Think Again: PPP Loans & Business Ownership Changes.

• Author: Legrand, Christine S.
• Position: Financialstrategies

The COVID-19 pandemic has caused many family business owners to consider gifting equity interests in their businesses due to the current low interest rates, the $ 11.58 million estate tax exemption and the somewhat depressed valuations for these businesses.

If the long-term growth prospects of a business remain favorable and if an owner's estate value is close to the current exemption amount, a gift of equity in the business can provide an opportunity to transfer a significant amount of future appreciation at low gift tax valuations.

However, a key consideration is whether the business holds a Paycheck Protection Program (PPP) loan, which may limit or prevent an equity transfer or negatively affect the forgiveness of the PPP loan by the Small Business Administration. Many small-business owners either still hold these loans or have recently applied for one.

The SBA uses the following thresholds to determine if there has been an ownership change in the PPP borrower's company (all transfers are considered from the date the borrower took out the PPP loan):

* At least 20 percent of the common stock or ownership is sold or transferred, including gifting, either in one or multiple transactions;

* Transfers of at least 50 percent of assets, measured at fair market value, either in one or multiple transactions, have occurred; and

* The business merges into or with another business.

When Is SBA or

Lender Approval Required?

The SBA's Notice 5000-20057, issued in October 2020, provides guidance about requesting approval for ownership changes of an entity that has received PPP funds. The Notice does not specifically address gift transfers or trust distributions of an ownership interest, but discusses equity and asset sales, merger transactions and "other transfers."

The procedures outlined in the Notice include the requirement for the PPP borrower to submit a written request to the SBA describing the details of the planned transfer, along with a statement of why PPP loan funds cannot be repaid prior to the equity transfer. Additional procedures include submitting details on the proposed transaction, disclosure of whether the transferee also holds a PPP loan and a list of any 20 percent owners of the transferee's business.

Following the receipt of a written request, the SBA has 60 days to inform the applicant of its decision on whether to allow the equity or asset transfer. Given this waiting period, those considering an equity transfer that requires SBA...