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Quandaries for M&A Deals Involving PPP Borrowers Eased

Posted on Nov. 18, 2020

The IRS has provided long-awaited guidance clarifying businesses’ eligibility for the employee retention tax credit when they acquire target entities that have received a Paycheck Protection Program loan. 

The agency on November 16 updated its FAQ on the interplay between the ERTC and the PPP to provide rules for determining whether an acquiring entity is eligible for the credit after purchasing a PPP borrower in a stock or asset acquisition. 

Without clear guidance, many private equity firms and corporate strategic buyers were reluctant to acquire a target company that had received a PPP loan because of the potential disqualification of significant ERTCs by the acquiring aggregate group. 

In some mergers and acquisitions, the parties agreed to covenants or altered the structure of the transaction to avoid the issue, according to practitioners. 

The Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) included two incentives that encourage employers to continue paying workers during the COVID-19 pandemic: loans forgivable tax free and refundable ERTCs.

But the benefits of the PPP forgivable loans and ERTCs are mutually exclusive — that is, an employer with a PPP loan can’t claim the credits. And if multiple entities are treated as a single employer under the aggregation rules and one entity obtains a PPP loan, all entities in the group are precluded from claiming the credit.

In FAQ No. 81a, the IRS said that for stock or equity acquisitions of a “target employer” with a PPP loan that has been fully satisfied or the borrower has submitted a forgiveness application and established an escrow account — under the Small Business Association’s October 2 notice — the post-transaction “aggregated employer group” won’t be treated as having received a PPP loan if requirements are met. 

For that result — being eligible for ERTCs — the acquiring group can’t have received a PPP loan before the transaction closed, and no member of the group may receive a PPP loan on or after the closing date. 

That means any employer that is a member of the aggregated employer group post-transaction, including the target employer, may claim the credit for qualified wages paid on and after the closing date if the group meets the requirements for claiming the credit. 

The guidance also states that the pre-transaction aggregated employer group’s ERTCs for wages paid before the closing date won’t be subject to recapture under the CARES Act. 

If the target entity’s PPP loan isn’t fully satisfied and no escrow account has been established before the transaction closes, the same restrictions on PPP loans for the aggregated group and its members apply for them to be eligible for ERTCs post-transaction, except those rules don’t apply to the target employer. 

Because the target entity received a PPP loan before the transaction and would continue to be obligated for the loan, it can’t claim ERTCs for any wages paid to its employees before or after the closing date. 

Asset Deals

Under FAQ 81b, businesses that acquire a target entity’s assets without assuming the PPP loan obligations won’t be treated as having received the loan, and therefore will be eligible for ERTCs after the transaction closes, and prior credits claimed won’t be subject to recapture. 

If the acquiring employer assumes the target’s PPP loan obligations in the transaction, it generally won’t be treated as having received a PPP loan if it didn’t receive a PPP loan before, on, or after the closing date; “however, the wages that may be treated as qualified wages after the closing date will be limited.” 

In that situation, “wages paid by the Acquiring Employer after the closing date to any individual who was employed by the Target Employer on the closing date” won’t be treated as qualified wages.

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