11/19/20

Client Alert: IRS Guidance Addresses the Impact of M&A Transactions Involving PPP Borrowers on Employee Retention Tax Credits

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Attorneys & Professionals

On November 16, the IRS provided guidance clarifying the effect of M&A transactions involving target Paycheck Protection Program (PPP) borrowers on a business’s eligibility for the Employee Retention Tax Credit (ERTC).  The following summarizes this guidance.

Prior Guidance Failed to Address M&A Transactions

Prior IRS guidance emphasized two important points about the interplay between the ERTC and the PPP: 

This guidance did not address how these rules apply in the case of an M&A transaction where a target business with a PPP loan becomes a part of the acquirer’s Employer Group.

Updated Guidance for Equity Acquisitions

The updated guidance provides that the acquirer’s Employer Group remains eligible for the ERTC even if the target had been a PPP borrower.

Whether an ERTC can be claimed for post-closing amounts paid by target that had been a PPP borrower depends on actions taken by target before the transaction closing date:

Updated Guidance for Asset Acquisitions

Under the updated guidance, the following rules apply to transactions in which a PPP borrower’s assets are acquired by an Employer Group that is otherwise eligible to claim the ERTC:

Conclusion

The IRS’s updated guidance provides welcome clarity for M&A transactions involving a target PPP borrower.  The target entity’s PPP loan generally will not affect the ERTC of the members of the acquiring group.  In certain cases, the Employer Group may even be able to increase its qualifying wages for the ERTC by acquiring the target entity.

Eligibility for the ERTC is one of many tax considerations that should be considered when structuring an M&A transaction.  If you have any questions about the ERTC, the PPP or this latest guidance, please contact your Vorys attorney.