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SB-0092, As Passed Senate, May 25, 2005

SUBSTITUTE FOR

SENATE BILL NO. 92

A bill to amend 1967 PA 281, entitled

"Income tax act of 1967,"

(MCL 206.1 to 206.532) by adding section 272.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 272. (1) Except as otherwise provided in subsections (3)

and (6), a taxpayer may claim a credit against the tax imposed by

this act for all of the following investments made after December

31, 2005:

(a) That portion of a taxpayer's equity investment in a

qualified business, as provided in subsection (2). A taxpayer shall

not claim a credit under this subdivision for the equity

investment of a partnership, limited liability company, S

corporation, estate, or trust electing to have income taxed

directly to the taxpayer. If the amount of the credit allowed under

this subdivision exceeds the tax liability of the taxpayer for the

tax year, that portion of the credit that exceeds the tax liability

shall be refunded.

(b) That portion of a taxpayer's equity investment, as

provided in subsection (2), in a community-based seed capital

company. A taxpayer shall not claim a credit under this subdivision

for an investment of a partnership, limited liability company, S

corporation, estate, or trust electing to have income taxed

directly to the taxpayer. If the amount of the credit allowed under

this subdivision exceeds the tax liability of the taxpayer for the

tax year, that portion of the credit that exceeds the tax liability

shall be refunded.

an amount of the equity investment in a community-based seed

capital company of a partnership, limited liability company, S

corporation, estate, or trust electing to have income taxed

directly to the taxpayer based upon the pro rata share of the

taxpayer's earnings from the investment of the partnership, limited

liability company, S corporation, estate, or trust. If the amount

of the credit allowed under this section exceeds the tax liability

of the taxpayer for the tax year, that portion of the credit that

exceeds the tax liability shall not be refunded but may be carried

forward as an offset to the tax liability in subsequent tax years

for 10 tax years or until the excess credit is used up, whichever

occurs first. A credit under this subdivision shall not be carried

back to a tax year before the tax year in which the taxpayer first

claims the credit.

(2) The amount of the credit under this section determined

under subsection (1)(a) and (b) shall not exceed 20% of the

taxpayer's total investment. The maximum amount of a credit under

this section for investment by an investor in any 1 qualified

business is $50,000.00. Each investor shall not claim a total of

all credits under this section for more than 5 different

investments in 5 different qualified businesses for any 1 tax year.

The amount of a credit under this section determined under

subsection (1)(c) shall not exceed 20% of the taxpayer's total

investment and shall not exceed a total of $250,000.00 in any 1

qualified business.

(3) A taxpayer may claim a credit under this section only in a

tax year in which, for federal income tax purposes, the taxpayer

realizes a loss from the sale or exchange of the investment or the

investment becomes a worthless security as determined under section

165(g) of the internal revenue code.

(4) An investment is considered to have been made on the same

date as the date of acquisition of the equity interest. For

purposes of this section, the date of acquisition is the same as

the date of acquisition of the equity interest under the internal

revenue code. Investments made before January 1, 2006 shall not

qualify for a tax credit under this section.

(5) The total of all credits to all taxpayers for all tax

years under this section shall not exceed $10,000,000.00.

(6) A credit allowed under this section shall be claimed only

in tax years that began after December 31, 2006.

(7) A credit allowed under this section is nontransferable and

shall not be transferred to any other taxpayer.

(8) A taxpayer shall not claim a credit under this section for

the same investment used as a basis for a credit under section 37e

of the single business tax act, 1975 PA 228, MCL 208.37e.

(9) The Michigan capital investment board is created in the

department. The Michigan capital investment board shall do all of

the following:

(a) Develop an application process for tax credit certificates

for credits allowed under this section.

(b) Determine the distribution of credits to investors under

this section.

administration of qualified businesses and community-based seed

capital companies.

(d) Develop application forms and distribute copies of the

application forms to all community-based seed capital companies and

potential individual investors.

(10) A business shall apply to the board to be designated as a

qualified business. To be designated as a qualified business, a

business shall meet all of the following criteria:

(a) The principal business operations of the business are

located in this state.

(b) The business has been in operation for 5 years or less.

This subdivision does not apply to a business, the business

activity of which is based on research or development by an

institution of higher education or organization exempt from

taxation under section 501(c)(3) of the internal revenue code that

is located in this state.

sales, real estate, or the provision of health care or other

professional services but is a business that focuses on areas

including, but not limited to, alternative energy technology,

technology as addressed by the Michigan tri-technology corridor

initiative, and Michigan life sciences corridor initiative, and

high-technology activity.

(d) The business has a preinvestment valuation of

$10,000,000.00 or less.

(11) A qualified business shall notify the board in a timely

manner of any changes in the qualifications of the business or in

the eligibility of investors to claim a credit under this section.

(12) A community-based seed capital company shall apply to the

board for eligibility under this section. An investment in a

community-based seed capital company qualifies for a credit under

this section if, in addition to all other requirements under this

section, the board determines that the following requirements are

met:

(a) The community-based seed capital company meets all of the

following criteria:

(i) The company is a limited partnership or limited liability

company.

(ii) The company has, on or after January 1, 2005, a total of

both capital commitments from investors and investments in

qualified businesses of at least $250,000.00 but not more

than $10,000,000.00.

(b) The community-based seed capital company has no fewer than

5 individual investors who are not affiliates, with no single

investor and affiliates of that investor that together own a total

of more than 35% of the ownership interests outstanding in the

company.

board within 120 days after the date of the first investment of the

names, addresses, taxpayer identification numbers, equity interests

issued, consideration paid for the interests, and the amount of any

credits under this section, of all limited partners or members who

may initially qualify for the credits under this section, and the

earliest year in which the tax credits may be claimed. The list of

limited partners or members who qualify for the credits under this

section shall be amended when new equity interests are sold or when

any information on the list changes.

(13) If the board determines that the business is a qualified

business or that an investment in a community-based seed capital

company is eligible for a credit under this section, the board

shall issue a tax credit certificate to be attached to the

taxpayer's annual return required under this act. The tax credit

certificate shall contain the taxpayer's name, address, tax

identification number, the amount of credit, the name of the

qualified business or community-based seed capital company, and

other information required by the department. A community-based

seed capital company shall notify the board in a timely manner of

any changes in the qualifications of the community-based seed

capital company, in the qualifications of any qualified business in

which the company has invested, or in the eligibility of limited

partners or members to redeem the tax credits in any year.

(14) For an equity investment to qualify for a credit under

this section, the business in which the equity investment is made

shall, within 100 days of the date of the first investment, notify

the board of the names, addresses, taxpayer identification numbers,

shares issued, consideration paid for the shares, and the amount of

any credits of all shareholders who may initially qualify for the

credits under this section. The list of shareholders who may

qualify for the credits shall be amended as new equity investments

are sold or as any information on the list changes.

(15) If a taxpayer does not claim all of the amount of credit

allowed by the taxpayer's tax credit certificate in the first 5 tax

years beginning with the tax year in which the tax credit

certificate was issued, the tax credit certificate expires and is

void, and no further credits shall be claimed based on that tax

credit certificate. In years following the tax year in which a tax

credit certificate expires, the department shall issue new tax

credit certificates under subsection (13) for the total amount of

tax credits that expired, but the total of all credits for all

taxpayers for all years shall not exceed the maximum under

subsection (5).

(16) An investor in a community-based seed capital company may

claim a credit under this section only for the investor's

investment in the community-based seed capital company and

may not claim any additional credit for the investor's share of

investments in a qualified business made by the community-based

seed capital company. However, an investor in a community-based

seed capital company may claim a credit under this section for a

separate direct investment made by the investor in the same

qualified business in which the community-based seed capital

company invests.

(17) On or before April 1 each year, the board shall publish

an annual report of the activities conducted under this section and

shall submit the report to the governor and the legislature. The

report shall include a listing of eligible qualified businesses, a

list of eligible community-based seed capital companies, the number

of tax credit certificates issued by the board and the total amount

of credits authorized by those certificates, and the total amount

of credits claimed under this section for the immediately preceding

calendar year.

(18) As used in this section:

(a) "Alternative energy technology" means that term as defined

in section 2 of the Michigan next energy authority act, 2002 PA

593, MCL 207.822.

(b) "Board" or "Michigan capital investment board" means the

Michigan capital investment board created in subsection (9).

through entity, the principal business operations of which are

located in this state, formed solely for the purpose of investing

in a single qualified business.

(d) "Flow-through entity" means an S corporation, partnership,

limited partnership, limited liability partnership, or limited

liability company. Flow-through entity does not include a publicly

traded partnership as that term is defined in section 7704 of the

internal revenue code that has equity securities registered with

the securities and exchange commission under section 12 of title I

of the securities exchange act of 1934, chapter 404, 48 Stat. 881,

15 USC 78l.

(e) "High-technology activity" means that term as defined in

section 3 of the Michigan economic growth authority act, 1995 PA

24, MCL 207.803.

(f) "Institution of higher education" means a public or

private institution of a state which offers a degree or course of

study beyond the twelfth grade.

(g) "Investor" means an individual who makes a cash investment

in a qualified business or a person who makes a cash investment in

a community-based seed capital company. Investor does not include a

person who is a current or previous owner, member, or shareholder

in a qualified business.

(h) "Near equity" means debt that may be converted to equity

at the option of the debt holder and royalty agreements.

(i) "Qualified business" means a business that meets the

criteria in subsection (10).

Enacting section 1. This amendatory act does not take effect

unless Senate Bill No. 521 of the 93rd Legislature is enacted into

law.