Private Equity Funds Maximize ROI with Employee Retention Credit

April 2021

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Private equity (PE) funds looking to maximize their return on investment (ROI) may generate cash by claiming the recently enhanced employee retention credit (ERC) for their eligible portfolio companies. The ERC is a refundable tax credit first introduced as part of 2020’s coronavirus relief law, known as the CARES Act, that provides employers a credit up to $33,000 per employee for “qualified wages.” It has made the difference for many firms between losing and making money during the pandemic. For example, an eligible portfolio company with 31 employees could receive over $1 million from the U.S. Treasury for its ERC, whether it has any federal income tax liability or not.

While the ERC may be lucrative, navigating the qualification and calculation considerations for PE portfolio companies can be complex. Below we summarize ERC eligibility requirements and benefits and provide insight into the various considerations PE firms and portfolio companies should evaluate as they determine whether and to what extent they qualify for the credit.
 

Eligibility Requirements

To be eligible for the ERC, an employer must meet at least one of the following tests:
  • Governmental order test: The employer’s operations were fully or partially suspended due to a governmental order related to COVID-19; or
  • Gross receipts test:
    • 2020: The employer incurred a decline in gross receipts of more than 50% during a 2020 calendar quarter compared to the same calendar quarter during 2019. Eligibility ends at the conclusion of the quarter in which the company’s decline in gross receipts is less than 20%.
    • 2021: The employer incurred a decline in gross receipts of more than 20% during a 2021 calendar quarter compared to the same calendar quarter during 2019. There is an optional one-quarter look-back to compare the gross receipts for the preceding quarter to the same quarter in 2019.


 

ERC Benefit

The ERC is calculated differently for 2020 and 2021. For each of these calendar years, the ERC equals a percentage of up to $10,000 of “qualified wage” and allocable health plan expenditures paid to employees during the eligibility periods, namely, March 13, 2020 to December 31, 2020 and January 1, 2021 to December 31, 2021 (“qualified ERC costs”). The amount of the ERC allowed for each employee is capped as shown below.
 
  % of Qualified ERC Costs Cap Per Employee
2020 50% $5,000
2021 70% $28,000
 
The definition of “qualified wages” for ERC purposes depends on the employer’s average headcount in 2019 and varies for the 2020 and 2021 ERC calculation.

For 2020:
  • If an eligible employer had 100 or fewer full-time employees in 2019, then qualified wages include both wages and health plan costs paid to all employees during the period of eligibility.
  • For eligible employers with more than 100 full-time employees in 2019, qualified wages include wages and health plan costs paid to employees who are not performing services due to COVID-19 during the period of eligibility.

For 2021:
  • If an eligible employer had 500 or fewer full-time employees in 2019, then qualified wages include both wages and health plan costs paid to all employees during the period of eligibility.
  • For eligible employers with more than 500 full-time employees in 2019, qualified wages include wages and health plan costs paid to employees who are not performing services due to COVID-19 during the period of eligibility.


 

Why BDO?

The employee retention credit may provide significant opportunities for your fund or company. Evaluating whether and when the government order or gross receipts test is met or the aggregation rules apply, what wage and health-plan expenses qualify, and the amount of the ERC require a nuanced and complicated analysis. This article does not address every potential situation and factor to be considered, and professional advice may be needed.

BDO has deep expertise working with PE firms and their portfolio companies to identify and document ERCs in a manner that maximizes ROI, maximizing the benefit and minimizing the costs, including interruptions to your business.
 

Technology

BDO has a dedicated technology solution, Credit Connect, to assist employers in capturing and documenting their employee time and therefore their qualified wages. The software provides a secure and confidential way to survey employees and determine and document qualified wages, thereby helping to provide contemporaneous support for the ERC.