CARES Act: important tax considerations for private equity

The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020, is the largest economic relief package in United States history. Many of the Act’s tax-specific provisions are relevant for private equity (PE) funds, investors and portfolio companies.

PE taxpayers will need to plan carefully in order to effectively use the CARES Act to help them through this uncertainty. For instance, those who receive a small business loan cannot also claim the employee retention credit. Likewise, certain credits available in the recently enacted Families First Coronavirus Response Act must be considered in conjunction with the CARES Act. Each portfolio company or PE fund should consult with professionals to evaluate these benefits in light of its own facts and circumstances.

1) The employee retention credit may be a helpful tool for portfolio companies

The CARES Act creates a refundable credit that can be used to offset certain payroll taxes. This credit is generally available to businesses that are either fully or partially suspended due to COVID-19. The credit is also available to businesses that continue to operate but endure a significant decline in gross receipts. The credit is equal to 50% of qualified wages, not to exceed $10,000 per employee, through the end of this calendar year. Employers with fewer than 100 employees are eligible for this credit even when an employee continues to perform services. Portfolio companies should evaluate eligibility prior to filing their first-quarter employment tax return. Taxpayers taking this credit cannot take a small business loan under the CARES Act Paycheck Protection Program (PPP) or utilize the Work Opportunity Tax Credit.

2) A payroll tax deferral is generally available to all businesses

The CARES Act defers payment of the employer’s portion of Social Security taxes, i.e., 6.2% of the base. The deferral applies to wages incurred through the end of the year. Half of the deferred liability is due Dec. 31, 2021, and half is due Dec. 31, 2022. This deferral is additionally extended to 50% of self-employment taxes. Essentially, this is an interest-free loan, and there is no requirement that the taxpayer be impacted by COVID-19. However, employers that utilize the loan forgiveness component of the payroll protection loan program are not eligible for this deferral.

3) Profitable portfolio companies can now utilize prior-year net operating loss (NOL) carryforwards to offset 100% of current-year taxable income

The Tax Cuts and Jobs Act (TCJA) established that, beginning in 2018, NOLs could only offset 80% of current-year income. The CARES Act repeals this change for the 2018, 2019 and 2020 tax years. Moreover, the CARES Act establishes that NOLs arising in 2018, 2019 and 2020 may be carried back five years. Portfolio companies that paid income taxes in 2018 or 2019 should consider filing amended returns to fully utilize NOLs.