Private equity will get a liquidity cushion with payroll tax holiday, as some investments face a cash crunch

Steven Mnuchin, Treasury secretary, listens during a House Appropriations Committee hearing on Capitol Hill in Washington, D.C., on Wednesday, March 11, 2020. Images

Sarah Silbiger | Bloomberg via Getty Images

Private equity firms are fretting that they may be excluded from a small business loan program established as part of the $2 trillion stimulus bill.

But they have already taken note that they qualify for another key provision in the legislation: the “payroll tax holiday.”

The CARES Act, which was signed into law last week, is aimed at offering economic relief as the coronavirus pandemic grinds business to a halt. It offers a number of relief mechanisms for small businesses that serve as the backbone of U.S. employment. One is $350 billion in loans aimed at small businesses. Another is a payroll tax holiday to allow companies to defer their share of Social Security payroll taxes in 2020.

The small business loan program has already become the subject of heavy lobbying, as some private equity firms have worried they may be disqualified from the program because of “affiliate rules” in the bill.  The legislation mandates that only companies with fewer than 500 employees may qualify. It also stipulates that if a company with outside investors has a portfolio of companies that exceed 500 employees (“affiliates”), that company may be excluded from the funds. 

The rule has exceptions, but could effectively shut out a number of private equity portfolio companies.

The lobbying group for the industry, the American Investment Council, has pushed for clarity around those rules that would ensure private equity firms can tap the funds. Democrats, like House Speaker Nancy Pelosi, wrote to Treasury Secretary Steven Mnuchin and Jovita Carranza, administrator of the Small Business Administration, on Tuesday warning of the impact the rule could have on start-ups that have taken on outside investment.

Still, even as lobbying for small business loans continues, private equity investors have taken note that they do qualify for another tool for relief: the payroll tax holiday.

According to the bill, employers can defer their share of Social Security payroll taxes in 2020. Companies have until the end of 2021 to pay the first half of the deferred levies. The remaining tax liability will be due by Dec. 31, 2022.

The tool is essentially another form of debt, that may simply kick a can farther down the road. But it could prove useful as a number of private equity-backed companies, like Neiman Marcus, are grappling with heavy debt loads and in industries like retail in which revenue has taken a massive hit.

“It’s a valuable lever,” said one person in private equity, who requested anonymity due to the sensitivities around the discussions. “Not game-changing, but some of these companies are liquidity squeezed and every dollar helps.”

Still, the American Investment Council wants all forms of government relief available to private equity firms.   

“It shouldn’t matter if these companies are backed by investments from corporations, pension funds, or others. We’ll continue to work with the Administration and Congress to request that federal programs support all businesses, regardless of ownership structure, and their workers,” the group’s CEO, Drew Maloney, said in a statement.

A spokesperson for the Treasury did not immediately respond to a request for comment.

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