A. Private capital-backed companies are generally ineligible for the CARES Act’s most publicized source of relief, the loans through the SBA, due to the maximum employee test. Small businesses that have received external growth capital from a private equity or venture capital firm will likely be required to include the employees of the private capital provider and its other portfolio companies when applying the 500-employee count though there are special rules for select industries. However, there are three potentially important exceptions. First, private equity-controlled hospitality and travel companies, those operating in food service industries (NAICS code 72) and franchises in the SBA’s Franchise Directory are not subject to the 500-employee test. Second, the SBA has published a list of maximum employees per industry, some of which include maximums in excess of 500 employees. The industry size standard set forth by the SBA can be found here. Third, there is an exception if a company is backed by a Small Business Investment Company (SBIC), in which case they might qualify for PPP loans. Given the complexities associated with the affiliation rules as well as the possible exceptions, care should be taken in evaluating individual companies’ potential eligibility. Further guidance can be found here. To find more information on access to funds from PPP loans, see the IRS FAQs on Employee Retention Credit under the CARES Act.
Employers who don’t take advantage of the Paycheck Protection Program (PPP) that either fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 or experience a significant decline in gross receipts during the calendar quarter are eligible for a 50% credit on qualifying wages paid to employees on March 13 through December 31, 2020.
All employers are eligible to defer their social security tax liability due March 27 through the earlier of PPP loan forgiveness, if applicable, or December 31, 2020. The tax savings opportunities offered by the CARES Act, in addition to payroll tax credits and deferral, also extends to AMT credits, net operating loss carryovers/carrybacks, and tax-deductible charitable contributions.
Furthermore, all hope for portfolio companies is not lost as several incentives provided for in the CARES Act merit attention by private equity backed companies, including the Employee Retention Credit, Payroll Deferral and Main Street Lending Program. Most recently, the Fed unveiled a new $600 billion Main Street Lending Program available to small and midsized businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues.
Mid-sized and larger companies from a myriad of industry sectors may also be eligible for low-interest loans under the $500 billion economic stabilization plan included in the CARES Act. This includes $46 billion specifically allocated for air carriers and businesses deemed critical to national security—which is likely to include “critical manufacturers” as defined by the DHS. Unlike the SBA programs, these loans must be paid back and come with public disclosure requirements.
To learn more about the federal government’s economic stimulus package, please visit: Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives