IRS has issued new guidance that provides significant flexibility allowing buyers of PPP borrowers to continue using the Employee Retention Tax Credit (ERTC) in most structures currently being used in the market today. It’s always a beautiful day for the deal community when IRS actually does something to help M&A deals, so let’s cherish the day* and dive in.
Recall that the ERTC is not available to PPP borrowers and to other companies that are part of that PPP borrower’s “Aggregated Employer Group,” because they are all treated as a single employer for purposes of ERTC eligibility. This had previously left significant uncertainty regarding ERTC eligibility for buyers who acquire a PPP borrower in a stock deal, and thus become treated as a single employer with that PPP borrower because the acquisition makes them part of the same Aggregated Employer Group.
The weight of that uncertainty has been at lastlifted by the new guidance. So you don’t have to lose yourself reading the new FAQs 81a and 81b, we will summarize them here:
· In stock deals, the buyer (referred to in the new FAQs as the “Acquiring Employer”) of a PPP borrower (the “Target Employer”) may continue using the ERTC across all of its Aggregated Employer Group, other than the PPP Borrower Target Employer, for both pre- and post-closing periods, as long as no other member of that group has received a PPP loan and as long as the Acquiring Employer otherwise meets the eligibility requirements (i.e., partially or fully suspended operations due to governmental lockdown orders due to COVID-19, or has a significant decline in gross receipts vs. 2019), and no prior ERTC amounts are subject to recapture. This applies to all legacy buyer entities, even if the PPP Borrower Target Employer does not pay off the loan or fit in the safe harbor described below.
· In a stock deal, the PPP Borrower Target Employer itself becomes eligible to use the ERTC “on and after the closing date” as part of the buyer’s Aggregated Employer Group if, and only if, prior to closing of the stock acquisition, it has “fully satisfied” the PPP loan or fits in the SBA safe harbor by submitting a forgiveness application and establishing an “interest-bearing escrow account” in the amount of at least the PPP loan balance, as described in the SBA’s October 2 notice, as summarized in our email below.
o To clarify, if the PPP Borrower Target Employer does not either pay off its PPP loan or comply with the safe harbor described below, then that entity (and the buyer’s Acquiring Employer Aggregated Employer Group) cannot claim the ERTC for “wages paid to any employee of the Target Employer before or after the closing date.”
o Our tax team is further analyzing this, but to a mere corporate lawyer like me it’s not immediately clear wither the “before or after” clause modifies “wages” or “employee”, such that a buyer could transfer target employees to a buyer entity immediately after closing and thus claim the ERTC for wages paid by the other entity.
· In asset deals, a somewhat similar rationale applies. The Acquiring Employer can continuing claiming the ERTC for all of its legacy employees even if it assumes the PPP loan in connection with the asset deal. However, if the Acquiring Employer does assume the PPP Borrower Target Employer’s PPP loan, then it cannot claim the ERTC for any wages paid “after the closing date to any individual who was employed by the [PPP Borrower] Target Employer on the closing date.” (This structure has not been used much, if at all, in our experience).
Prior to this guidance, it had been challenging to structure the purchase of a target with a large PPP loan by a buyer had made or intended to make signficant use of a PPP loan in situations where an asset deal was not ideal due to regulator, third-party contractual consent or other issues. Most of us were not expecting something this helpful, so the times, they are a-changin’. This approach provides significant flexibility to buyers and should faciliate a risinglevel of these and other M&A transactions involving PPP borrowers by eliminating the buyer’s potential loss of the ERTC, and by (surprisingly?) bestowing a halo on the acquired PPP borrower and allowing it to begin utilizing the ERTC after the sale.
(But, don’t say the the thrill is gone just yet. Should we stay tuned for clever tax practitioners to create acquisition structures designed to facilitate use of the ERTC? Only in America. At least until IRS or SBA changes its approach and for that, there’s always tomorrow.)
*The songs underlined above are found on President Obama’s Promised Land playlist,which he announced (perhaps ironically?) in a tweet on Monday. We intend no political statement here; just noting there’s some pretty good music on there. (Though I have to say, I would have expected Dreams instead of Rhiannon, but maybe he figured that had been recently taken. Either way, the Fleetwod Mac renaissance continues.)