As explained in our April 2 alert, an employer can either obtain a PPP loan or claim the ERC, but not both. Prior to the new IRS clarification, it was unclear whether a buyer’s ability to claim the ERC could be affected (or if the buyer would be required to repay any amount of the ERC previously claimed) if it purchases the equity interests or the assets and liabilities of an entity with a PPP loan. In the FAQs, the IRS clarifies that under certain conditions and limitations, the acquiring employer’s eligibility to claim the ERC would not be impacted by such acquisition.
In the context of an acquisition of equity interests of an entity with a PPP loan, where such entity is expected to become a member of the acquiror’s aggregated group under the ERC rules, the IRS clarified in Q/A 81a that:
- If the PPP loan was satisfied prior to the acquisition date, or the acquired entity submitted a forgiveness application to the PPP lender and established an escrow account, the buyer may claim the ERC post-acquisition for qualified wages paid post-acquisition, including with respect to the wages paid to the employees of the acquired entity (provided the other requirements for the ERC are satisfied). In addition, no ERC claimed by the acquiror pre-acquisition is subject to recapture. Under this scenario, neither the acquiror nor the acquired entity are impacted by the existence and forgiveness of the PPP loan post-acquisition.
- If the PPP loan was not fully satisfied prior to the acquisition, or the acquired entity did not submit the forgiveness application and no escrow account was established, the acquiror (and its aggregated group other than the acquired entity) may claim the ERC after acquisition for qualified wages paid post-closing (assuming the other requirements for the ERC are satisfied) and would also not be subject to recapture but the acquired entity (that is still subject to the PPP loan) continues to be ineligible for the ERC for any wages paid to any employee of such entity before or after the acquisition.
Therefore, to the extent possible, we recommend as part of the negotiation to require a target to submit the PPP forgiveness documents and set up an escrow.
The acquisition of assets from an entity with a PPP loan has a similar result to the equity acquisition described above. In such cases, the IRS clarified (Q/A 81b) that:
- If the PPP loan is not assumed by the acquiror, the transaction will have no effect on the acquiror’s eligibility to claim ERC nor would it give rise to recapture of previously claimed ERC by the acquiror.
- If the acquiror assumes the PPP loan, then a bifurcated approach will apply. The acquiror will remain eligible for the ERC with respect to its own employees’ wages (not would it be subject to recapture) but will not be able to claim the ERC with respect to employees who were employed by the seller of the assets prior to the acquisition. This bifurcation can result in the administrative complexity of tracking specific employees’ wages and buyers should consider implementing procedures to address this requirement.
Parties to such transactions should consider how this clarification may affect current plans to obtain a PPP loan or file for forgiveness. In addition, potential liabilities and recapture should be addressed in the purchase agreement.
Although this guidance offers welcomed clarity to buyers and sellers, it does leave some unanswered questions. For example, it is not clear how transactions that are structured as a sale of equity but are treated for income tax purposes as an asset sale, should be treated. More guidance may be needed in that area.
The COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Co-authors Sharon Shachar, partner, and Sarah Herman, associate, are members of the tax practice group within the corporate and securities department at Klehr Harrison.