Angel Tax Credit Act
Bill: S.5262 | Sponsor: Sen. Murphy, Christopher (D-CT)
Policy area: Taxation

Summary:
Angel Tax Credit Act
This bill allows a new business-related tax credit for 25% of equity investments of $25,000 or more in a domestic corporation or partnership that (1) has its headquarters in the United States, (2) has gross revenues for the taxable year of less than $1 million, (3) employs fewer than 25 full-time employees, (4) has been in existence for less than 7 years as of the date of the investment, (5) has more than 50% of its employees performing substantially all of their services in the United States, and (6) is engaged in a high technology trade or business. The bill limits the allowable amount of such credit to $250,000 in any taxable year and imposes an overall limitation on such credit of $500 million for each of calendar years 2023 through 2027.

To amend the Internal Revenue Code of 1986 to allow a credit against 
         income tax for equity investments by angel investors.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Angel Tax Credit Act''.

SEC. 2. ANGEL INVESTMENT TAX CREDIT.

    (a) In General.--Subpart B of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 is amended by adding at the end 
the following new section:

``SEC. 30E. ANGEL INVESTMENT TAX CREDIT.

    ``(a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an amount 
equal to 25 percent of the qualified equity investments made by a 
qualified investor during the taxable year.
    ``(b) Limitation.--The amount of the credit allowed under 
subsection (a) for any taxpayer for any taxable year shall not exceed 
$250,000.
    ``(c) Qualified Equity Investment.--For purposes of this section--
            ``(1) In general.--The term `qualified equity investment' 
        means any equity investment in a qualifying business entity 
        if--
                    ``(A) the aggregate amount of such investments made 
                by the taxpayer during the taxable year is $25,000 or 
                more,
                    ``(B) such investment is acquired by the taxpayer 
                at its original issue (directly or through an 
                underwriter) solely in exchange for cash, and
                    ``(C) such investment is designated for purposes of 
                this section by the qualifying business entity.
            ``(2) Equity investment.--The term `equity investment' 
        means--
                    ``(A) any form of equity, including a general or 
                limited partnership interest, common stock, preferred 
                stock (other than nonqualified preferred stock as 
                defined in section 351(g)(2)), with or without voting 
                rights, without regard to seniority position and 
                whether or not convertible into common stock or any 
                form of subordinate or convertible debt, or both, with 
                warrants or other means of equity conversion, and
                    ``(B) any capital interest in an entity which is a 
                partnership.
            ``(3) Redemptions.--A rule similar to the rule of section 
        1202(c)(3) shall apply for purposes of this subsection.
    ``(d) Qualifying Business Entity.--For purposes of this section--
            ``(1) In general.--The term `qualifying business entity' 
        means any domestic corporation or partnership if such 
        corporation or partnership--
                    ``(A) has its headquarters in the United States,
                    ``(B) has gross revenues for the taxable year 
                preceding the date of the qualified equity investment 
                of less than $1,000,000,
                    ``(C) employs less than 25 full-time equivalent 
                employees as of the date of such investment,
                    ``(D) has been in existence for less than 7 years 
                as of the date of the qualified equity investment,
                    ``(E) has more than 50 percent of the employees 
                performing substantially all of their services in the 
                United States as of the date of such investment,
                    ``(F) is engaged in a high technology trade or 
                business related to--
                            ``(i) advanced materials, nanotechnology, 
                        or precision manufacturing,
                            ``(ii) aerospace, aeronautics, or defense,
                            ``(iii) biotechnology or pharmaceuticals,
                            ``(iv) electronics, semiconductors, 
                        software, or computer technology,
                            ``(v) energy, environment, or clean 
                        technologies,
                            ``(vi) forest products or agriculture,
                            ``(vii) information technology, 
                        communication technology, digital media, or 
                        photonics,
                            ``(viii) life sciences or medical sciences,
                            ``(ix) marine technology or aquaculture,
                            ``(x) transportation, or
                            ``(xi) any other high technology trade or 
                        business, as determined by the Secretary of the 
                        Treasury, and
                    ``(G) has equity investments designated for 
                purposes of this paragraph.
            ``(2) Designation of equity investments.--For purposes of 
        paragraph (1)(G), an equity investment shall not be treated as 
        designated if such designation would result in the aggregate 
        amount which may be taken into account under this section with 
        respect to equity investments in such corporation or 
        partnership exceeds $2,000,000, taking into account the total 
        amount of all qualified equity investments made by all 
        taxpayers for the taxable year and all preceding taxable years.
    ``(e) Qualified Investor.--For purposes of this section--
            ``(1) In general.--The term `qualified investor' means an 
        accredited investor, as defined by the Securities and Exchange 
        Commission.
            ``(2) Exclusion.--The term `qualified investor' does not 
        include--
                    ``(A) a person controlling at least 50 percent of 
                the qualifying business entity,
                    ``(B) any venture capital fund (within the meaning 
                of section 203(l) of the Investment Advisers Act of 
                1940 (15 U.S.C. 80b-3(l))), or
                    ``(C) any bank, savings association, loan 
                association, trust company, insurance company, or 
                similar entity whose business activities include making 
                similar investments to investments of a venture capital 
                fund (as so defined).
    ``(f) National Limitation on Amount of Investments Designated.--
            ``(1) In general.--There is an angel investment tax credit 
        limitation of $500,000,000 for each of calendar years 2023 
        through 2027.
            ``(2) Allocation of limitation.--The limitation under 
        paragraph (1) shall be allocated by the Secretary among 
        qualified business entities selected by the Secretary.
            ``(3) Carryover of unused limitation.--If the angel 
        investment tax credit limitation for any calendar year exceeds 
        the aggregate amount allocated under paragraph (2) for such 
        year, such limitation for the succeeding calendar year shall be 
        increased by the amount of such excess. No amount may be 
        carried under the preceding sentence to any calendar year after 
        2032.
    ``(g) Application With Other Credits.--
            ``(1) Business credit treated as part of general business 
        credit.--Except as provided in paragraph (2), the credit which 
        would be allowed under subsection (a) for any taxable year 
        (determined without regard to this subsection) shall be treated 
        as a credit listed in section 38(b) for such taxable year (and 
        not allowed under subsection (a)).
            ``(2) Personal credit.--
                    ``(A) In general.--In the case of an individual who 
                elects the application of this paragraph, for purposes 
                of this title, the credit allowed under subsection (a) 
                for any taxable year (determined after application of 
                paragraph (1)) shall be treated as a credit allowable 
                under subpart A for such taxable year.
                    ``(B) Carryforward of unused credit.--If the credit 
                allowable under subsection (a) by reason of 
                subparagraph (A) exceeds the limitation imposed by 
                section 26(a) for such taxable year, reduced by the sum 
                of the credits allowable under subpart A (other than 
                this section) for such taxable year, such excess shall 
                be carried to each of the succeeding 20 taxable years 
                to the extent that such unused credit may not be taken 
                into account under subsection (a) by reason of 
                subparagraph (A) for a prior taxable year because of 
                such limitation.
    ``(h) Special Rules.--
            ``(1) Related parties.--For purposes of this section--
                    ``(A) In general.--All related persons shall be 
                treated as 1 person.
                    ``(B) Related persons.--A person shall be treated 
                as related to another person if--
                            ``(i) the relationship between such persons 
                        would result in the disallowance of losses 
                        under section 267 or 707(b), or
                            ``(ii) for purposes of subsection (e), the 
                        person is an individual who is the spouse of a 
                        lineal descendant of an individual described in 
                        subsection (e)(2)(A).
            ``(2) Basis.--For purposes of this subtitle, the basis of 
        any investment with respect to which a credit is allowable 
        under this section shall be reduced by the amount of such 
        credit so allowed. This subsection shall not apply for purposes 
        of sections 1202 and 1397B.
            ``(3) Recapture.--The Secretary shall, by regulations, 
        provide for recapturing the benefit of any credit allowable 
        under subsection (a) with respect to any qualified equity 
        investment which is held by the taxpayer less than 3 years, 
        except that no benefit shall be recaptured in the case of--
                    ``(A) transfer of such investment by reason of the 
                death of the taxpayer,
                    ``(B) transfer between spouses,
                    ``(C) transfer incident to the divorce (as defined 
                in section 1041) of such taxpayer, or
                    ``(D) a transaction to which section 381(a) applies 
                (relating to certain acquisitions of the assets of one 
                corporation by another corporation).
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be appropriate to carry out this section, including 
regulations--
            ``(1) which prevent the abuse of the purposes of this 
        section,
            ``(2) which impose appropriate reporting requirements, and
            ``(3) which apply the provisions of this section to newly 
        formed entities.''.
    (b) Credit Made Part of General Business Credit.--Subsection (b) of 
section 38 of the Internal Revenue Code of 1986, as amended by Public 
Law 117-169, is amended--
            (1) in paragraph (39), by striking ``plus'';
            (2) in paragraph (40), by striking the period at the end 
        and inserting ``, plus''; and
            (3) by adding at the end the following new paragraph:
            ``(41) the portion of the angel investment tax credit to 
        which section 30E(g)(1) applies.''.
    (c) Conforming Amendments.--
            (1) Section 1016(a) of the Internal Revenue Code of 1986 is 
        amended by striking ``and'' at the end of paragraph (37), by 
        striking the period at the end of paragraph (38) and inserting 
        ``, and'', and by inserting after paragraph (38) the following 
        new paragraph:
            ``(39) to the extent provided in section 30E(h)(2).''.
            (2) The table of sections for subpart B of part IV of 
        subchapter A of chapter 1 of the Internal Revenue Code of 1986 
        is amended by adding at the end the following new item:

``Sec. 30E. Angel investment tax credit.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to investments made after December 31, 2022, in taxable years 
ending after such date.
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