IRS Eases PPP Loan Stumbling Block in M&A Deals

Pillsbury Winthrop Shaw Pittman LLP

TAKEAWAYS

  • The IRS’s informal FAQs provide comfort that an acquirer, including affiliated companies treated as a single employer (employer group), will not lose its past or future employee retention tax credits (ERTCs) if it acquires a target with a Paycheck Protection Program (PPP) loan outstanding on or any prior to closing (if after May 18, 2020).
  • Going forward, private equity and strategic buyers should be relatively unconcerned by targets with outstanding PPP loans.

The IRS has provided comfort that an acquirer will not jeopardize its ERTCs if it acquires a target that has entered into a PPP loan.

The torment resulted from the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s prohibition against an employer group taking ERTCs if any member of the employer group had received a PPP loan, even if that PPP loan had been repaid (unless the loan was repaid by May 18, 2020). The ban had not previously addressed situations where a target with a PPP loan that was outstanding any time after May 18, 2020 (whether or not repaid) by the closing date became part of acquirer’s employer group by virtue of an acquisition. In such situations, taxpayers were concerned that the ERTCs not only of the acquirer but also the acquirer’s entire employer group would be jeopardized on a retroactive basis. The breadth of the prohibition had a severe chilling effect on M&A transactions involving both strategic buyers and private equity buyers whose portfolio companies constituted an employer group, leading to abandoned deals and complicated restructurings.

The IRS relief is far-reaching and comes in the form of the IRS’s informal FAQs, updated on November 16, 2020. (Note: These FAQs include a disclaimer reminding taxpayers that they cannot rely on them, although practitioners use them to understand IRS thinking on an issue.) The revision provides comfort that an acquirer and its employer group will not lose its past or future ERTCs if it acquires a target with a PPP loan outstanding on or any prior to closing (if after May 18, 2020):

  • Target Stock (or Other Equity) Acquisition. If a member of an employer group acquires the stock (or other equity interests) of a target that had received a PPP loan prior to the closing date, and as a result of the acquisition the target becomes a member of the acquirer’s employer group,

- the acquirer’s pre-closing employer group will not be required to recapture ERTCs taken prior to the closing date and will be eligible to seek ERTCs for the periods on and after the closing date and

- the target entity (i) may claim ERTCs for the periods on and after the closing date if, prior to the closing date, its PPP loan had been satisfied or it had applied for forgiveness and established an escrow account (see Small Business Administration Notice, effective Oct. 2, 2020, paragraphs 1 and 2.b) but (ii) may not claim ERTCs either before or after the closing date if the PPP loan remains outstanding (with no forgiveness application/escrow arrangement) after the closing date.

  • Target Asset Acquisition. If a member of an employer group acquires the assets of a target that had received a PPP loan prior to the closing date,

- the acquirer’s ability to claims ERTCs for all periods will be unaffected by the acquisition

- except that if the acquirer assumes the liability for the PPP loan, wages paid by the acquirer after the closing date to any individual who was employed by the target on the closing date shall not be treated as qualified wages for purposes of the ERTC.

Going forward, private equity and strategic buyers should be relatively unconcerned by targets with outstanding PPP loans, subject to counsel’s comfort with IRS guidance in FAQ form. The exception may be if the ERTC ban on a target entity, or employees of a group acquired in an asset acquisition, would be material to the acquisition.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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