Buyers may be eligible for employee retention credit even if they are acquiring equity or assets from PPP loan borrowers – Finance and Banking
United States: Buyers may be eligible for employee retention credit even if they are acquiring equity or assets from PPP loan borrowers
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On November 16, 2020, the IRS issued Faq clarify the interaction between Employee Loyalty Credit (“ERC”) and Paycheck Protection Program (“PPP”) loans in M&A transactions. A taxpayer (including all affiliates who are treated as members of the same employer according to the aggregation rules) cannot claim the CER if a member of the aggregate group has taken out a PPP loan. This rule has raised significant concerns in M&A transactions where the target company has taken out a PPP loan and the buyer has claimed the ERC. FAQ 81a specifies that a taxpayer (the “acquiring employer”) who acquires the shares or other equity interests of an entity (the “target employer”) as part of a transaction that causes the target employer to become member of an aggregate group with the acquirer An employer who is treated as a single employer under the aggregation rules (the “aggregate employer group”) can still apply for the EWC. Likewise, FAQ 81b specifies that an acquiring employer who acquires the assets and liabilities of a target employer is always eligible to claim the CRE as long as the acquiring employer does not assume the obligation of the target employer to the PPP loan. While the FAQs cannot be relied on as legal authority, they provide welcome confirmation that the acquiring employer in a merger and acquisition transaction will not have to recover or forgo the ERC.
Taxpayers who receive a PPP loan are generally not eligible to claim the CRE
Under the CARES Act, if a taxpayer has taken out a PPP loan, the taxpayer and all members of the taxpayer’s aggregate employer group are not eligible for CER. Additionally, if a taxpayer uses the CER and subsequently obtains a PPP loan, the taxpayer must collect the CER. These rules have raised significant concerns in M&A transactions, that a buyer or its affiliates acquiring the shares or assets of a target that received a PPP loan would not be eligible for ERC and would be obliged to recover any benefit previously claimed.
Buyer’s eligibility for ERC after purchase of shares or other shares
If, before the transaction closing date, the target employer, in accordance with procedures established by the Small Business Administration (SBA), either (i) fully satisfies the PPP loan, or (ii) submits a request for cancellation of the PPP loan and establishes an interest-bearing escrow account (which will be used to repay the PPP loan), the acquiring employer and members of its aggregate employer group (including the target employer) remain eligible to claim the EWC after the Closing Date. In addition, the acquiring employer and members of its aggregate employer group are not required to recover previously claimed CREs.
If the title loans is not fully satisfied or if the escrow account is not established before the closing date of the transaction, the buyer and their group of aggregate employers will generally still be eligible to claim the ERC. . In addition, any ERC claimed by the buyer or its aggregate group of employers prior to the transaction will not be subject to a clawback. The newly acquired target employer, however, would continue to be ineligible for the EWC with respect to wages paid to its employees before or after the closing date.
Eligibility of buyers for REB after asset acquisitions
If a buyer acquires the assets of a target employer with a PPP loan, the buyer will not be considered to receive a PPP loan for ERC eligibility purposes, provided that the buyer does not assume the obligations of the target employer under the PPP loan. Thus, the buyer will be eligible for the ERC after the closing date and is not required to recover the ERCs that he used before the closing date.
Even if the buyer assumes the target employer’s obligation for the PPP loan, the buyer will not be considered to receive a PPP loan for ERC eligibility purposes. Thus, any ERC claimed before the closing date will not be subject to recovery. However, any salary paid by the Purchaser to employees who were employed by the Target Employer at the Closing Date will not be treated as qualified salary for ERC purposes. As a result, the buyer will not be able to claim the CER for salaries paid to permanent employees of the target employer.
The FAQ does not cover all outstanding questions regarding ERC and PPP loans. The FAQ does not address whether the ERC should be recouped if a buyer with a PPP loan acquires a lens that has used the ERC prior to the trade closing date, nor does the FAQ contemplate any transactions. in which the buyer has a PPP loan. The FAQ also does not explicitly address the treatment of share purchases treated as asset acquisitions under Section 338 or Section 336 (e). In the event of a section 338 (g) election, the new target, rather than the purchaser, will be deemed to have assumed the obligations of the old target for tax purposes. In the event of an election under Section 338 (h) (10), the purchaser will be deemed to have assumed the obligations of the PPP loan for tax purposes, but not for commercial law purposes. In the case of an election under section 336 (e), which can be made without the consent of the purchaser, the purchaser will be considered to have purchased the assets of the target.
Implications for M&A transactions
While FAQs are not legally permitted, they provide welcome confirmation that the acquiring employer in a merger and acquisition transaction will not have to recover or forgo the ERC.
Parties should verify early in the due diligence process whether the buyer, target, or both have claimed the ERC or received a PPP loan. This will allow the parties to develop a transaction structure and strategies to deal with situations where one of the parties to the transaction has claimed the ERC and the other has claimed a PPP loan. It will also be important to determine whether the party that received the PPP loan has paid, or will have paid before closure, sufficient eligible expenses to achieve full cancellation of the PPP loan. Buyers should keep in mind that if they assume PPP loans, the qualifying expenses will not be deductible if the loan is canceled. Our analysis of recent guidelines on the deductibility of expenses paid with the proceeds of PPP loans can be found here. PPP loan issues may also require purchase price adjustments, trust integers, declarations and indemnification provisions in purchase contracts.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.
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