

8 distribution under section 304(a). 

9 ‘‘(f) SPECIAL RULE FOR RELATED PARTIES.— 

10 ‘‘(1) IN GENERAL.—No credit shall be allowed 

11 under subsection (a) with respect to a qualified eq12 uity investment made by a qualified investor in a 

13 qualified small business that is a related party to the 

14 qualified investor. 

15 ‘‘(2) RELATED PARTY.—For purposes of para16 graph (1), a person is a related party with respect 

17 to another person if such person bears a relationship 

18 to such other person described in section 267(b) or 

19 707(b), or if such persons are engaged in trades or 

20 businesses under common control (within the mean21 ing of subsections (a) and (b) of section 52). 

22 ‘‘(g) RECAPTURE OF CREDIT IN CERTAIN CASES.— 

23 ‘‘(1) IN GENERAL.—If, at any time during the 

24 3-year period beginning on the date that the quali25 fied equity investment is made by the qualified inVerDate Mar 15 2010 23:26 Jul 27, 2010 Jkt 089200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H5864.IH H5864

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1 vestor, there is a recapture event with respect to 

2 such investment, then the tax imposed by this chap3 ter for the taxable year in which such event occurs 

4 shall be increased by the credit recapture amount. 

5 ‘‘(2) CREDIT RECAPTURE AMOUNT.—For pur6 poses of paragraph (1), the credit recapture amount 

7 is an amount equal to the sum of— 

8 ‘‘(A) the aggregate decrease in the credits 

9 allowed to the taxpayer under section 38 for all 

10 prior taxable years which would have resulted if 

11 no credit had been determined under this sec12 tion with respect to such investment, plus 

13 ‘‘(B) interest at the underpayment rate es14 tablished under section 6621 on the amount de15 termined under subparagraph (A) for each 

16 prior taxable year for the period beginning on 

17 the due date for filing the return for the prior 

18 taxable year involved. 

19 No deduction shall be allowed under this chapter for 

20 interest described in subparagraph (B). 

21 ‘‘(3) RECAPTURE EVENT.—For purposes of 

22 paragraph (1), there is a recapture event with re23 spect to a qualified equity investment if such invest24 ment is sold, transferred, or exchanged by the quali25 fied investor, but only to the extent that such sale, 


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1 transfer, or exchange is not the direct result of a 

2 complete or partial liquidation of the qualified small 

3 business in which such qualified equity investment is 

4 made. 

5 ‘‘(4) SPECIAL RULES.— 

6 ‘‘(A) TAX BENEFIT RULE.—The tax for 

7 the taxable year shall be increased under para8 graph (1) only with respect to credits allowed 

9 by reason of this section which were used to re10 duce tax liability. In the case of credits not so 

11 used to reduce tax liability, the carryforwards 

12 and carrybacks under section 39 shall be appro13 priately adjusted. 

14 ‘‘(B) NO CREDITS AGAINST TAX.—Any in15 crease in tax under this subsection shall not be 

16 treated as a tax imposed by this chapter for 

17 purposes of determining the amount of any 

18 credit under this chapter or for purposes of sec19 tion 55. 

20 ‘‘(h) BASIS REDUCTION.—The basis of any qualified 

21 equity investment shall be reduced by the amount of any 

22 credit determined under this section with respect to such 

23 investment. 

24 ‘‘(i) REGULATIONS.— 


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1 ‘‘(1) IN GENERAL.—The Secretary shall pre2 scribe such regulations as necessary to carry out the 

3 provisions of this section. 

4 ‘‘(2) CERTIFICATION OF QUALIFIED EQUITY IN5 VESTMENT.—Such regulations shall require that a 

6 qualified investor— 

7 ‘‘(A) certify that the small business in 

8 which the equity investment is made meets the 

9 requirements described in subsection (c)(3), and 

10 ‘‘(B) include the name, address, and tax11 payer identification number of such small busi12 ness on the return claiming the credit under 

13 subsection (a). 

14 ‘‘(j) TERMINATION.—This section shall not apply to 

15 qualified equity investments made in taxable years begin16 ning after December 31, 2016.’’. 

17 (b) CREDIT MADE PART OF GENERAL BUSINESS

18 CREDIT.—Subsection (b) of section 38 of such Code is 

19 amended by striking ‘‘and’’ at the end of paragraph (34), 

20 by striking the period at the end of paragraph (35) and 

21 inserting ‘‘, and’’, and by adding at the end the following 

22 new paragraph: 

23 ‘‘(36) in the case of a taxpayer, the equity in24 vestment in small business tax credit determined 

25 under section 45R(a).’’. 


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1 (c) CLERICAL AMENDMENT.—The table of sections 

2 for subpart D of part IV of subchapter A of chapter 1 

3 of such Code is amended by adding at the end the fol4 lowing new item: 

‘‘Sec. 45R. Equity investment in small business tax credit.’’. 

5 (d) EFFECTIVE DATE.—The amendments made by 

6 this section shall apply to qualified equity investments 

7 made after December 31, 2010, in taxable years beginning 

8 after such date. 

9 SEC. 3. ADMINISTRATOR OF SMALL BUSINESS ADMINISTRA10 TION. 

11 (a) DATA COLLECTION.—The Secretary of the Treas12 ury shall provide to the Administrator of the Small Busi13 ness Administration any data— 

14 (1) available to the Secretary on the implemen15 tation and use of the equity investment in small 

16 business tax credit determined under section 45R of 

17 the Internal Revenue Code of 1986; and 

18 (2) requested by the Administrator for analysis 

19 purposes. 

20 (b) REPORT.—Not later than 1 year after the date 

21 of enactment of this Act and annually thereafter during 

22 the 5-year period beginning on such date, the Adminis23 trator of the Small Business Administration shall submit 

24 to Congress a report describing the implementation and 

25 use of the equity investment in small business tax credit 


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1 determined under section 45R of the Internal Revenue 

2 Code of 1986. 

Æ 


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