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.

1. Decide if you should file an amended tax return.

The CARES Act included several tax changes that may be beneficial to your portfolio company:

• If a portfolio company pays federal income taxes at the company level, it can carry back net operating losses from 2018 or 2019 to each of the five tax years preceding the loss and can use a net operating loss (and any carryback) to fully offset taxable income for all years through 2020.
• Taxpayers can claim bonus depreciation (i.e., immediate expensing) for qualified improvement property. Qualified improvement property is an improvement a taxpayer makes to an interior portion of a building which is nonresidential real property (e.g., restaurants, retail shops, etc.) after the building has been constructed and placed into service.
• For portfolio companies that pay federal income taxes at the company level, for 2019, the company can deduct business interest expense equal to the taxpayer’s business interest income and 50 percent of the taxpayer’s adjusted taxable income (i.e., the taxpayer’s earnings before interest, taxes, depreciation and amortization).

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.

2. Explore incentives to help you continue to pay your employees.

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.

3. See if you’re eligible for tax benefits as an individual investor.

In addition to the business tax incentives, the CARES Act includes several provisions that may benefit individual investors.

• For 2020, individuals can deduct up to $300 of charitable cash contributions as an above the line deduction whether they itemize deductions or not. Additionally, for individuals that do itemize deductions, the individual can deduct charitable contributions up to the taxpayer’s income.
• The CARES Act suspends the excess business loss limitation rules for 2018, 2019 and 2020. If an investor’s deductible business losses were limited because of these rules in 2018 and/or 2019 (i.e., losses exceeded $250,000 for single filers and $500,000 for married filing jointly), the investor can amend its return and take advantage of those losses.
• Individuals can take coronavirus-related distributions up to $100,000 from qualified retirement plans without incurring the 10 percent early withdrawal penalty. Any income attributable to the distributions would be subject to tax over three years. Additionally, the individual may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. A coronavirus-related distribution is one made to an individual who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19 or who experiences financial hardship as a result of the COVID-19 outbreak.

For more resources and LP's response to COVID-19, visit this webpage.