IRS Employee Retention Tax Credit Guidance for Acquisitions of PPP Borrowers

Alerts / November 23, 2020

The IRS recently updated its Employee Retention Tax Credit (ERTC) FAQs, providing additional guidance regarding the effect on ERTC eligibility of mergers and acquisitions involving Paycheck Protection Program (PPP) loan recipients. Under the CARES Act, if a group of entities are treated as a single employer under the aggregation rules, any one of such entities receiving a PPP loan will prevent all of the entities within the aggregated group from claiming the ERTC. This restriction created significant uncertainty regarding whether the acquisition of a PPP loan recipient would taint a buyer and its affiliates in terms of past or future ERTC claims. See our alert, M&A Considerations for Buyers of Targets with PPP Loans. The FAQs provide welcome guidance on these issues.

Equity Acquisitions. If an employer acquires the stock or other equity interests of a target that borrowed a PPP loan and that target will be included within the acquiror’s aggregated group for ERTC purposes, the impact on ERTC eligibility depends upon the status of the PPP loan as of the closing date of the transaction.

  • Loan Repaid or Forgiveness in Process. If prior to the closing date of the transaction, the target had either repaid the PPP loan or submitted a forgiveness application to the lender and established an escrow account as required under the applicable Small Business Administration guidance, the acquisition will not impact the acquiring group’s members’ eligibility for the ERTC. In fact, even the target employer could claim the ERTC for qualified wages paid on and after the closing date of the acquisition, provided all other requirements are satisfied.
  • Loan Forgiveness Uncertain. However, if the target received a PPP loan that was not repaid and the target has not applied for forgiveness and established the requisite escrow account as of the acquisition closing date, the target will continue to be ineligible for the ERTC. The acquisition will not, however, negatively impact ERTC eligibility or previously claimed ERTCs of the other members of the acquiring group.

Asset Acquisitions. In the context of asset deals, the effect on ERTC eligibility depends upon whether the buyer assumes the target’s PPP loan obligations.

  • Buyer Does Not Assume PPP Loan. If the buyer does not assume the loan, the acquisition will have no negative impact on the buyer’s eligibility for the ERTC or previously claimed ERTCs.
  • Buyer Assumes PPP Loan. If the buyer assumes the target’s PPP loan obligations as part of the acquisition, the buyer will not be treated as having borrowed a PPP loan and therefore ineligible for the ERTC, but the acquisition will affect the qualifying wage base. Specifically, any wages paid after the closing date to employees previously employed by the target will not be eligible for the ERTC. Otherwise, the buyer’s ERTC eligibility and any previously claimed ERTCs will not be affected.

The new FAQs provide insight into how the IRS plans to apply the ERTC to business acquisitions. Because application of the ERTC may be complex and fact specific, we encourage employers to carefully consider their particular facts and all aspects of the guidance in evaluating the availability of the credit.

Authorship Credit: Michelle M. Hervey and Lucas L. Witters

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