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Employee retention credit where stock or assets of PPP loan recipient are acquired

December 4, 2020

Article provided by Thomson Reuters

On its website, the IRS has updated its COVID-19 employee retention credit FAQs. One FAQ addresses how eligibility for the credit is affected if an employer acquires an entity that had received a Paycheck Protection Program (PPP) loan and, under the aggregation rules, the employers are treated as a single employer as a result of the transaction. The other FAQ addresses how is eligibility for the credit is affected if an employer acquires the assets of another employer that received a PPP loan.
Background—employee retention credit. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (PL 116-136; the Act) provides a refundable payroll tax credit for 50% of wages paid by Eligible Employers to certain employees during the COVID-19 crisis (the 'employee retention credit' or credit). (Act Sec. 2301(a)) The IRS has issued detailed FAQs regarding the employee retention credit. See IRS issues detailed employee retention credit FAQs (05/01/2020).
For purposes of determining an employer's eligibility for and the amount of the employee retention credit, all entities that are treated as a single employer under Code Sec. 52(a)Code Sec. 52(b)Code Sec. 414(m), or Code Sec. 414(o) (collectively, the 'aggregation rules') are considered one employer. (IRS website: COVID-19-Related Employee Retention Credits: Determining Which Entities are Considered a Single Employer Under the Aggregation Rules FAQs)
Background—recapture provision. Act Sec. 2301(l)(3) provides that the IRS must issue guidance as necessary to provide for the recapture of the credit if the credit is allowed to a taxpayer that receives a Paycheck Protection Program (PPP) loan (discussed below) during a subsequent quarter.
Background—PPP. Under Act Sec. 1102, a recipient of a loan (covered loan) made pursuant to the Paycheck Protection Program (PPP) (under section 7(a)(36) of the Small Business Act (15 USC 636(a)(36)) may use the proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations.
Update to FAQs regarding the PPP. The IRS has updated its detailed employee retention credit FAQs regarding the interaction of the credit with receipt of PPP loans:
Q. How is eligibility for the employee retention credit affected if an employer (Acquiring Employer) acquires the stock or other equity interests of an entity (Target Employer) that had received a PPP loan and, under the aggregation rules, the employers are treated as a single employer (Aggregated Employer Group) as a result of the transaction?
A. If the Target Employer had received a PPP loan, but prior to the transaction closing date, the Target Employer fully satisfied the PPP loan, or submitted a forgiveness application to the PPP lender and established an interest-bearing escrow account in accordance with Small Business Administration (SBA) rules, then, after the closing date, the Aggregated Employer Group will not be treated as having received a PPP loan, provided that the Acquiring Employer (including any member of the Acquiring Employer's pre-transaction Aggregated Employer Group) had not received a PPP loan before the closing date and no member of the Aggregated Employer Group receives a PPP loan on or after the closing date.
In this case, any employer that is a member of the Aggregated Employer Group, including the Target Employer, may claim the employee retention credit for qualified wages paid on and after the closing date, provided that the Aggregated Employer Group otherwise meets the requirements to claim the employee retention credit.
In addition, any employee retention credit claimed by the Acquiring Employer's pre-transaction Aggregated Employer Group for qualified wages paid before the closing date will not be subject to recapture.
If the Target Employer had received a PPP loan, but prior to the transaction closing date, the PPP Loan is not fully satisfied and no escrow account was established in accordance with SBA rules, then, after the closing date, the Aggregated Employer Group (other than the Target Employer) will not be treated as having received a PPP loan, provided that the Acquiring Employer (including any member of the Acquiring Employer's pre-transaction Aggregated Employer Group) had not received a PPP loan before the closing date and no member of the Aggregated Employer Group receives a PPP loan on or after the closing date.
Any employer (other than the Target Employer) that is a member of the Aggregated Employer Group may claim the employee retention credit for qualified wages paid on and after the closing date, provided that the Aggregated Employer Group otherwise meets the requirements to claim the employee retention credit.
In addition, any employee retention credit claimed by the Acquiring Employer's pre-transaction Aggregated Employer Group for qualified wages paid before the closing date will not be subject to recapture. However, the Target Employer that received the PPP loan prior to the transaction closing date and that continues to be obligated on the PPP loan after the closing date is ineligible for the employee retention credit for any wages paid to any employee of the Target Employer before or after the closing date.
Q. How is eligibility for the employee retention credit affected if an Acquiring Employer acquires the assets of a Target Employer that received a PPP loan?
A. An Acquiring Employer that acquires the assets of a Target Employer that had received a PPP loan will not be treated as having received a PPP loan by virtue of the asset acquisition, provided that the Acquiring Employer does not assume the Target Employer's obligations under the PPP loan. In this case, the Acquiring Employer will be eligible for the employee retention credit after the transaction closing date if the employer otherwise meets the requirements to claim the credit. In addition, any employee retention credit claimed by the Acquiring Employer for qualified wages paid before the closing date will not be subject to recapture.
If, as part of the acquisition of the Target Employer's assets and liabilities, the Acquiring Employer assumes the Target Employer's obligations under the PPP loan, then after the transaction closing date, the Acquiring Employer generally will not be treated as having received a PPP loan, provided that the Acquiring Employer had not received a PPP loan before or on or after the closing date; however, the wages that may be treated as qualified wages after the closing date will be limited.
Specifically, the wages paid by the Acquiring Employer after the closing date to any individual who was employed by the Target Employer on the closing date shall not be treated as qualified wages. Subject to this limitation, the Acquiring Employer may claim the employee retention credit for qualified wages paid on and after the closing date, provided that the employer otherwise meets the requirements to claim the employee retention credit.
In addition, any employee retention credit claimed by the Acquiring Employer for qualified wages paid before the closing date will not be subject to recapture.
 Observation. Although IRS doesn't say so specifically, this Q&A would seem to apply only if Acquiring Employer acquires all of the Target Employer’s assets and all of its liabilities.