by Vanessa L. Kanaga, Esq., President and Director of Content Development, InterActive Legal
An Additional Consideration for Those Advising Business Owners on Lifetime Gifts1
Restrictions on Change in Ownership
On October 2, the SBA issued Procedural Notice Control No. 5000-20057 setting forth "required procedures for changes of ownership of an entity that has received [PPP] funds (a 'PPP borrower')." That notice provides:
A "change of ownership" is defined as (1) the sale or other transfer of at least 20% of the common stock or other ownership interest of the PPP borrower, whether in one or more transactions, (2) a sale or other transfer of at least 50% of the PPP borrower's assets, as measured by fair market value, again whether in one or more transactions, or (3) merger of a PPP borrower with or into another entity.
This is consistent with the terms of the SBA promissory note form made available for use by PPP Lenders (the "SBA Note Form"), which provides that the PPP borrower is in default if it "[r]eorganizes, merges, consolidates, or otherwise changes ownership or business structure without [the PPP] Lender's prior written consent."4 However, in addition to requiring the PPP Lender's approval, the notice establishes certain circumstances in which a change of ownership must also be approved by the SBA.
Estate planners advising clients with ownership interest in PPP borrowers should review the notice and be aware that certain transfers of the client's ownership interest will require approval by the PPP Lender and possibly the SBA.
Additional Terms of Default
In addition to the restrictions on changes in ownership referenced above, estate planners should also be aware of the other terms of default under the PPP borrower's promissory note, and consider how those terms of default may affect potential transfers of a client's interest in the PPP borrower. For example, under the SBA Note Form, the terms of default include the PPP borrower's assignment for the benefit of a creditor, and "any adverse change in financial condition or business operation that [the PPP] Lender believes may materially affect [the PPP borrower's] ability to pay" the promissory note. Though most lifetime transfers will not trigger these provisions, it is possible that certain transactions could be problematic, depending on the structure. In addition, PPP Lenders were permitted to use their own form of promissory note, rather than the SBA Note. Accordingly, it is important to review the terms of the promissory note signed by the PPP borrower when evaluating its potential implications relating to lifetime transfers.
Non-Deductibility of Expenses
Although not directly affecting lifetime transfers by owners, it is important to note that PPP borrowers seeking loan forgiveness are not permitted to deduct from income taxes the expenses for which the PPP loan proceeds were used. In order to be eligible for forgiveness, a majority of the loan proceeds must have been used to cover wages and other eligible payroll costs, many of which are generally deductible expenses for income tax purposes. The CARES Act provides that any PPP loan amount forgiven is excluded from the PPP borrower's gross income for federal income tax purposes.5 In Rev. Rul. 2020-276, the IRS confirmed that any such forgiven loan proceeds (or loan proceeds expected to be forgiven) would be considered tax-exempt income, and any otherwise deductible expenses allocated to the forgiven loan proceeds (or loan proceeds expected to be forgiven) are non-deductible under Section 265(a)(1) of the Code.
2 For additional information, see Section 1102 of the CARES Act, Pub. L. § 116-136 (Mar. 27, 2020); see also https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program#section-header-2.
5 See Pub. L. § 116-136, Section 1106(i).
6 Released in advance on November 18, 2020. Rev. Rul. 2020-27 confirms earlier guidance issues in IRS Notice 2020-32, 2020-21 IRB 837 (May 18, 2020).