It’s a crucial time for private equity sponsors and investors to respond to the effect the pandemic is having on their portfolio companies. Here are some ways you can conserve cash and manage business operations in the short-term while preparing for long-term impact.
The CARES Act included several tax changes that may be beneficial to your portfolio company:
As a result of these changes, it may be advantageous for your portfolio company to file an amended return. Normally a portfolio company cannot file an amended return if it is taxed as a partnership and is subject to the partnership centralized audit regime. However, the IRS is allowing these companies to file amended returns for 2018 and 2019 to take advantage of the changes made by the CARES Act.
The CARES Act provides relief in helping portfolio companies by providing (1) tax advantaged loans to help pay payroll costs; and (2) employment tax credits and deferral of employment tax payments.
The CARES Act adds the Payroll Protection Program (PPP) that allows businesses that have 500 employees or fewer to apply for a loan to cover certain types of expenses, including wages and salaries for its employees. The government will forgive the portion of the loan that the borrower uses to pay payroll costs and other qualifying expenses. The forgiven amounts will not be considered taxable income to the borrower. Read our detailed explanation of the PPP.
If the company does not qualify for a PPP loan or chooses not to obtain a loan, the company may be eligible to claim employment tax credits and defer a portion of its employment tax payments. Qualifying employers can claim a refundable payroll tax credit for 50 percent of the qualified wages (up to $10,000 per employee) it pays to employees during the period from March 13, 2020 through December 31, 2020. This credit is available to employers whose (1) operations were fully or partially suspended due to a government related shutdown order; or (2) gross receipts in a 2020 calendar quarter are less than 50 percent of the gross receipts of the same quarter in 2019. For companies with more than 100 employees, qualified wages are wages paid to employees while they are not working due to COVID-19 related shutdowns. For employers with 100 or less employees, all wages qualify, whether the employer is open for business or is shut down. Additionally, companies can defer paying the employer share of Social Security taxes for wages paid from March 27, 2020 through December 31, 2020. Employers must pay 50 percent of the deferred taxes by December 31, 2021 and the remaining 50 percent by December 31, 2022.
In addition to the business tax incentives, the CARES Act includes several provisions that may benefit individual investors.
For more resources and LP's response to COVID-19, visit this webpage.