S. 2139 — Introduced in Senate

II 113th CONGRESS 2d Session S. 2139 IN THE SENATE OF THE UNITED STATES March 13, 2014 Mr. Menendez (for himself and Mr. Toomey) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to extend the exclusion for small business stock, to provide incentives for small business high technology research investment, and for other purposes. 1. Permanent full exclusion applicable to qualified small business stock (a) In general Paragraph (4) of section 1202(a) of the Internal Revenue Code of 1986 is amended— (1) by striking and before January 1, 2014, and (2) by striking certain periods in 2010, 2011, 2012, and 2013 in the heading and inserting certain periods after 2009. (b) Conforming amendments (1) The heading for section 1202 of the Internal Revenue Code of 1986 is amended by striking partial. (2) The item relating to section 1202 in the table of sections for part I of subchapter P of chapter 1 of such Code is amended by striking Partial exclusion and inserting Exclusion. (3) Section 1223(13) of such Code is amended by striking 1202(a)(2),. (c) Increase in gross asset threshold (1) In general Paragraph (1) of section 1202(d) of the Internal Revenue Code of 1986 is amended by striking $50,000,000 each place it appears and inserting $150,000,000. (2) Adjustment for inflation Subsection (d) of section 1202 of such Code is amended by adding at the end the following new paragraph: (4) Adjustment for inflation In the case of any taxable year beginning after December 31, 2014, the $150,000,000 amount in subparagraphs (A) and (B) of paragraph (1) shall be increased by an amount equal to— (A) such dollar amount, multiplied by (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting calendar year 2013 for calendar year 1992 in subparagraph (B) thereof. If any amount as increased under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000. . (d) Effective date The amendments made by this section shall apply to stock acquired after December 31, 2013. 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 of the Internal Revenue Code of 1986 is amended by redesignating paragraphs (4) through (7) as paragraphs (5) through (8), respectively, and by inserting after paragraph (3) the following new paragraph: (4) High technology research activities (A) In general The term passive activity shall not include any qualified research activity of the taxpayer carried on by a high technology research small business pass-thru entity. (B) Treatment of losses and deductions (i) In general Losses or deductions of a taxpayer relating to 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 relating to 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 relating to 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 means any activity constituting qualified research (within the meaning of section 41(d)(1)(B) and taking into account paragraphs (3) and (4) of section 41(d)) which involves a process of experimentation. (E) High technology research small business pass-thru entity For purposes of this paragraph, the term high technology research small business pass-thru entity means any domestic pass-thru entity for any taxable year if— (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 in paragraph (3)(A) thereof), (ii) such entity is a small business (within the meaning of section 41(b)(3)(D)(iii), applied by substituting 250 for 500 in subclause (I) thereof), and (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 has the meaning given such term in section 1202(d)(2). (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 2014, 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 2013 for calendar year 1992 in subparagraph (B) thereof. 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 means any partnership, S corporation, or other entity identified by the Secretary as a pass-thru entity for purposes of this paragraph. (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) of the Internal Revenue Code of 1986, as redesignated by subsection (a), is amended by striking and (3) in the heading and text and inserting , (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) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph: (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 credits of an individual taxpayer determined under sections 41 and 48D 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 on or after the date of the enactment of this Act.