PARTNER Act

To amend the Internal Revenue Code of 1986 to provide an exception from the passive loss rules for investments in high technology research small business pass-thru entities. 1. Short title This Act may be cited as the Partnerships to Advance Revolutionary Technology and Novel Entrepreneurial Research Act PARTNER Act 2. Exception from passive loss rules for investments in high technology research small business pass-thru entities (a) In general Subsection (c) of section 469 (4) High technology research activities (A) In general The term passive activity (B) Treatment of losses and deductions (i) In general Losses or deductions of a taxpayer in connection with qualified research activities carried on by a high technology research small business pass-thru entity shall not be treated as losses or deductions, respectively, from a passive activity except as provided in clause (ii) and subparagraph (C). (ii) Limitation Clause (i) shall apply to losses and deductions of a taxpayer in connection with a high technology small business pass-thru entity for a taxable year only to the extent that the aggregate losses and deductions of the taxpayer in connection with qualified research activities of such entity for such taxable year do not exceed the portion of the taxpayer’s adjusted basis in the taxpayer’s ownership interest in such entity that is attributable to money or other property contributed— (I) in exchange for such ownership interest, and (II) specifically for use in connection with qualified research activities. For purposes of the preceding sentence, the taxpayer’s basis shall not include any portion of such basis which is attributable to an increase in a partner’s share of the liabilities of a partnership that is considered under section 752(a) as a contribution of money. (C) Treatment of carryovers Subparagraph (B)(i) shall not apply to the portion of any loss or deduction that is carried over under subsection (b) into a taxable year other than the taxable year in which such loss or deduction arose. (D) Qualified research activity For purposes of this paragraph, the term qualified research activity (E) High technology research small business pass-thru entity For purposes of this paragraph, the term high technology research small business pass-thru entity (i) either— (I) more than 75 percent of the entity’s expenditures (including salaries, rent and overhead) for such taxable year are paid or incurred in connection with qualified research (within the meaning of section 41(d)(1)(B), taking into account paragraphs (3) and (4) of section 41(d)) that involves a process of experimentation conducted by the entity, or (II) more than 50 percent of the entity’s expenditures for such taxable year constitute qualified research expenses (as defined in section 41(b), but determined without regard to the phrase 65 percent of (ii) such entity is a small business (within the meaning of section 41(b)(3)(D)(iii), applied by substituting 250 500 (iii) at no time during the taxable year does the entity have aggregate gross assets in excess of $150,000,000. (F) Provisions related to aggregate gross assets limitation For purposes of this paragraph— (i) In general Except as otherwise provided in this subparagraph, the term aggregate gross assets (ii) Exception for certain intangibles Any section 197 intangible (as defined in section 197(d) and determined without regard to section 197(e)) which is used directly in connection with the research referred to in subparagraph (E)(i) shall not be taken into account in determining aggregate gross assets. (iii) Exception for certain follow-on investments Cash from a sale of equity interests shall not be taken into account in determining aggregate gross assets if— (I) the aggregate gross assets of such entity (determined immediately after such sale and without regard to this clause) do not exceed the sum of $150,000,000, plus 25 percent of the aggregate gross assets of such entity (determined immediately before such sale and without regard to this clause), and (II) the aggregate gross assets of such entity (determined immediately before such sale and without regard to this clause) do not exceed $150,000,000. Sales of equity interests which are part of the same plan or arrangement, or which are carried out with the principal purpose of increasing the amount of cash to which this clause applies (determined without regard to this sentence), shall be treated as a single sale for purposes of this clause. (iv) Inflation adjustment In the case of any taxable year beginning after 2017, the $150,000,000 amount in subparagraph (E)(iii) and subclauses (I) and (II) of clause (iii) shall each be increased by an amount equal to— (I) such dollar amount, multiplied by (II) the cost of living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins determined by substituting calendar year 2016 calendar year 1992 Any increase determined under the preceding sentence shall be rounded to the nearest $100,000. (G) Capital expenditures taken into account for expenditures test An expenditure shall not fail to be taken into account under subparagraph (E)(i) merely because such expenditure is chargeable to capital account. (H) Pass-thru entity For purposes of this paragraph, the term pass-thru entity (I) Aggregation rules (i) In general All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (m) or (o) of section 414, shall be treated as a single entity for purposes of subparagraphs (E) and (F)(iii). (ii) Limitation where entity would not qualify No entity shall be treated as a high technology research small business pass-thru entity unless such entity qualifies as such both with and without the application of clause (i). (J) Activities not engaged in for profit and economic substance rules Section 183 and the economic substance rules of section 7701(o) shall not apply to disallow the losses, deductions, and credits of a high technology research small business pass-thru entity solely as a result of losses incurred by such entity. . (b) Material participation not required Paragraph (5) of section 469(c) and (3) , (3), and (4) (c) Certain research-Related deductions and credits of high technology research small business pass-Thru entities allowed for purposes of determining alternative minimum tax (1) Deduction for research and experimental expenditures Paragraph (2) of section 56(b) (E) Exception for high technology research small business pass-thru entities In the case of a high technology research small business pass-thru entity (as defined in section 469(c)(4)), this paragraph shall not apply to any amount allowable as a deduction under section 174(a). . (2) Allowance of certain research-related credits Subparagraph (B) of section 38(c)(4) of such Code is amended by redesignating clauses (ii) through (ix) as clauses (iii) through (x), respectively, and by inserting after clause (i) the following new clause: (ii) the credit of an individual taxpayer determined under section 41 to the extent attributable to a high technology research small business pass-thru entity (as defined in section 469(c)(4)), . (d) Exception to limitation on pass-Thru of research credit Subsection (g) of section 41 of such Code is amended by adding at the end the following: Paragraphs (2) and (4) shall not apply with respect to any high technology research small business pass-thru entity (as defined in section 469(c)(4)). (e) Effective date The amendments made by this section shall apply to losses and credits arising in taxable years beginning after December 31, 2016.

Summary: Partnerships to Advance Revolutionary Technology and Novel Entrepreneurial Research Act or the PARTNER Act This bill amends the Internal Revenue Code to exempt from the definition of "passive activity," for purposes of the passive loss tax rules, any qualified research activity carried on by a high technology research small business pass-thru entity. The bill defines "high technology research small business pass-thru entity" as any domestic pass-thru entity if: (1) more than 75% of the entity's expenditures are paid or incurred in connection with qualified research that involves a process of experimentation conducted by the entity, or (2) more than 50% of the entity's expenditures constitute qualified research expenses. A high technology research entity is a small business if such entity has 250 or fewer full-time employees. The entity may not have aggregate gross assets in excess of $150 million at any time during the taxable year.