Employee Retention Credit: IRS Adds 81a and 81b to their FAQ

Adam Taplinger
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On November 16, 2020 the IRS added FAQ 81a and 81b to their ERC FAQ site. Both are related to the ERC eligibility / qualified wages of employers and controlled groups that may have acquired an entity which took PPP prior to the acquisition. FAQ 81a references SBA guidance released on October 2, 2020 with respect to the procedure to satisfy PPP loans in companies before those companies can be sold.

Check out the breakdown of the updated CARES Act COVID-19 Employee Retention Credit FAQ below:

81a – Specific to Stock (Equity) Purchases

  • If the PPP loan is satisfied or escrow is established pre-transaction
    • The control group acquiring the target may claim qualified wages for ERC both before and after the date of the acquisition. Exception: In the acquired company, qualified wages may only be claimed on or after the date of acquisition.
  • If the PPP loan is not satisfied and escrow is not established
    • The control group acquiring the target may claim qualified wages for ERC both before and after the date of the acquisition. Exception:  In the acquired company, qualified wages may not be claimed at all.
    • It should be noted that this FAQ is silent with respect to qualified wages if the PPP is satisfied post-transaction.

81b – Specific to Asset Purchases

  • If the PPP loan is not an assumed liability
    • The control group acquiring the target may claim qualified wages for ERC both before and after the date of the acquisition.
    • It should be noted that this FAQ does not distinguish between employees that came over from the target and existing employees.  
  • If the PPP loan is an assumed liability
    • The control group acquiring the target may claim qualified wages for ERC both before and after the date of the acquisition. Exception: For individuals employed by the target company now working for the acquirer, qualified wages may not be claimed in any scenario.
    • It should be noted that this FAQ is silent with respect to qualified wages if the PPP is satisfied post-transaction.

In any acquisition scenario, it is important for companies and their payroll providers to be thoughtful about how to either maintain or combine employee cohorts between companies and systems. Generally, during post-merger integration, employee payrolls are combined for ease of management and cost savings.

If the acquired company took PPP, payroll departments should be made aware of the situational requirements of maintaining separation in any employee groups. In the example of an asset purchase where the PPP loan is assumed, this is particularly important. If the employees of the target are comingled in the payroll reporting system with employees of the acquirer, the calculation of the ERC may become overly complicated. With respect to the ERC, the person or group conducting the calculation should separate the acquired employees from any analysis prior to certification. This extra step has the potential to be time consuming and may result in some incremental cost as the payroll provider may need to create new reports or data feeds.

Learn more about the CARES Act COVID-19 Employee Retention Credit.

Adam Taplinger is TCC’s Sponsor Solutions Director. With over 20 years of investment banking and operating experience, he has extensive knowledge with respect to P&L optimization of sponsor backed entities, including identifying and maximizing tax credits and other incentives.

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