June 21, 2005, Introduced by Reps. Hildenbrand, Taub, Vander Veen, Stahl, Gaffney, Hansen, Wenke, Marleau, Gosselin, Hune, Jones, Ball, Elsenheimer, Robertson, Hoogendyk, Lemmons, Jr., Schuitmaker, Pavlov and Lemmons, III and referred to the Committee on Tax Policy.
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) For tax years that begin after December 31,
2005, and except as otherwise provided in subsection (3), a
taxpayer may claim a credit against the tax imposed by this act for
the sum of all of the following:
(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 section 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 section exceeds the tax liability of the taxpayer for the tax
year, that portion of the credit that exceeds the tax liability
shall be refunded.
(c) A taxpayer may claim a credit under this subdivision for
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 carried forward or refunded.
The excess 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 and all affiliates of the
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 credit under this section shall be claimed only in a tax
year in which the realized return on an investment under subsection
(1) is less than zero for that tax year.
(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 not be claimed
for any tax year that begins before January 1, 2008.
(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.
(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.
(c) Develop procedures for the qualification and
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) 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.
(11) 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 3 years or less.
(c) Other criteria that the board determines will increase the
probability of success of the qualified business.
(d) The business is not a business engaged primarily in retail
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 high-
technology activity.
(e) The business has a preinvestment valuation of
$10,000,000.00 or less.
(f) The business has secured total equity or near equity
financing equal to at least $250,000.00 within 24 months after the
first date on which equity investments qualifying for credits under
this section are made.
(12) 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.
(13) 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.
(c) The community-based seed capital company notifies the
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.
(14) 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.
(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 (14) 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 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 shall not 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(d) 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).
(c) "Community-based seed capital company" means a flow-
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) "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.
(g) "Near equity" means debt that may be converted to equity
at the option of the debt holder and royalty agreements.
(h) "Qualified business" means a business that meets the
criteria in subsection (11).
(i) "Realized return" means the change in value of the
investment that is actually earned over the investment period,
including all distributions made during the investment period.