HF 615 (LSB 2327HZ (3) 85)

HOUSE FILE 615

BY  COMMITTEE ON WAYS AND MEANS

(SUCCESSOR TO HF 585)
(SUCCESSOR TO HSB 198)

(As Amended and Passed by the House 2013-04-03)

A BILL FOR

An Act relating to the innovation fund investment tax credit by modifying the tax credit and the authority and duties of the Iowa innovation corporation relating to the tax credit, and including effective date and retroactive applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

    Section 1.  Section 15.107A, Code 2013, is amended by adding the following new subsection:
   NEW SUBSECTION.  3.  The corporation may establish one or more innovation funds for purposes of stimulating early-stage and seed capital investment in the state. If a fund is established to qualify for innovation fund investment tax credits pursuant to section 15E.52, the corporation shall ensure that the following requirements are met:
   a.  If the corporation seeks to enter into a contract with an entity to provide investment management services to an innovation fund, such an entity shall be chosen according to an open and competitive proposal process. The corporation may contract with a different entity for the provision of investment management services for each innovation fund.
   b.  The compensation package provided to an entity under paragraph “a” shall be at or below the market rate for such services as determined by at least one independent investment management evaluation group.
   c.  Any contract entered into for services pursuant to this subsection shall be made available, upon request, to the authority, the general assembly, the auditor of state, and the governor’s office.
    Sec. 2.  Section 15E.52, Code 2013, is amended to read as follows:
   15E.52  Innovation fund investment tax credits.
   1.  For purposes of this section, unless the context otherwise requires:
   a.  “Board” means the same as defined in section 15.102.
   b.  “Innovation fund” means one or more early-stage capital funds certified by the board.
   c.  “Innovative business” means a business applying novel or original methods to the manufacture of a product or the delivery of a service. “Innovative business” includes but is not limited to a business engaged in the industries of advanced manufacturing, biosciences, and information technology.

   d.  “Nonprofit corporation” means a corporation organized under chapter 504 and qualifying under section 501(c)(3) of the Internal Revenue Code as an organization exempt from federal income tax under section 501(a) of the Internal Revenue Code.
   2.
  a.  A tax credit shall be allowed against the taxes imposed in chapter 422, divisions II, III, and V, and in chapter 432, and against the moneys and credits tax imposed in section 533.329, for a portion of a taxpayer’s equity investment in the form of cash in an innovation fund.
   b.  An individual may claim a tax credit under this section of a partnership, limited liability company, S corporation, estate, or trust electing to have income taxed directly to the individual. The amount claimed by the individual shall be based upon the pro rata share of the individual’s earnings from the partnership, limited liability company, S corporation, estate, or trust.
   3.
  a.  The amount of a tax credit allowed under this section shall equal twenty percent of the taxpayer’s equity investment in an innovation fund
 
tax credits issued under this section for a fiscal year shall equal the amount allocated in section 15.119, subsection 2, paragraph “e”.
   b.
  (1)  The authority shall issue one or more certificates totaling the amount allowed per fiscal year under paragraph “a” to one or more nonprofit corporations operating an innovation fund.
   (2)  In order to receive a certificate pursuant to this paragraph, a nonprofit corporation shall be functioning as an innovation intermediary that is aligning local technologies, assets, and resources to collaborate on advancing innovation in this state, shall be in compliance with the requirements of section 15.107A, subsection 3, and shall not be controlled by a financial institution as defined in section 422.61 or a credit union as defined in section 533.102. For purposes of this subparagraph (2), “controlled” means the ability, either directly or indirectly through an affiliate of the financial institution or credit union, to direct or cause the direction of the management and policies of the nonprofit corporation, and includes but is not limited to instances in which fifty percent or more of the directors, officers, or members of the nonprofit corporation are also a director, officer, member, owner, employee, or agent of the financial institution, credit union, or of an affiliate of the financial institution or credit union. “Affiliate” includes any entity that owns or holds fifty percent or more of the equity interest or voting power in a financial institution or credit union, or any entity in which fifty percent or more of the entity’s equity interest or voting power is owned or held by a financial institution or credit union.
   (3)
  (a)  If in a fiscal year multiple nonprofit corporations qualify to receive certificates issued pursuant to this paragraph, certificates shall be issued in such a way that each nonprofit corporation operating an innovation fund receives a pro rata share of the total tax credits equal to the same proportion that the outstanding certified binding investment commitments to that nonprofit corporation bears to the total outstanding certified binding investment commitments to all qualified nonprofit corporations being issued a certificate under this paragraph.
   (b)  Upon the request of the authority, a nonprofit corporation operating one or more innovation funds shall certify to the authority the outstanding amount of binding investment commitments it has received to invest in innovation funds it operates.
   c.  Notwithstanding subsection 9, a nonprofit corporation to which a certificate has been issued pursuant to paragraph “b” shall only transfer the amount of tax credits represented on the certificate to taxpayers who make an equity investment in the form of cash in an innovation fund operated by the nonprofit corporation. In transferring such tax credits, the nonprofit corporation shall ensure that the total amount of tax credits transferred by the nonprofit corporation to a taxpayer equals fifty percent of the taxpayer’s investment in the innovation fund. Notwithstanding any other provision of law to the contrary, a nonprofit corporation operating an innovation fund shall not be allowed to make an equity investment in such innovation fund.
   d.  A nonprofit corporation to which a certificate has been issued pursuant to paragraph “b” shall ensure that an investor in an innovation fund operated by the nonprofit corporation shall not be permitted to vote for or participate in a decision to invest moneys from the innovation fund in a business in which the investor has a controlling interest.
   e.  A certificate and related tax credit issued pursuant to this section shall be deemed a vested right of the original holder or any transferee thereof, and the state shall not cause either to be redeemed in such a way that amends or rescinds the certificate or that curtails, limits, or withdraws the related tax credit, except as otherwise provided in this section or upon consent of the proper holder. A certificate issued pursuant to this section cannot pledge the credit of the state and any such certificate so pledged to secure the debt of the original holder or a transferee shall not constitute a contract binding the state.
   4.  A taxpayer shall not claim a tax credit under this section if the taxpayer is a venture capital investment fund allocation manager for the Iowa fund of funds created in section 15E.65 or an investor that receives a tax credit for the same investment in a qualifying business as described in section 15E.44 or in a community-based seed capital fund as described in section 15E.45.
   5.
  a.  The board shall issue certificates under this section which may be redeemed for tax credits. The board shall issue such certificates so that not more than the amount allocated for such tax credits under section 15.119, subsection 2, may be claimed. The certificates shall not be transferable.
   b.  The board shall, in cooperation with the department of revenue, establish criteria and procedures for the allocation and issuance of tax credits by means of certificates issued by the board. The criteria shall include the contingencies that must be met for a certificate to be redeemable in order to receive a tax credit. The procedures established by the board, in cooperation with the department of revenue, shall relate to the procedures for the issuance
 
and transfer of the certificates and for the redemption of a certificate and related tax credit. 
   6.  The department of revenue in conjunction with the authority shall by February 15 of each year issue an annual report to the general assembly containing the name of each person to whom a tax credit certificate was issued or transferred pursuant to this section during the previous calendar year.
   6.

7.  A taxpayer shall not redeem a certificate and related tax credit prior to the third tax year following the tax year in which the investment is made. Any tax credit in excess of the taxpayer’s liability for the tax year
 
in which the taxpayer claims the credit may be credited to the tax liability for the following five years or until depleted, whichever is earlier. A tax credit shall not be carried back to a tax year prior to the tax year in which the taxpayer claims the tax credit.
   7.
  8.  a.  An
 
A nonprofit corporation establishing an innovation fund shall submit an application for certification to the board. The board shall
 
may approve the application and certify the innovation fund if all of the following criteria are met:
   a.
 
(1)  The fund is organized for the purposes of making investments in promising early-stage companies which have a principal place of business in the state.
   b.
 
(2)  The fund proposes to make investments in innovative businesses.
   c.
 
(3)  The fund seeks to secure private funding sources for investment in such businesses.
   (4)  The fund proposes to function as an innovation intermediary by aligning local technologies, assets, and resources to collaborate on advancing innovation in this state.
   (5)  The fund proposes to provide multiple rounds of funding and early-stage private sector funding to innovative businesses with a high growth potential, and proposes to focus such funding on innovative businesses that show a clear potential to produce commercially viable products or services within a reasonable period of time.
   (6)  The fund proposes to operate in a manner designed to complement the purposes and further the policy goals of the demonstration fund and the state small business credit initiative demonstration fund administered by the authority pursuant to 261 IAC 105 and 261 IAC 117, respectively.
   (7)  The fund proposes to evaluate all prospective innovative businesses using a rigorous, technology-based approach and proposes to collaborate and coordinate with the authority and other state and local entities in an effort to achieve policy consistency.
   (8)  The fund proposes to collaborate with the regents institutions of this state and to leverage relationships with such institutions in order to commercialize research developed at those institutions.
   (9)  The fund proposes a detailed plan to support the continuum of innovation in this state by addressing the need for early-stage venture capital investments.
   (10)  The fund meets any other criteria adopted by the authority by rule.
   b.  The board shall certify funds in such a way that not more than three funds are certified as innovation funds at any one time. In determining whether to certify a fund the board shall consider the following:
   (1)  The total available pool of innovation fund investment tax credits.

   (2)  The size of the prospective fund as compared to other existing or prospective innovation funds.
   (3)  The impact that certification of the fund would have on the available pool of investment capital for other existing or prospective innovation funds.
   (4)  Whether certifying the fund as an innovation fund would further the economic goals of the state.
   9.  Tax credit certificates issued pursuant to this section may be transferred, in whole or in part, to any person. A tax credit certificate shall only be transferred twice. For purposes of this subsection, the two transfers shall include the first transfer from the corporation to an investor and one subsequent transfer from the investor to another transferee. Within ninety days of transfer, the transferee shall submit the transferred tax credit certificate to the department of revenue along with a statement containing the transferee’s name, tax identification number, and address, the denomination that each replacement tax credit certificate is to carry, and any other information required by the department of revenue.
   10.  Within thirty days of receiving the transferred tax credit certificate and the transferee’s statement, the department of revenue shall issue one or more replacement tax credit certificates to the transferee. Each replacement tax credit certificate must contain the information required for the original tax credit certificate. A replacement tax credit certificate may designate a different tax than the tax designated on the original tax credit certificate. A tax credit shall not be claimed by a transferee under this section until a replacement tax credit certificate identifying the transferee as the proper holder has been issued. The department of revenue shall conspicuously label on the face of the certificate any tax credit certificate that is ineligible for transfer.
   11.  The transferee may use the amount of the tax credit transferred against the taxes imposed in chapter 422, divisions II, III, and V, and in chapter 432, and against the moneys and credits tax imposed in section 533.329, for any tax year the original transferor could have claimed the tax credit. Any consideration received for the transfer of the tax credit shall not be included as income under chapter 422, divisions II, III, and V. Any consideration paid for the transfer of the tax credit shall not be deducted from income under chapter 422, divisions II, III, and V.
    Sec. 3.  EFFECTIVE UPON ENACTMENT.  This Act, being deemed of immediate importance, takes effect upon enactment.
    Sec. 4.  RETROACTIVE APPLICABILITY.  This Act applies retroactively to January 1, 2013, for tax years beginning on or after that date and for equity investments in an innovation fund made on or after that date.