Parties engaging in transactions in 2020 have faced uncertainty regarding the intersection between the employee retention credit (ERC) and Paycheck Protection Program (PPP). There has been significant concern regarding the eligibility for an acquiror to claim the ERC in situations when a target has previously received a PPP loan.
The IRS this week updated a set of “frequently asked questions” (FAQs) that address this concern and clarify that, with certain limitations, an acquiring employer’s eligibility to claim the ERC will not be adversely affected by an acquisition with a target that had received a PPP loan. Read TaxNewsFlash
Eligible employers whose business has been affected by the coronavirus (COVID-19) pandemic may be entitled to an ERC—a refundable tax credit equal to 50% of qualified wages up to $10,000 (i.e., up to a $5,000 credit) per employee. However, there are additional limitations on determining ERC eligibility. If an otherwise eligible employer receives a loan under the PPP, the employer is generally not eligible for the ERC, and any prior ERC claims may be recaptured. Additionally, an aggregation rule applies under which all persons treated as a single employer under section 52(a) or (b) or section 414(m) or (o) of the Internal Revenue Code are treated as a single employer for ERC purposes.
Many larger acquisitive employer organizations (referred to here as “Acquirors”) have availed themselves of the relief provided in the form of the ERC or plan to do so before year-end. Many smaller employers that are likely to be on the sell-side of the acquisition (referred to here as “Targets”) have sought relief through PPP loans. However, the interaction between these two relief provisions caused concern and raised the following questions:
The statutory language does not provide direct guidance on the nuanced application of the aggregation rule and PPP loan restrictions in the context of an acquisition, and this was not previously addressed in IRS guidance. While there was hope earlier in the year that these scenarios would be addressed through additional legislation, that is increasingly less likely.
The IRS has now provided guidance responding, at least in part, to these scenarios in the form of additions to its ERC “frequently asked questions” (FAQs). The new guidance, described below, generally results in favorable outcomes for employers engaging in either a stock or an asset acquisition, each addressed separately.
In a new Q/A 81a, the IRS addressed how ERC eligibility is affected if an Acquiror employer acquires the stock or other equity interests of a Target employer that had received a PPP loan and, under the aggregation rules, the employers are treated as a single employer as a result of the transaction.
Under this new Q/A, the outcome depends in large part on whether Target’s PPP loan is fully satisfied or an escrow to repay the loan is established prior to the transaction.
The asset acquisition scenarios described in a new Q/A 81b have similar outcomes to those described in the stock acquisition context. When acquiring Target’s assets, the outcome is dependent upon whether Acquiror is assuming the PPP loan obligations.
Parties in a transaction need to consider how this new guidance may affect their current plans for claiming any COVID-19-related credits or other relief before 2020 comes to a close. In addition, parties need to consider if additional planning measures are warranted in advance of any impending transactions. Parties to previous transactions that may have discontinued claiming the ERC may need to revisit those positions.
Finally, whether an employer is otherwise eligible for the ERC, and what constitutes “qualified wages” for ERC purposes, need to be carefully considered and may be subject to requirements not addressed in this brief summary.
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