IRS Issues New Guidance on Employee Retention Credits for Acquisitions Involving PPP

On Nov. 16, 2020, the Internal Revenue Service (IRS) issued two new Frequently Asked Questions (FAQs) on the Employee Retention Credit (ERC) and its interaction with other COVID-19 relief provisions. Specifically, the two new FAQs address the eligibility of a business (the Acquiring Employer) that acquires another business (the Target Employer), either through the acquisition of equity interests or the assets of the Target Employer, to continue to utilize the ERC when the Target Employer had received a Paycheck Protection Program (PPP) loan. As a reminder, FAQ 81 of the IRS guidance states, “An employer that receives a PPP loan may not receive an Employee Retention Credit, regardless of whether and when the loan is forgiven.” The new FAQs were issued to address situations where an Acquiring Employer did not have a PPP loan, but acquired an entity that does have a PPP loan.

Stock and Equity Acquisitions

FAQ #81a discusses the Acquiring Employer’s eligibility to utilize the ERC when acquiring the stock or other equity interests of a Target Employer that had obtained a PPP loan.

Scenario 1

If, prior to the acquisition closing date, the Target Employer fully satisfied its PPP loan or has created an interest-bearing escrow account at a financial institution containing the balance of the PPP loan and submitted its forgiveness application,[1] the Acquiring Employer will be treated as if it did not receive a PPP loan[2] and can claim the ERC for those wages paid subsequent to the transaction date and that are eligible for such credits. This means that any employer, including the Target Employer, within the Aggregated Employer Group may claim the ERC for qualified wages paid after the closing date. The guidance also states that any ERC claimed by the Acquiring Employer prior to the acquisition date will not be subject to the re-capture rules under Section 2301(l)(3) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Scenario 2

If, prior to the acquisition closing date, the Target Employer does not fully satisfy its PPP loan or create an interest-bearing escrow account at a financial institution containing the balance of the PPP loan and submitted its forgiveness application, the Acquiring Employer will still be treated as if it did not receive a PPP loan and can claim the ERC for those wages paid subsequent to the transaction date and that are eligible for such credits. Any qualified employer within the Acquiring Employer’s Aggregated Employer Group may still continue to utilize the ERC on qualified wages paid after the closing date of the transaction; however, unlike Scenario 1, the Target Employer that received the PPP loan prior to the transaction closing date and continues to be obligated on the PPP loan is ineligible to use the ERC on any wages paid to employees of the Target Employer, either before or after the transaction closing date. Similar to Scenario 1, any ERC claimed by the Acquiring Employer prior to the acquisition date will not be subject to the re-capture rules under Section 2301(l)(3) of the CARES Act.

Asset Acquisitions

FAQ #81b discusses the Acquiring Employer’s eligibility to utilize the Employee Retention Credit in an asset acquisition of a Target Employer that had obtained a PPP loan.

Scenario 1

If the Acquiring Employer does not assume the PPP loan obligation of the Target Employer, the Acquiring Employer will be eligible to utilize the ERC for the Acquiring Employer and Target Employer’s qualified wages paid after the transaction closing date, assuming it meets the requirements to claim the credit. Similar to the equity interests acquisition scenarios above, qualified wages paid before the closing date will not be subject to recapture.

Scenario 2

If the Acquiring Employer does assume the PPP loan obligation of the Target Employer, the Acquiring Employer will be treated as not receiving a PPP loan and is generally eligible to continue using the ERC for qualified wages. However, wages paid after the transaction date to employees of the Target Employer will not be considered qualified wages and are not eligible for the ERC. The Acquiring Employer may continue to use the ERC for qualified wages paid on or after the transaction date, assuming it meets the other requirements for eligibility.

For more information, reach out to us at CARESActQuestions@dhg.com.

References:

[1] See DHG’s alert on the Small Business Administration (SBA) Notice issued Oct. 2, 2020, for guidance on determining whether the PPP loan is considered “fully satisfied” and the establishment of an escrow account.

[2] Provided that the Acquirer did not receive a PPP loan prior to or after the transaction closing date.

CONTRIBUTORS

Denny Ard
DHG Solutions Lab Leader
Denny.Ard@dhg.com

Payal Shah
Manager, Assurance

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