On-Demand: Tax Planning During the Pandemic | Provisions for Private Equity Funds and Portfolio Companies

Once we close, because, of course, those always close, and if the deal does close we move into the 120 day plan with our private equity groups. We always try to sync up and understand what the investment thesis is, not only for the company but the broader platform and we will work with the management teams at that point to provide audit and advisory services and also tax.

Today I'm with three of my colleagues, Jon Zefi, Alan Wink, and Simcha David and we are going to be talking about some of the tax services where we can be very creative and help find value at the portfolio level.

Basically, I also want to point you towards, as Lexi was mentioning, in the resource list we do have a list, which is a COVID-19 checklist for consideration for private equity funds and portfolio companies. Although, the discussion today will be primarily around the government financing programs and how that is going to work from a fund level tax issues, provisions, and opportunities as well as portfolio, we do have that list available to you. We've been having a lot of conversations with our private equity clients around valuation considerations for Q1, for Q2, and beyond.

We also have due diligence considerations in a virtual environment as well as deal flow and deal sourcing in a virtual environment, information management and security for platform companies now that we're in a working from home environment to protect data, and then we will walk through some of the fund level and portfolio level tax issues today but those are also outlined in that document. Feel free to look at that.

Of course, after this webcast please feel free to reach out to myself, Simcha David, Alan Wink, Jon Zefi or any of your partners or directors at EisnerAmper to follow-up in more detail about what we'll be discussing today.

Lexi, if I could move on why don't we go ahead and hit our first polling question at this point and then I'm going to turn the conversation over to Alan Wink.

moderator:Polling question number one, how confident are you that current and proposed federal aid packages will help lower the amount of permanent business closures? A, very confident. B, somewhat confident. C, somewhat not confident. D, not confident at all. We'll give everyone a few more seconds to respond.All right. We're going to now close the poll and share the results.

EB:Okay. Everyone can see that, very confident 44%, somewhat confident 31.1% and somewhat not confident 42.2%. Very interesting. I will at this point turn it over to Alan Wink. Alan will introduce himself but has spent so much time digging into the CARES Act and walking through with our clients what that means for them. We were just talking before this call that there had been nine interim final rules to the PPE.

Alan, at this time let me turn it over to you to talk about financing programs, where we stand today, what we've learned so far, and where we think we're going with this in the future and how these programs can benefit private equity groups at the funding portfolio level. I'll send it your way.

Alan Wink:Ethan, thank you very much and good day to everyone. I hope everyone is safe and sound during these truly extraordinary times. My name is Alan Wink. I'm the managing director of capital markets for EisnerAmper.

I'm going to talk a little bit today about what's known as the CARES Act or the Coronavirus Aid Relief and Economic Security Act. As you know, the CARES Act we've all heard a lot about it, we've read a lot about it in the newspapers, in the media. The CARES Act really was to expand the SBA 7(a) loan program to support new paycheck protection program loans or PPE loans, as they're known.

The first part of the CARES Act had allocated $350 billion for PPE loans and an additional $50 billion for economic injury disaster loans or the SBA EIDL loans. I will certainly talk about those in a little bit more detail.

PPE loans the purpose was really to assist small businesses, to keep businesses operating, and to keep workers employed amid the COVID-19 pandemic and economic downturn. They define small businesses with less than 500 employees. Actually the guidance ... As Ethan spoke before, there have been several different changes in guidance the last couple of weeks and even one here relative to employee counts. The guidance changed in late April regarding employee head count. Now companies must include all their employees, in their headcount, not just full-time equivalents. That was a really significant change to the Act since early April.

The PPE loans provide 100% federally guaranteed loans to small businesses. They're administered by the SBA and loans are issued by private lenders and there were several thousand private lenders who loaned money in this program. The application deadline is still open and it does expire on June 30th of 2020. The amount of PPE loan that you are eligible for is simply calculated at two and a half times your average monthly payroll and it's capped at $10 million.

There are certain things that are excluded from payroll cost, which are salaries in excess of $100,000, payments to independent contractors, and payments to workers whose principle place of residence is outside of the United States.

These loans are to be used exclusively for payroll, benefits, rent, utilities, mortgage interest if you own the building your business is in, and they are meant to be spent during the covered eight week period, which begins with the day the funds are deposited into your account and eight weeks subsequent to that.

These loans require no personal or collateral guarantees. As we all have found out, public companies are not eligible and all or a portion of the loans are eligible for forgiveness. In the original application process for these loans, borrowers had to make a couple of certifications. The first was that uncertain economic conditions due to COVID-19 make the loan necessary to support ongoing operations and, number two, that the loan proceeds will be used exclusively to retain workers and maintain payroll and make mortgage interest, lease, and utility payments.

There has been some discussion in the media relative to the assessment of need, especially when several public companies received PPE loans and also even the Los Angeles Lakers received a PPE loan. Once the public companies were announced the borrower assessment of need was now stated to include consideration of the borrower's current business activity and their ability to access other sources of liquidity. Fishing to support their ongoing operations in a manner that is not detrimental to the business.

Once, again, it was that item of access to other sources of liquidity and that wasn't just for public companies. That was for private companies also. Matter of fact, there was actual guidance from the SBA on this this morning, which I just want to discuss briefly. The SBA has instituted a safe harbor in this regard so, for example, any borrower together with its affiliates who receive PPE loans less than $2 million and, once again, less than $2 million, will be deemed to have made the certification in good faith.

The reason that they cut it off at $2 million was they felt that borrowers of loans less than $2 million would have a very difficult time accessing other forms of liquidity. Once again, the SBA has said with its limited resources they prefer to take a deep dive in loans over $2 million rather than focusing on smaller loans.

Simcha David: Alan, I think it's safe to point out that that guidance ... Alan, I think it's good to point out that particular guidance with the under $2 million literally just came out. People may have thought other things with regard to this but this is the new guidance. It's important you reach out again to find out about this new guidance.

Alan Wink:Once again, if the SBA does review your loan and it's determined that the borrower lacked an adequate basis for the required certification, the SBA will require repayment and it also will inform the lender that the loan is not eligible for forgiveness. If the borrower repays the loan there's no further action so you're free and clear.

You know, as we all know, the PPE loans do have the ability to request loan forgiveness. Borrowers entitled to loan forgiveness for the amounts spent during the eight week covered period on payroll costs, benefits, insurance premiums, rent, interest on mortgage obligations and utilities, the loan forgiveness amount will be reduced if the borrower reduces their head count or reduces wages by more than 25%.

Also, in order to qualify for full forgiveness no more than 25% of the loan can be used for non-payroll expenses. Also, to let you know, even though the loan forgiveness process will actually be beginning in about another 30 days, the SBA has still not come out with its "final guidance" on the forgiveness process.

In order to apply for forgiveness, the borrower must file an application with the lender within 30 days of the end of the eight week covered period and the lender must make decisions relative to the forgiveness amount within 60 days and that sure is asking a lot of the lenders because some of the larger lenders in the PPE program have probably passed through 20,000 or 25,000 applications.

In the event that your loan is not forgiven or a portion of your loan is not forgiven that will revert to a two year loan at 1% interest with principle and interest deferred for six months from the origination date.

As I mentioned, the first traunch of the PPE loans was about $350 billion. It was fully used up within a number of days. There certainly was some controversy in terms of how the banks prioritized the PPE loan applications. Just to give you a sense of scale, the SBA approved more loans in the first 14 days of the PPE loan process than they did in the last 14 years cumulatively.

As a result, on April 22nd the Treasury Department approved another traunch of $310 billion for the PPE loans. Of this $310 billion, $90 was set aside for smaller banks with the hope that smaller businesses that missed out on the first $350 billion would receive their loans in this traunch.

As you've all read, 300 public companies received PPE loans of approximately $1 billion. They have been requested under the safe harbor provision to return those funds by May 14th.

You know, the PPE program certainly got a lot of money into the system in a short period of time but it certainly wasn't short of controversy. There's been several public companies that have been ridiculed because of taking these loans. I think as a result of that a lot of better capitalized private companies are now under scrutiny relative to eligibility. Smaller companies, as I mentioned before, that lacked good banking relationships were shut out of the earlier rounds and hopefully getting into the second traunch.

I think you're seeing some of the uncertainty about these loans being revealed in the second traunch of $310 billion since about 40% of the $310 billion is still open and has not been lent out yet.

The second program I want to talk about under the CARES Act is the Economic Injury Disaster Loan program or the EIDL program. This program made $50 billion available and this program is more akin to the typical SBA lending program that we're all accustomed to.

This program was used to making working capital loans up to $200 million per borrower. Eligible businesses must have less than 500 employees and be located in states designated as disaster areas by the SBA and I think by this point all states have been designated disaster areas.

These EIDL loans will be used to assist businesses to meet ordinary and necessary financial obligations that cannot be met as a result of COVID-19. For example, working capital operating expenses, payroll, rent, fixed deaths, and even some higher interest rate deaths that your company might have.

The amount of loan that you can receive is the amount of economic injury that your company faced less any proceeds that you might have received from disaster recoveries. It will be capped at $2 million per borrower.

Also, as part of the application process for the EIDL loans, you are eligible for a $10,000 emergency advance and this advance will be forgiven in the event that you do not receive an EIDL loan.

The terms of these loans it's a 30 year loan. The interest rate is 3.75% for small businesses and 2.75% for not-for-profits. No personal guarantees required for loans under $200,000. Personal guarantees required for loans over $200,000. No pre-payment penalty. The borrower needs to exhibit the ability to repay these loans when they initially apply. Also, there are no loan forgiveness available for the EIDL loans.

Just some other things to consider for the EIDL loans, businesses can apply for both EIDL and PPE. If you get both, they cannot be used for the same expenses for the same time period. If you get the EIDL loan, you can certainly refinance it as part of the PPE loan and eventually get forgiveness.

At this point, Lexi, polling question number two.

moderator:Polling question number two. What is the size of the additional stimulus relief package do you feel the US government will provide between now and the end of May? A, the government will provide a stimulus package below $1 trillion. B, the government will provide a stimulus package between $1 and $2 trillion. C, the government will provide a stimulus package greater than $2 trillion. D, I do not anticipate the US government will provide an additional stimulus relief between now and the end of May. We'll give everyone just a few more seconds to respond. We are now going to share the results.

Alan Wink:You know, the results are very interesting, especially in light of the fact that the House Democrats basically detailed a program this morning of another $3 trillion aid package to address the economic effects of COVID-19. It seems like our poll here, people are certainly geared towards larger stimulus packages.

At this point, I'd like to turn it over to my colleague Jon Zefi who is going to talk about what the impact of these loan programs are on the private equity community. Jon?

Jon Zefi: Thank you, Alan. My name is Jon Zefi and I'm a principal at EisnerAmper's New York office. I advise portfolio companies on various federal, state, and international tax matters as well as M&A due diligence.

Alan and I have probably been on 40 to 45 calls with our clients, particularly in the private equity context. One of the biggest issues that we've faced have been the affiliation rules and the eligibility for portfolio companies to participate in the PPE loan program due to the affiliation rules.

When you are determining eligibility for a PPE loan in most cases a borrower's size will be considered together with its affiliates. The supplemental interim final rule clarifies that affiliate status under the paycheck protection program is determined in accordance with the rule contained in section 301, which provides ... I'm going into specificity here to show the general affiliation rule and then some exceptions to it, which some people may not be aware of and we've seen applicable to many portfolio companies.

Section 301 provides that entities are affiliates of each other when one controls or has the power to control the other, facts and circumstances test, or a third party or parties controls or has the power to control both.

The SBA deems a minority shareholder of a borrower to be in control of the borrower if it has the ability to prevent a quorum or otherwise block action by the borrower's board of directors. That's important. That section 301 rule has trapped many private equity funds and their portfolio companies and made them ineligible to participate in the PPE program.

What we wanted to point out is that there are specific expectations and the CARES Act specifically waives the SBA affiliation rule for the following businesses seeking relief under the CARES Act provisions and they are any businesses with five or fewer employees at a single physical location that operates under a NAICS code beginning with 72, which implies businesses in the accommodation and food services industry, and you can go to the SBA's website to take a look at their table of NAICS codes.

Two, any business operating as a franchise that is assigned a franchise identifier code by the SBA. Three, any business that receives financial assistance from a small business investment company licensed under the SBIA. That's an important exception that may touch a lot of private equity owned portfolio companies.

As a result, private equity owned businesses that are a franchisee's recipients of SBIC financial assistance or operate in a single location of 500 or fewer employees that are in the hospitality or food services industries and have no more than 500 employees per physical location likely do not have to perform the affiliation analysis and therefore are more likely to be eligible to receive assistance under the CARES Act and be eligible for some of these loans. Those exceptions are really critical. If you have portfolio companies in which any of those three exceptions apply, please take note. There's still time, as Alan mentioned. There are plenty of funds available to be accessed and garnered by your portfolio companies.

If in response, you are deemed to be affiliates and ineligible because the affiliation rules application to the portfolio companies result in them being ineligible to participate in the PPE program then portfolio companies have focused on obviously the payroll tax credit and payroll tax deferment options.

Two important facets here that we need to discuss.

Simcha David: There's a long list in the old SBA rules that actually have limitations on employees that are higher than 500 in certain industries so it's very worthwhile. Maybe the portfolio companies that private equity funds own are on that list and it can go as high as 1500 I think, if not more, affiliated employees. It's important to keep that in mind.

Jon Zefi:What you need to do is, as I referenced earlier, go to the SBA website. You'll see the NAICS code and then you'll see the employee counts that are applicable to specific NAIC codes and you'll be able to determine whether you fit within those parameters and could access the paycheck protection loan program.

Having said that, if you're ineligible because of the affiliation rules capture you and cause you not to be in a position which you could apply, a number of our portfolio companies have looked at employee retention credits. That's a payroll tax credit against the 6.2% employer only Social Security tax.

It's a refundable credit for up to 50% of qualified wages paid by eligible employers between, and these are important dates, March 12th of 2020 and December 31st of 2020 so, effectively, in this COVID environment.

Qualified wages cannot exceed $10,000 per an employee. That's an important consideration and upper limitation in terms of your eligibility.

Who is an eligible employer? Well, an eligible employer is an entity whose operations have been fully or partially suspended due to a COVID-19 governmental shutdown order or had a decline in gross receipts of more than 50% compared to the same calendar quarter in the prior year.

Qualified wages. There are two different thresholds: employers with 100 or more full-time employees, wages paid to those employees not working due to COVID-19 shutdowns are eligible, if you're under the 100 employee threshold then all wages paid to employees, whether working or not are eligible.

If we take a little baseline example just to quickly roll through this to show what the potential order of magnitude is, ABC portfolio company has five employees. During the second quarter of 2020, ABC's gross ABC paid each of those five employees $8000 during that quarter so you have gross wages paid of $40,000. You have a credit of 50% of those gross wages or $20,000. The employer retention Social Security tax on the $40,000 of total compensation during that period is $2,480 so that nets you a refundable credit at the company level of $17,520. That's an important credit. A lot of our portfolio companies are garnering.

The other piece is an employer payroll tax deferral item that allows for the deferral of the employer 6.2% payroll taxes incurred between the date of enactment March 27th of 2020 and December 31st of 2020.

50% of those employer payroll taxes are due by each of December 31st, 2021 and December 31st, 2022. It's a benefit that a lot of our portfolio companies are exploring.

Having said that, Alan, what may be more relevant to a lot of our private equity companies is this main street lending program. Can you spend about five minutes and discuss where the parameters are right now and where the program stands?

Alan Wink:Thanks, Jon. Just a quick caveat before we talk about the main street lending program, this program is not yet operational. The Federal Reserve should be coming out with final guidance really any day now but the main street lending program is a $600 billion program that was jointly announced by the US Treasury and the Federal Reserve.

It's for eligible businesses will have up to 15,000 employees or up to $5 billion in annual revenues in 2019. The purpose of this program is really to promote liquidity for small to medium sized businesses. It really includes three separate facilities, the main street new loan facility, the main street expanded loan facility, and the main street priority loan facility.

These loans are significantly more than the PPE loans or the EIDL loans. Minimum loan size is $500,000. Maximum loan size for the main street expanded loan facility is $150 million.

The main street new loan facility applies to loans that are originated after April 8th and the expanded loan facility is for additional traunches of existing loans that were originated before April 8th.

How does this program work? It's a little different than some of the other stimulus programs. Under the main street lending program, the Treasury actually capitalizes a special purpose vehicle with $75 billion. This special purpose vehicle will use the $75 billion of equity capital and Federal Reserve loans for the balance to actually purchase up to $600 billion of eligible loans that are issued by eligible lenders.

This special purpose vehicle will in turn purchase 95% of the principle amount of the loans that are made by these eligible lenders. The remaining 5% of the loan is going to be on the balance sheet of the lenders. The lender does have some financial risk here.

As I mentioned before, the minimum loan size is $500,000. For the main street new loan facility, the minimum loan size is $500,000 and the maximum is $25 million.

How do we calculate the amount of loan that you're eligible for? The loan size is calculated at four times 2019 EBITDA less any outstanding or committed but undrawn debt. Once again, the loan amount is four times 2019 EBITDA less any outstanding or committed but undrawn debt.

These loans are structured with four year maturities. These are unsecured loans. The payment of interest and principle is deferred for one year from the origination of the loan and the interest rate is a secured overnight financing rate plus 250 to 400 basis points. It's probably in today's funding environment probably 2.75% to 4.25% so it's still relatively cheap money.

The main street expanded loan facility is a minimum of $500,000 and a maximum of $150 million. The loan size under this program is the lower of 30% of existing outstanding or committed but undrawn bank debt or six times your 2019 EBITDA less any outstanding or committed but undrawn bank debt. It's the lower of those two amounts. The rates and the maturity are the same as the new loan facility.

The main street priority loan facility, very similar to the new main street program except this is for companies that have higher debt loads. In these cases the eligible lender will have to maintain a 15% stake in the debt that's sold to the special purpose vehicle. The risk for the lender is considerably higher.

In terms of the application of the main street lending program to private equity backed companies there are some limitations here. It might not be a good alternative for the PE community because of the limits on leverage and only four times EBITDA.

One of the other limits on this is that borrowers may not pay dividends or other capital contributions. That might take a lot of private equity firms out of the game. There is also significant limitations on officer or employee compensation, which also might not be appropriate for the private equity community.

Jon, I'll pass it back to you.

Jon Zefi:Thank you, Alan. What we wanted to do is go over with the folks on the line today some of the tax items. The CARES Act is replete with extraordinarily beneficial tax provisions that portfolio companies should avail themselves of.

What we wanted to do was walk you through a basic case study today. We have a private equity portfolio company that's called So Long Sports Retail Inc. Our straw man So Long was formed in 2000 with a December 31st tax year end. That'll be an important point when we discuss net operating losses. It's headquartered in the northeast and it sells sports equipment for men, women and children through brick and mortar stores located in New York, New Jersey, Connecticut and Massachusetts.

So Long was extremely profitable in the calendar years 2013 and through '17. However, due to more rigorous competition from Amazon, So Long has experienced significant losses in 2018 and '19 and due to the COVID-19 environment it expects 2020 to be its worst performing year to date. In addition, their expectation is that there will be an economic lag and 2021 may also present a downturn for So Long.

During 2018, in a last ditch effort to improve the customer experience at its stores, So Long has made major retail leasehold improvements to its various retail locations and did this through borrowing funds from the bank. So Long is concerned that during this 2020 year they're considering potentially closing down some of their Massachusetts stores that are clearly underperforming.

Let's talk about first, net operating losses. The CARES Act grants taxpayers a tremendous attribute. It provides for a five year carryback for net operating losses that were generated in tax years beginning after December 31st, 2017 and these are crucial dates, and before January 1st, 2021.

So Long and similar situated corporations can therefore carryback losses from 2018 and '19 and 2020 NOLs to offset pre-2018 ordinary income and capital gains that were taxed at rates of up to 35%, generating a tremendously favorable rate differential and current refund. Remember, with the passage of the Tax Cuts and Jobs Act in order to make the US more competitive with its G7 brethren, the Tax Cuts and Jobs Act set down corporate tax rates from a high of 35% to now a current low of 21%. That rate differential is tremendous.

If you have a loss generated in 2018 the goal is that losses should be carried back to the earliest of the tax years to which the loss may be carried. In essence, if you're looking at So Long Corporation and they generated a tax loss in 2018 the earliest taxable year that you could carry that back to is 2013.

The other limitation that the Tax Cuts and Jobs Act imposed on companies is that they imposed an 80% of taxable income limitation on the use of NOLs, which apply to NOLs generated in tax years beginning after December 31st, 2017.

The goal in the Tax Cuts and Jobs Act was to subject all corporations to a minimum effective tax rate of essentially 4.2%. The CARES Act does something that's wonderful for corporate taxpayers. It suspends the 80% of taxable income limitation on the use of NOLs for tax years beginning before January 1st, 2021, thereby permitting corporate taxpayers to fully offset NOLs against taxable income in those years.

If you're a corporate taxpayer and you're a portfolio company you essentially have three buckets of NOLs. We're going to go into planning opportunities but let's just review the buckets. For NOLs generated in tax years beginning on or before December 31st, 2017, those NOLs were eligible for a two year carryback and a 20 year carry forward. They can offset 100% of taxable income.

For NOLs generated in tax years beginning after December 31st, 2017 and before January 31st, 2021 you could carry those NOLs back five years and they have an indefinite carry forward. You can use the NOLs if you can offset prior period income.

100% of taxable income for tax years beginning before January 1st, 2021 can be offset by these NOLs, huge benefit there. 80% of taxable income for tax years beginning after December 31st, 2020 can be offset by these NOLs.

For NOLs beginning on or after January 1st, 2021 and we anticipate a number of portfolio clients will experience significant NOLs in 2021, there is generally no carryback and you have an indefinite carry forward but the 80% limitation still applies to the use of those NOLs.

Let's talk about planning opportunities that portfolio companies can undertake. What I'd like you all to do is reach out to your tax advisors, both accounting firms and law firms that you may be working with and talk to them about the following opportunities.

First, consider filing accounting method changes for tax years 2019 and 2020 to accelerate deductions into those years or, conversely, to defer revenue out of those years and thus increase the NOL that could be generated in the 2019 and 2020 years that could be carried back for five years and offset taxable income in prior periods.

Remember, corporate taxpayers, and in our example, our profile company So Long Corp was highly profitable in 2013 through 2017 before there was stepped up competition from Amazon, which cuts into their profit margins in '18, '19 and '20 along with the economic environment.

Corporate taxpayers with significant carryback capacity, i.e., taxable income in prior years that could be eligible for NOL offset that anticipate losses being generated into 2021 should consider whether they should change their tax year from the calendar year ... Remember So Long's tax year was December 31st year end. They should consider changing their tax year to end November 30th.

The point of that is it ensures that some part of the 2021 anticipated losses would be front-loaded into a tax year that ends before or commences before December 31st, 2020 and as a result could be utilized to be carried back five prior years. That's an incredibly important attribute and consideration that you should discuss with any of your service providers.

In addition to that, one item that I have to make note of that everyone should be aware of is internal revenue code 165I. It's a timing provision that allows taxpayers to elect to claim a disaster loss in the tax year immediately prior to the year in which the loss was actually sustained. A disaster loss is a loss occurring in a disaster area and attributable to a federally declared disaster. President Trump made this declaration in connection with the COVID-19 pandemic so paving the way for early disaster loss claims.

 When we reach out to our service providers the key question that you need to ask is how do we claim an early disaster loss? In claiming a section 165 disaster loss, the following rules apply. The loss must be deductible under 165 of the tax code, which generally requires a basis in the intangible or tangible property and they close and complete a transaction fixed by an identifiable event.

 That's consideration number one in order to claim a loss. Discuss that with your service provider. The loss is limited to the unreimbursed amount with any insurance reimbursements reducing the amount of the loss that can be deducted. Insurance reimbursements offset the potential loss.

The loss cannot exceed a taxpayer's basis in the damaged property. Finally, the loss must be incurred in a federally declared disaster area, which would be broadly applicable.

Let's talk about the types of losses that we're looking at here. Sit down with your tax service providers and look at inventory impairments. Abandonment of fixed assets, i.e., leasehold improvements or equipment. In our discussion, So Long is considering shutting down their Massachusetts-based stores. Those leasehold improvements and equipment that would be abandoned as part and parcel of the shutdown could be an eligible loss that could be subject to the 165I provisions.

Permanent closure costs associated with the disposition of inventory and fixed assets and where the security costs should be looked at and claimed. These disaster losses can create a substantial current deduction and benefits and potential refund opportunities for you. That's a key consideration.

Now remember in our discussion we talked about So Long's desire to improve its customer experience by doing a facelift in 2018. That facelift is considered qualified improvement property and let's talk about the nuances there and some of the things that you need to explore.

Qualified improvement property was modified as of January 1st, 2018 to include interior improvements to non-residential buildings, so be aware if you have any portfolio companies that are engaging in that activity, qualified leasehold improvements, qualified retail improvements, which So Long is directly involved with the 2018 refurbishment of its stores, and qualified restaurants improvements.

 Now remember when the Tax Cuts and Jobs Act was trumpeted by the Trump administration. That was a tremendous amount of legislation that was put together in an extraordinarily rapid period of time. There was some substantial drafting errors that were part of the passage of the legislation.

Due to a drafting error in the Tax Cuts and Jobs Act, qualified improvement property was assigned a 39 year life for depreciation purposes. The CARES Act corrected the technical error by changing the life for depreciation purposes to 15 years.

Property that has a class life of 20 years or less can elect to take 100% bonus depreciation. That's a tremendous opportunity so for taxpayers ... This is the planning tip for you all to sit down with your tax advisors. For taxpayers who place qualified improvement property in service in 2018, you can avail yourself of a couple of alternatives that you need to consider with your service providers.

A, amend your 2018 returns to claim bonus depreciation for the shorter life asset. B, adjust the depreciation of the remaining basis in the asset over its new life. C, file a form 3115, which is what we call a change of accounting method to deduct the difference in depreciation the taxpayer would have been entitled to take in 2018 and '19 if the return was filed as if the assets had the shorter life from day one and continued to depreciate those assets over their remaining lives. That's an important consideration.

The one thing that portfolio companies need to be aware of is that in our federal system there's a lack of conformity between federal and state provisions. Many states have decoupled from the federal bonus depreciation deduction rules.

The result is that there can be a significant and substantial state addback of bonus depreciation in the year that the bonus depreciation may be taken under federal law. That may result in a current state income tax liability on behalf of your portfolio companies that you need to be aware of and cognizant of.

One other item that I want to discuss with you before I turn it over to my colleague Simcha David with respect to modifications of the limitations on business interests. That's an important provision. In the Tax Cuts and Jobs Act, it was an incredibly beneficial pro-taxpayer piece of legislation but one of the things that the Tax Cuts and Jobs Act did is it cut back on the ability of corporations to take business interest expense deductions.

Under the Tax Cuts and Jobs Act business interest expense deduction is limited to the sum of the following three items, business interest income and the key term, which is 30% of the adjusted taxable income, which is the key focus of our discussion here today, and any floor plan financing interest.

This limitation, this 30% of adjusted taxable income limitation applies to all taxpayers and all debt, domestic and foreign, individuals, corporations, S-corps, partnerships, REITs, you name it.

There are certain businesses that are excluded from this provision that you just need to be aware of if your portfolio company is a real property trade or business it can elect out of this 163J provision, if it's a regulated public utility it can elect out, and certain other qualified small businesses that have gross receipts under certain thresholds.

What happened with the CARES Act? Well, the CARES Act did a wonderful thing. This is the focus because any private equity fund that uses some certain amount of leverage in acquisitions will benefit substantially from the provision and will be more competitive with similarly situated equity-based financing private equity funds.

The CARES Act increased the deductible amounts from 30% to 50% of adjusted taxable income. That's an incredible provision. It allows you a greater amount of capacity to offset business interest expenses against a greater amount of adjusted taxable income.

In addition, they had the forethought to realize that 2000 was going to be an incredibly down year for most portfolio companies so they provided portfolio companies with the ability to use 2019 adjusted taxable income in the 2020 year to provide portfolio companies with a greater capacity to offset business interest expense.

Now there are certain nuances that are very important for private equity funds to be focused on. What I'd like to do now is turn it over to my colleague and partner Simcha David to discuss those aspects of 163J. Simcha?

Simcha David:Thank you, Jon. Hopefully, I will not experience any technical difficulties as I have in the last three minutes. Thank you for turning it over. Yeah. I want to spend a minute to talk about the rule as it applies to partnerships.

Let's just keep in mind that 163J actually works differently for partnerships than for non-partnership. Under the TCJA you have to keep in mind a flow through nature of partnerships and so the actual interest expense limitation is first calculated at a partnership level.

If there is a limitation at the partnership level, the partnership will report the additional interest that was not allowed to be deducted on line 13K of the schedule K1. Keep that in mind because there's an important rule for that that the CARES Act put into place as well.

For partnerships, believe it or not, the change from 30% in limitation from 30% to 50% of adjusted taxable income, the increase in the limitation, that is only going to work for tax years 2020, not for tax year 2019 as it is for non-partnerships.

The reason for that initially was because the partnerships were not really eligible to file an amended return as corporations can under the BBA, the new partnership audit rules, partnerships could not just simply file an amended return. They'd have to make any amendments on an AAR, administrative adjustment request. That only creates a tax benefit going forward. It doesn't allow you to go back and get an immediate tax benefit.

Because in 2019 they figured most people already filed their returns they said, "Listen, we'll give you the 30% to 50% in 2020 but 2019 stick to 30% but we're going to put a special rule into place."

The 30% to 50% in partnerships is for 2020. If the partnership wants out of that they have to elect out.

Believe it or not, this reason for not giving partnerships this benefit in '19 actually kind of went away with the release of Rev. Proc. 2020-23. That actually allows partnerships to file amended returns, real amended returns for 2018 and 2019, if they already filed them in order to take advantage of all the other CARES Act provisions such as the qualified improvement property, the depreciation that Jon had just spoke about.

It kind of obviated it but the rule is the rule and even if you went back and amended your 2019 return for partnerships you would still be under the 30% limitation versus the 50% limitation.

What have they done for partnerships to make up for the fact that they no longer or that they don't get that special bump up in 2019? They said, as follows, if you, the partner, got this amount reported to you on line, 13K, because once it's reported to you it's your responsibility to keep track of it and only if you get excess taxable income from the same partnership or excess business interest income from the same underlying partnership can you in a subsequent year take this into account and perhaps deduct it?

What they said if you got in 2019 an amount reported online of 13K from a partnership, 50% of that amount will be automatically deductible in 2020 and not be subject to the partners 2020 1-63J computation at all. You don't need excess taxable income so instead of giving you the bump up in 2019, they gave you the benefit in 2020 to deduct 50% of the line 13K of your 2019 schedule K-1 excess business interest expense that you may have been given. That's another special rule that was put into place. If you want to elect out, that election takes place at the partner level, not the partnership level, because that is actually a partner level calculation once the first initial year has already passed.

Then as Jon had mentioned, for all taxpayers you can utilize your 2019 Adjusted Taxable Income in 2020. If you want to do that you have to elect into that, the partnership must elect into doing that with the presumption that your 2019 adjusted taxable income will be higher than your 2020 and it will give you a higher number.

If you're going to go back and amend your partnership return to take benefit if you've got and really reduce your 2019 income it might not pay to do that. It might pay to use your 2020 ATI. Just depends on the specific circumstances that a person finds themselves in.

Just to bring this home with regard to Private Equity Fund that have US Blocker corporations in their Structures there may be two drivers at the interest expense at a blocker corp. You know, there may be interest expense from an underlying pass through portfolio investment. When you use US blockers in private equity structures to block income from underlying operating partnerships so that amount may have come up to you as a line 13K.

Your blocker corp might have gotten flow through amount of excess interest expense and in that situation in 2020 you can deduct 50% of the amount and/or the blocker itself might be levered. You might have lent money to it. Then the question becomes does it have its own calculation and how much of the interest expense at its own level if it doesn't fall under the small business exemption does it have for it to deduct? Then, of course, in 2019 or 2020, corporation that has its own entity level calculation to make that it can apply the 50% versus the 30% rule.

For anyone holding real estate in their portfolio and had a portfolio partnership make a real property election to be exempt from 163J ... This was kind of interesting because people either didn't elect in or did elect in and a lot of that might have been connected to do I really need the deduction if I'm doing future forecast of income I'm okay so maybe somebody didn't make the election and now that they look back they say, "Oh, my God. I need to have those deductions back then" or somebody made the election but because they have to trade-off the beneficial bonus depreciation, which they didn't know if they were going to get because it was a lot of leasehold improvements, as Jon had said, that got corrected in the CARES Act.

They made the election and now they're saying, "Oh, I don't want to make that election. I want to get the better deduction for depreciation, which I can't get under the election." The election actually allows you to deduct all your interest expenses but everybody's situation is different.

Then the issue becomes but that election is irrevocable and so somehow the service, although they're not allowed to write legislation, came out with Rev Proc 2020-22 that not only allowed for somebody who didn't make the election to go back and make it by filing an amended return, if you had made the election you could then go back and revoke the election. Well, it cannot be revoked because the law says it's irrevocable. They said if you go back and file your return differently it's as if you had never made the election.

I think there's a fine line there on whether the IRS is actually writing legislation since the TCJA specifically said it wasn't deductible but I don't think anybody is going to fight them on that. I think people are really looking forward to having more flexibility. Again, that's with regard to 163J.

There was another provision that they put on hold and that's the 461L provision. That's more for partners. That's more for individuals. 461L as it applies to the owners of management companies and general partner entities, just a very simple example, if you earned an incentive allocation as a general partner of a million dollars and then you also had a loss in your management company, you paid bonuses of a million dollars, before the TCJA you could offset one against the other and have zero taxable income.

This 461L that was put into play by the TCJA that said at least for the first year you can only offset up to $500,000 if you file married filling joint of your investment income with your net business losses. Okay? What happens to the additional $500,000 in our example? That becomes a regular NOL going forward, which can deduct against up to 80% of your income but keep this in mind, they've now said that 461L for the tax years 2018, 2019 and 2020 is now suspended. Okay? That means that you can offset all of your investment income with your net business losses.

You're not limited to the $500,000 but keep in mind what this does now to help you generate perhaps a larger NOL in that particular year. With the new NOL provisions you have the carrybacks, et cetera, everything that Jon spoke about earlier so this is something to keep in mind that 461L has been suspended. Most people that understand how it ended up in the code in the first place, a small one year provision, it seems to be a one year change between a normal NOL and what you can do under 461L. That being said, it's now being suspended for 2018, 2019, and 2020.

I'm going to hand it back over to our moderator Ethan. Thank you.

EB:Thank you, Simcha. Jon, did you have anything else you wanted to address? We are at time so if not we're going to go wrap and then we will follow-up with questions afterwards.

Jon Zefi:Sure. One critical thing for the folks that are on the line today that I just want to highlight for everyone and just make sure that everyone is aware of. It's happened to me post the CARES Act passage where private equity funds are doing portfolio company acquisitions or platform acquisitions.

Remember, it's really important that you be aware of a couple of things. First, following the CARES Act if transaction tax deductions produce an NOL for the year of the transaction, ala 2020, and that year is clearly within the purview of the CARES Act the NOL carryback rules can apply. Remember, that NOL can be carried back to yield an immediate cash refund of taxes paid in prior years.

We need to, as private equity fund advisors, carefully consider the potential tax benefits in negotiating those acquisition and disposition agreements depending on whether you're on the buy side or sell side. If you're on the buy side and you're acquiring it you need to specify in the acquisition agreement that any losses that can be carried back that the refund is associated with the generation of the loss in the year of the transaction would be to the benefit of the buyer as opposed to the inverse, which is the benefit of the seller.

The other important consideration that's come up in the number of other transactions that I want to make you all aware of, particularly in private equity models where using a tremendous amount of leverage, credit agreements may require the use of tax refunds to pay down the principle on the debt so if we're entering into new transactions because this could be a quick cash benefit to you as the acquirer, you may want to try to negotiate those provisions outside of your credit agreement or if you have already kind of baked in your credit agreement and you need to utilize refunds to pay down the debt, realize where the cash refunds will be going.

Those are two important nuances that a lot of people have just not touched upon but have come up in a number of transactions. Ethan, I'll turn it back to you.

EB:Great. Thank you. Alan Wink, any closing comments? If not, we're going to turn it over to Lexi.

Alan Wink:No, I think that's fine, Ethan. Thank you.

EB: Okay. Thank you

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