November 30, 2020

Employer Retention Tax Credit Eligibility for Certain M&A Transactions

One of the many lessons learned from the COVID-19 pandemic is the importance of cash flow and the need for cash flow planning. When the pandemic first arrived in Atlanta many businesses were scrambling to adjust to the various government orders including forced business closures. This meant some had to make challenging decisions to reduce costs when limited, to no revenue, was generated.  Congress stepped in offering a lifeline in the form of the CARES Act which not only created the Paycheck Protection Program (PPP) but also introduced the  Employee Retention Tax Credit (Credit). The purpose of each was to provide businesses with an immediate and ongoing opportunity to increase working capital based on certain activities. Unfortunately, any business that took a PPP loan is not allowed to claim the Credit. However, for those involved in acquiring businesses with PPP Loans, questions have persisted about when, and if, an acquiring business could still claim the Credit.  To help clients, prospects, and others, Wilson Lewis has provided a summary of key details below.

Eligibility When Acquiring the Assets of Employer with a PPP Loan

The following rules should be considered when determining if an Atlanta business acquiring the assets and liabilities of another company that received a PPP loan is eligible for the credit.

• No Assumption of the PPP Loan – A business that acquires the assets of another company that received a PPP loan will not be treated as having received the loan simply by the acquisition assuming the acquiring business does not assume any PPP loan obligations. In this case, the acquiring business is eligible to claim the Credit after the transaction closing date. It is important to note that any Credit claimed by the acquiring business for qualified wages prior to the closing date will not be subject to recapture.
• Assumption of the PPP Loan – A business that acquires the assets of another company that received a PPP loan will not be treated as having received the loan, even though they are assuming the loan obligation. This is provided the acquiring business did not receive a PPP loan prior to, on, or before the transaction closing date. However, it is important to note the number of qualifying wages may be limited. For example, any wages paid by the acquiring business after the transaction to an individual employed by the target business is not eligible. When claiming the credit, the acquiring business can only claim qualifying wages paid on or before the closing date.

Eligibility When Acquiring Stock/Equity of a Business with a PPP Loan (Under Aggregation Rules) and Treated as a Single Employer

The following rules should be considered when determining if an Atlanta business that acquires the stock, or other equity interests of a business with a PPP loan, that results in the acquiring business being treated as a single employer, is eligible for the Credit.

• Loan Satisfied or Escrow Established Pre-Transaction – If the target business received a PPP loan but prior to the transaction closing date has satisfied the loan (or submitted a PPP loan forgiveness application), then post-closing, the new single employer will not be treated as having received a PPP loan. This assumes the acquiring business did not have a loan prior to closing and no member of the new employer group received a loan after the closing date.
• Loan Not Satisfied or No Escrow Established Pre-Transaction – If the target business received a PPP loan but did not satisfy or establish escrow, then after the closing date, the new single employer will not be treated as having received a PPP loan. This assumes the acquiring business did not have a loan prior to closing and no member of the new employer group received a loan after closing. Any business that is a member of the Aggregated Employer Group may claim the Credit for qualifying wages paid on or after the closing date.

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Taking advantage of the Employee Retention Tax Credit means immediate tax savings for Atlanta businesses. However, the details involved in determining eligibility when assets or equity of another business with a PPP loan, can be very complex. For this reason, it is important to consult with a qualified tax advisor to assess your situation and determine the best path forward. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.