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COVID-19: Potential Tax Deferral and Credit Impacts

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COVID-19 has obviously sent shock waves through the global economy and disrupted, on a massive scale, normal consumer behavior patterns, stalling a bullish economy into a decline. With the passage of the CARES Act, many businesses, including those controlled by private equity, were hopeful for relief.
April 2, 2020

COVID-19 has obviously sent shock waves through the global economy and disrupted, on a massive scale, normal consumer behavior patterns, stalling a bullish economy into a decline. With the passage of the CARES Act, many businesses, including those controlled by private equity, were hopeful for relief. Unfortunately, many private equity controlled companies, even though each such company may be an eligible “small business concern” when considered on its own, will likely be left out of the Paycheck Protection Program (PPP) and loan forgiveness due to SBA affiliation rules. However, there is some uncertainty in the text of the CARES Act as to whether the affiliation rules apply generally to PPP loans, and it is possible that the Small Business Administration will issue interpretive guidance. While the PPP may currently be an unlikely benefit for businesses controlled by private equity, the CARES Act provides two major cash savings or deferral opportunities for these businesses.

Deferred Payment of Employer Payroll Taxes

First, the CARES Act provides for 100% deferral of Social Security taxes (6.2% of wages up to $137,700) for payments made by employers and self-employed individuals during the Payroll Tax Deferral Period. Payroll Tax Deferral Period means the period beginning on the date of the enactment (March 27, 2020) and ending before January 1, 2021. (As such, companies should consider paying team members on 12/30/2020, including any FY2020 bonuses). The deferred amounts will be paid during the years ended December 31, 2021 and 2022, with 50% payable each year and due December 31.

Employee Retention Credit

Second, for employers who fully or partially suspended business during 2020 due to COVID-19 governmental orders or experienced a quarterly decline in gross receipts of 50% over the prior year, the CARES Act includes a refundable credit for up to 50% of qualified wages (capped at $10,000 of wages per employee) from March 12, 2020 through December 31, 2020. The credit is applied quarterly to the employer’s 6.2% Social Security taxes liability. For employers of over 100 employees, only wages paid to employees who are not providing services due to the shutdown qualify. For employers with less than 100 employees, all wages are eligible. In counting the 100 employees, related employer rules under the Internal Revenue code do apply.

Please note, if a company takes advantage of the PPP, it is not eligible for the employer retention credit and deferral of payroll taxes may only occur if the PPP loan is not forgiven. We are continuing to review the CARES Act and all benefits and changes that it brings to companies controlled by private equity. As information becomes available and clarifications are made, we will update you.

 

Readers should not act upon information presented without individual professional consultation.

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

 

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