The Small Business Administration issued a procedural notice for business ownership changes for entities that have an outstanding Paycheck Protection Program loan. So, if your business is merging, buying or selling and one of the entities involved has a PPP loan, there are a few things you need to know.
- The seller will be required to put a portion of the purchase price related to the outstanding PPP loan balance in escrow until the loan is forgiven.
- The seller would be able to defer the taxation of these escrowed funds if they use the installment sale method of accounting.
- PPP loan borrowers must inform the SBA and the bank that originated the loan when there is a substantial change in ownership before the PPP loan has been forgiven. This would include the sale/transfer of 20% or more of the common stock, the sale/transfer of 50% or more of the business’ assets or a merger where at least one of the entities have an outstanding PPP loan.
Generally, both the SBA and the bank whom originated the PPP loan must grant approval before a sale, merger or other change in ownership occurs. An exception to the general rule occurs in non-merger transactions where less than 50% of the common stock changes hands, if:
- The PPP borrower submits a PPP loan forgiveness application to the lender;
- An escrow account controlled by the lender is funded in an amount equal to the outstanding PPP loan balance; and
- Those escrow funds first pay any remaining PPP loan balance prior to being disbursed
If your ownership change falls outside of these conditions, your lender will ask for a list of items that will be needed for SBA approval including the relevant details of the transactions, including ownership of the purchasing entity.
After the change of ownership is approved, the liability for the loan remains with the PPP borrower. In the case of a merger, the successor entity would retain liability. If the new owners have a separate PPP loan, the funds and related expenditures must be appropriately segregated and accounted for separately.
If you’re contemplating the sale of your business, the purchase of another, or merging with one or more other businesses, you’ll need to evaluate the impacts of PPP loans in your due diligence. Dark Horse CPAs stand ready to help you navigate through these, and other, tax considerations.
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