SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Invest in Innovative Small 
Businesses 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) Qualified Equity Investment.--For purposes of this section--
            ``(1) In general.--The term `qualified equity investment' 
        means any equity investment in a qualified small business 
        entity if--
                    ``(A) such investment is acquired by the taxpayer 
                at its original issue (directly or through an 
                underwriter) solely in exchange for cash, and
                    ``(B) such investment is designated for purposes of 
                this section by the qualified small 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.
    ``(c) Qualified Small Business Entity.--For purposes of this 
section--
            ``(1) In general.--The term `qualified small business 
        entity' means any domestic corporation or partnership if such 
        corporation or partnership--
                    ``(A) is a small business (as defined in section 
                41(b)(3)(D)(iii)),
                    ``(B) has its headquarters in the United States,
                    ``(C) 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,
                    ``(D) has been in existence for less than 5 years 
                as of the date of the qualified equity investment,
                    ``(E) employs less than 100 full-time equivalent 
                employees as of the date of such investment,
                    ``(F) 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, 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--
                    ``(A) $10,000,000, taking into account the total 
                amount of all qualified equity investments made by all 
                taxpayers for the taxable year and all preceding 
                taxable years,
                    ``(B) $2,000,000, taking into account the total 
                amount of all qualified equity investments made by all 
                taxpayers for such taxable year, and
                    ``(C) $1,000,000, taking into account the total 
                amount of all qualified equity investments made by the 
                taxpayer for such taxable year.
    ``(d) 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, investor network, or investor fund who review new 
        or proposed businesses for potential investment.
            ``(2) Investor network.--The term `investor network' means 
        a group of accredited investors organized for the sole purpose 
        of making qualified equity investments.
            ``(3) Investor fund.--
                    ``(A) In general.--The term `investor fund' means a 
                corporation that for the applicable taxable year is 
                treated as an S corporation or a general partnership, 
                limited partnership, limited liability partnership, 
                trust, or limited liability company and which for the 
                applicable taxable year is not taxed as a corporation.
                    ``(B) Allocation of credit.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), the credit allowed under 
                        subsection (a) shall be allocated to the 
                        shareholders or partners of the investor fund 
                        in proportion to their ownership interest or as 
                        specified in the fund's organizational 
                        documents, except that tax-exempt investors 
                        shall be allowed to transfer their interest to 
                        investors within the fund in exchange for 
                        future financial consideration.
                            ``(ii) Single member limited liability 
                        company.--If the investor fund is a single 
                        member limited liability company that is 
                        disregarded as an entity separate from its 
                        owner, the credit allowed under subsection (a) 
                        may be claimed by such limited liability 
                        company's owner, if such owner is a person 
                        subject to the tax under this title.
            ``(4) Exclusion.--The term `qualified investor' does not 
        include--
                    ``(A) a person controlling at least 50 percent of 
                the qualified small business entity,
                    ``(B) an employee of such entity, or
                    ``(C) any bank, bank and trust company, insurance 
                company, trust company, national bank, savings 
                association or building and loan association for 
                activities that are a part of its normal course of 
                business.
    ``(e) 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 2018 
        through 2022.
            ``(2) Allocation of limitation.--The limitation under 
        paragraph (1) shall be allocated by the Secretary among 
        qualified small 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 
        2027.
    ``(f) 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) Limitation based on amount of tax.--In the 
                case of a taxable year to which section 26(a)(2) does 
                not apply, the credit allowed under subpart A for any 
                taxable year (determined after application of paragraph 
                (1)) by reason of subparagraph (A) shall not exceed the 
                excess of--
                            ``(i) the sum of the regular tax liability 
                        (as defined in section 26(b)) plus the tax 
                        imposed by section 55, over
                            ``(ii) the sum of the credits allowable 
                        under subpart A (other than this section) and 
                        section 27 for the taxable year.
                    ``(C) Carryforward of unused credit.--If the credit 
                allowable under subsection (a) by reason of 
                subparagraph (A) exceeds the limitation imposed by 
                section 26(a)(1) or subparagraph (B), whichever is 
                applicable, 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.
    ``(g) 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 the relationship 
                between such persons would result in the disallowance 
                of losses under section 267 or 707(b).
            ``(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, 1397B, and 1400B.
            ``(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).
    ``(h) 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 is amended--
            (1) in paragraph (35), by striking ``plus'';
            (2) in paragraph (36), by striking the period at the end 
        and inserting ``, plus''; and
            (3) by adding at the end the following new paragraph:
            ``(37) the portion of the angel investment tax credit to 
        which section 30E(f)(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 (36), by 
        striking the period at the end of paragraph (37) and inserting 
        ``, and'', and by inserting after paragraph (37) the following 
        new paragraph:
            ``(38) to the extent provided in section 30E(g)(2).''.
    (d) Clerical Amendment.--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.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to investments made after December 31, 2017, in taxable years 
ending after such date.
    (f) Regulations on Allocation of National Limitation.--Not later 
than 120 days after the date of the enactment of this Act, the 
Secretary of the Treasury or the Secretary's delegate shall prescribe 
regulations which specify--
            (1) how small business entities shall apply for an 
        allocation under section 30E(e)(2) of the Internal Revenue Code 
        of 1986, as added by this section;
            (2) the competitive procedure through which such 
        allocations are made;
            (3) the criteria for determining an allocation to a small 
        business entity, including--
                    (A) whether the small business entity is located in 
                a State that is historically underserved by angel 
                investors and venture capital investors;
                    (B) whether the small business entity has received 
                an angel investment tax credit, or its equivalent, from 
                the State in which the small business entity is located 
                and registered;
                    (C) whether small business entities in low-, 
                medium-, and high-population density States are 
                receiving allocations; and
                    (D) whether the small business entity has been 
                awarded a Small Business Innovative Research or Small 
                Business Technology Transfer grant from a Federal 
                agency;
            (4) the actions that such Secretary or delegate shall take 
        to ensure that such allocations are properly made to qualified 
        small business entities; and
            (5) the actions that such Secretary or delegate shall take 
        to ensure that angel investment tax credits are allocated and 
        issued to the taxpayer.
    (g) Audit and Report.--Not later than January 31, 2021, the 
Comptroller General of the United States, pursuant to an audit of the 
angel investment tax credit program established under section 30E of 
the Internal Revenue Code of 1986 (as added by subsection (a)), shall 
report to Congress on such program, including all qualified small 
business entities that receive an allocation of an angel investment 
credit under such section.
Output: Invest in Innovative Small Businesses Act This bill amends the Internal Revenue Code to allow a new business-related tax credit equal to 25% of the equity investments made by a qualified investor &nbsp;in a domestic corporation or partnership that:   is a small business,   has its headquarters in the United States,   is engaged in a specified high technology trade or business, has been in existence for less than 5 years,  employs fewer than 100 full-time employees,  has more than 50% of its employees performing substantially all of their services in the United States, and has certain equity investments designated for the purposes of this bill that do not exceed specified amounts.   The bill limits the allowable amount of such credit to the excess of the sum of regular tax liability, plus the tax under provisions regarding the alternative minimum tax, over the sum of specified tax credits allowed for the year. It also imposes an overall limitation on such credit of $500 million for each of calendar years 2018 through 2022.