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Employee retention credit FAQ updated

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Tax Hot Topics newsletter The IRS recently updated its frequently asked questions (FAQs) on the employee retention credit to provide guidance on situations where a target employer in a merger or acquisition has taken a loan under the Paycheck Protection Program (PPP).

Under the CARES Act, employers that receive a PPP loan are prohibited from claiming the employee retention credit as well. In addition, all members of an aggregated group, as determined under the employee retention credit rules, are treated as a single employer. As such, if one member of an aggregated group received a PPP loan, all other members generally are prohibited from claiming the employee retention credit.

The latest guidance, issued under FAQs 81a and 81b, addresses the impact of these restrictions in transactions where the target employer in a merger or acquisition had received a PPP loan and the acquiring employer did not.

FAQ 81a specifically covers transactions involving the acquisition of stock or other equity interests. It provides that if, prior to the transaction closing date, the target satisfied its PPP loan or submitted a forgiveness application and established an interest-bearing escrow account in accordance with the applicable Small Business Administration guidance, the aggregated employer group will not be treated as having received a PPP loan and any member may be eligible to claim the employee retention credit if otherwise eligible to do so. If the target employer’s PPP loan is not fully satisfied and no escrow account was established prior to the transaction closing date, FAQ 81a provides that the aggregated employer group, other than the target, will not be treated as having received a PPP loan and may be eligible to claim the employee retention credit.

In both situations, any employee retention credit claimed by the acquiring employer prior to the transaction closing date will not be subject to recapture under the CARES Act. However, in the second scenario, the target employer will remain ineligible for the credit with respect to any wages paid to target employees before or after the closing date.

FAQ 81b addresses transactions involving the acquisition of assets and liabilities of an employer that received a PPP loan. It provides that regardless of whether the acquiring employer assumes the target’s obligations under the PPP loan, the acquiring employer will not be treated as having received a PPP loan and thus may be eligible for the employee retention credit. However, if the acquiring employer assumes the target’s PPP loan obligation, wages paid after the closing date to any individual who was employed by the target employer on the closing date cannot qualify as wages for purposes of the employee retention credit. In either scenario, any employee retention credit claimed by the acquiring employer before the closing date will not be subject to recapture.

The updated FAQs do not address the situation where an acquiring employer had received a PPP loan, but the target employer had not. It is unclear the extent to which, if any, the updated guidance may apply in that situation. It should also be emphasized that IRS FAQs generally are not binding on the IRS and taxpayers generally cannot rely on the guidance as legal authority.

Contacts:
Jeff Martin
Partner
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
+1 202 521 1554

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