CARES Act update: US Treasury Department issues guidance allowing buyers to claim employee retention tax credits if target company had a PPP loan

US Tax Alert

COVID-19 Alert

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The US Treasury Department has issued guidance to provide relief from statutory rules in the CARES Act that precluded an employer from claiming (or keeping) the employee retention credit (ERC) in the event that it acquired a target company that had taken a small business PPP loan under the CARES Act.  The statutory rules absent the guidance put the economics of some planned mergers in doubt.

The statutory rules provide that if an employer, defined as the aggregated group of commonly owned companies (using generally a 50-percent common ownership test), receives a PPP loan it may not also claim the ERC.  This meant that if any member of the controlled group received a PPP loan, no member of the controlled group could take the ERC.  This applied even in the case of the acquisition by the controlled group after the fact of an entity that had received a PPP loan.  The only relief Treasury previously provided required the entity that received the PPP loan to repay it by May 18, 2020.

The new guidance, issued in the form of FAQs, provides circumstances under which an acquiring employer may keep or claim the ERC even though it purchases the stock or assets of a target employer that received a PPP loan.  In general, the guidance provides:

  • If the target employer received a PPP loan but prior to the close of its purchase by the acquiring employer fully satisfied the loan or filed for loan forgiveness to its PPP lender and set up an interest-bearing escrow account in accordance with the SBA's Procedural Notice of October 2, the acquiring employer will not be treated as receiving a PPP loan prior to the closing date and will not be subject to recapture with respect to any ERC it claimed prior to the closing date.  Moreover, the members of the acquiring employer group including the target employer may claim the ERC for wages paid after the closing date.
  • If the target employer received a PPP loan but has not fully satisfied it or set up the escrow account, the members of the acquiring employer are permitted the ERC for wages paid both before and after the closing date, but because the target employer remains obligated on the PPP loan, its employees are not eligible for the ERC.
  • In the event of an asset acquisition, the acquiring employer is not disqualified from the ERC as long as it does not assume the target employer`s obligations under the PPP loan.  The target employer's employees' wages are not ERC creditable, however.
  • If the acquiring employer does assume the target employer`s obligations under the PPP loan it remains eligible for the ERC, but any wages paid by the acquiring employer to any individuals who worked for the target employer on the closing date will not be ERC eligible. 

This is a general description of these new rules and the application to a particular transaction will require a specific facts and circumstances analysis which we would be pleased to provide.  In general, this new guidance will for the most part remove the potential loss of the ERC in merger transactions involving entities that received PPP loans. Learn more by contacting Evan Migdail and Melissa Gierach, or your DLA Piper lawyer. 


Visit www.sba.gov, www.treasury.gov and www.irs.gov for the most up to date information on the Paycheck Protection Program and Employee Retention Tax Credits.


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