On November 16, the IRS added two new FAQs to its website that address an issue that has been concerning employers since the CARES Act was adopted.  For purposes of the employee retention credit (“ERC”), Section 2301(d) of the CARES Act includes an aggregation rule that treats all employers required to be aggregated under section 52 of the Code or certain provisions of section 414 of the Code to be treated as a single employer.  (See earlier coverage of the aggregation rule.)  Because the CARES Act also prohibits any employer who receives a Paycheck Protection Program (“PPP”) loan (regardless of whether the loan is forgiven) from claiming the ERC.

Based on the statutory language, practitioners have been concerned that if an employer acquires another employer that previously received a PPP loan, the acquirer’s entire aggregated group may no longer be eligible to claim the ERC.  More troubling, Section 2301(l)(3) of the CARES Act instructs the Treasury to promulgate regulations for the recapture of the ERC claimed by an employer that subsequently obtains a PPP loan.  This caused concerned that the acquirer could not only lose the ability to claim the ERC prospectively after the acquisition, but could be required to repay any amount or ERC previously claimed.  Although the new FAQs are not binding on the IRS, they prove welcome news.

Stock Acquisitions

 New FAQ 81a addresses the effect of acquiring an employer that obtained a PPP loan in a stock acquisition that requires the acquiring employer group and acquired employer to be aggregated for purposes of the ERC.  The FAQ indicates that the effect of the transaction varies depending upon whether or not the PPP loan was fully satisfied or an escrow was established pre-transaction under existing Small Business Administration guidance from October 2.

If the PPP loan was satisfied prior to closing or the target employer submitted a forgiveness application to the PPP lender and established an escrow account, the entire employer group post-closing (including the acquired employer) may claim the ERC after the closing for qualified wages paid post-closing (assuming the other requirements for the credit are satisfied).  In addition, no ERC claimed by the acquiring group is subject to recapture as a result of the acquisition.

If the PPP loan was not fully satisfied prior to closing or no pre-transaction escrow account was established, the acquiring employer group’s eligibility for the ERC is similarly not changed.  However, in this case, the acquired employer would remain ineligible to claim the ERC in the post-closing period, just as it was before the transaction.  In addition, any amount of ERC claimed by the acquiring group pre-transaction for qualified wages paid before the closing date are not subject to recapture under section 2301(l)(3) of the CARES Act.

Asset Acquisitions

New FAQ 81b addresses the effect of acquiring the assets of an employer who obtained a PPP loan.  The effect differs depending upon whether or not the acquiring employer assumes the PPP loan liability.  In neither case, however, is any amount of ERC claimed by the acquiring employer before the transaction subject to recapture.  If the acquiring employer does not assume liability for the PPP loan, the transaction will have no effect on the acquiring employer’s eligibility for the ERC.  Post-acquisition, the acquiring employer may claim the ERC (assuming the other requirements for the credit are satisfied) with respect to all employees, including those previously employed by the employer whose assets it acquired.

If, in contrast, the acquiring employer does assume liability for the PPP loan, the result is somewhat different.  Although the acquiring employer will remain eligible for the ERC, it may not treat wages paid to any employee who was an employee of the employer whose assets it acquired on the closing date as qualified wages.  As a result, the acquiring employer will not be able to claim the ERC with respect to employees who were employed by the employer whose assets is acquired on the closing date.

The FAQs provide welcome guidance that will resolve practitioner’s concerns with respect to many transactions.  In some cases, planning opportunities may exist post-closing to maximize the amount of ERC that may be claimed if the structure of the transaction did not maximize eligible pre-closing.  As Congress continues to express interest in expanding and extending the ERC, the relief provided in the FAQs may continue to be relevant in the future.

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Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.