IRS issues CARES Act guidelines on common tax issues in merger and acquisition transactions | Alston & Bird

In a series of guidelines in various forms, all released in the same week, the IRS has provided much-needed insight into the interplay of two important, but mutually exclusive, benefits offered in aid, relief and relief. Coronavirus Economic Security (CARES) Act and also reaffirmed its position on the non-deductibility of expenses financed by the proceeds of the loan under the Paycheck Protection Program (PPP).

PPP loans and employee retention credits

Under the CARES Act, a PPP loan borrower cannot also claim Employee Retention Credits (ERTCs). In fact, no member of the “aggregate group” of a PPP loan borrower is eligible for ERTCs.

Since the CARES law was enacted, M&A practitioners have struggled to understand how the provisions for ERTC and PPP loans interact when a target is a PPP loan borrower and the buyer (or a member of its aggregate group) called for ERTCs. The problem is that when the borrower of the PPP loan is part of the buyer’s aggregate group, it could taint the group, causing the potential clawback of previous ERTCs claimed by the group and barring group members (who have not otherwise received from PPP loan) to claim ERTC in the future. This problem is particularly acute for private equity funds, which may have many holding companies treated as part of the aggregate group of an acquiring fund for ERTC purposes. When considering a new target with a PPP loan (even if the loan was finally repaid before May 18, 2020, in which case the borrower is considered never to have received a PPP loan for the purposes of the ERTC, but nonetheless gave rise to a persistent payback risk in the perspective of the most prudent advisers), these ERTC risks have often caused parties to restructure transactions in an effort to mitigate tax consequences. potential negatives, often occurring from the sale of shares to the sale of assets with significant business and tax implications.

On November 16, 2020, the IRS added FAQ 81a and 81b to its ERTC Guidance List, which provides guidance that will help buyers and sellers better understand the implications of acquiring a target who has (or has taken but returned, repaid or canceled) a loan PPP.

The guidelines deal with the circumstances in which an acquiring employer acquires either (1) shares or other equity interests; or (2) the assets and liabilities of an entity (a target employer) that has received a PPP loan.

Equity investments

When a target employer, before an equity investment, either (1) fully satisfies its PPP loan in accordance with article 1 of the Opinion of the Small Business Administration of October 2, 2020 (via refund or total discount); or (2) submits a rebate request and establishes an escrow account in accordance with section 2.a of the SBA Notice, then after the acquisition date, the acquiring employer (and its aggregate group, including the employer target) will not be treated as having obtained a PPP loan, provided that the acquiring employer (and any member of its pre-transaction aggregate group) has not received a PPP loan by the closing date and that no member of its aggregate group does not receive a PPP loan on or after the closing date. In this case, the acquiring employer and any member of its aggregate group (including the target employer after the acquisition) can claim ERTCs for eligible wages paid as of the closing date. In addition, ERTCs for qualified salaries paid by the acquiring employer and any member of its aggregate group before the closing date will not be clawed back.

Relief is also provided in the case of equity acquisitions, even if the PPP loan is not fully satisfied or if a forgiveness request is not submitted (and an escrow account is not established) before the closing date in accordance with section 1 or 2.a of the opinion of the ASB. However, in these circumstances, the target employer who received the PPP loan prior to the vesting date but remains committed under the loan after the closing date is not eligible for ERTC on any eligible salary it pays. before or after the closing date. This raises additional issues and open questions. Buyers should be aware that while acquiring a target who is a PPP loan borrower in this circumstance will not result in the clawback of their ERTCs, they will not be able to ask the target employer to claim ERTCs. for its own qualified salaries. Also, what happens after the PPP loan is fully satisfied after closing – could the target employer claim ERTC for eligible salaries paid after the loan is fully satisfied? Also, how is this limitation applied after post-closing restructurings (i.e. transferring employees to a new entity via a post-closing merger)?

Asset acquisitions

When an acquiring employer acquires the assets and liabilities of a target employer, but fails to meet its obligations under the PPP loan, the ERTCs claimed by the acquiring employer prior to the closing date will not be subject to clawback. , and the acquiring employer will also be eligible to claim ERTC after the closing date, provided that the acquiring employer (or any member of its aggregate group) has not received a PPP loan before and is not receiving a loan PPP after acquisition. However, in a sale of assets where the acquiring employer assumes the obligations of a target employer under the PPP loan, the acquiring employer cannot claim ERTC for eligible wages paid after closing to any person employed by the target employer on the closing date. Subject to this limitation, however, the acquiring employer may otherwise claim ERTCs after the closing date. Additional guidance may be needed, for example, to address circumstances in which an employee is fired by the target employer before the closing date (and therefore not employed by the target on that date) and rehired by the acquiring employer after. fence.

Non-deductibility of PPP loan expenses

In Rev. Rul. 2020-27, the IRS confirmed its position (published earlier this year in Notice 2020-32) that expenses paid or incurred from the proceeds of canceled PPP loans cannot be deducted. The ruling specifies that these expenses are not deductible even if a PPP loan is canceled in a subsequent fiscal year. In a scenario described in the decision, a PPP loan borrower pays “qualifying expenses” (meeting the requirements of the CARES Act to be eligible for a loan forgiveness) and requests a forgiveness in November 2020 but does not receive a determination of the loan forgiveness. lender by the end of 2020. In a second scenario, the facts are the same, except that the borrower does not request a rebate in 2020 but expects to request it in 2021. The IRS has ruled that in both scenarios, the taxpayer had a reasonable expectation of rebate and could not deduct these expenses.

Congress has criticized the IRS for its position in no uncertain terms. A day after the decision was released, the Senate Finance Committee issued a bipartisan opinion declaration saying their intention in the CARES Act was not to deny these deductions to taxpayers, urging the IRS to reconsider its position and expressing hope that Congress would clarify this intention in subsequent legislation.

In the accompanying guidelines, the IRS in Rev. Proc. 2020-51 has provided a safe haven for PPP loan borrowers who have had their forgiveness requests fully or partially refused (or who decide to withdraw their requests). These borrowers are authorized to claim deductions for covered expenses and may claim these deductions on their original 2020 tax return, on an amended 2020 tax return or administrative adjustment request, or on their original tax return for the following tax year in which the rebate request was refused or withdrawn.

Buyers often ask sellers with PPP loans for statements that no proceeds from those loans have been unduly deducted. In light of the Safe Harbor, sellers, in appropriate circumstances, should consider arrangements that recoup the benefit of permitted deductions if a pardon request is denied or withdrawn after closing (or if the IRS position is replaced by Congress).

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