Due to low interest rates, high estate tax exemption and depressed business valuations, many small business owners are considering gifting a portion or all their equity in order to transfer future appreciation at low gift tax valuations. However, a key consideration is whether or not the business holds a Paycheck Protection Program (PPP) loan that could limit an equity transfer to prevent forgiveness by the Small Business Administration (SBA). It’s not uncommon for a small-business owner to either still have 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):
As of October 2020, the SBA issued a notice to provide guidelines on how an entity that has received PPP funds can change its ownership. This includes but is not limited to selling equity or assets, merging with another company and transferring shares in trust. Specifically, it does not address gift transfers or trust distributions of an ownership interest.
The procedures outlined in the Notice include requiring that a PPP borrower submit a written request to SBA describing why they cannot repay their loan before transferring equity. It also requires information on what is planned for transfer, whether or not this will affect other loans and if there are 20 percent owners of business involved with the transaction.
It's best to include a conditional clause into an equity transfer agreement for SBA approval, which states that the transaction is not binding until it has been approved by the agency. This way if there are any problems with receiving SBA permission or rejection of change in ownership, you won't be stuck dealing with them alone.
For transfers of less than 20 percent, there is no requirement for SBA or lender approval. If the borrower has repaid their loan (or completed forgiveness) before completing an ownership transfer, then neither party needs to approve it beforehand.
For transactions between 20 and 50 percent, the PPP lender must be given a heads up about what's changing, including copies of any proposed transfer agreements. The lenders have five business days to approve or reject changes without consent from the SBA.
If a PPP borrower has fully repaid the loan or finished their contract, they can transfer more than 50% of equity in property without SBA consent. Otherwise, the lender must receive prior approval from them before completing any transaction with another party for that portion of property.
A likely outcome of not meeting the SBA’s requirements would be that loan proceeds need to be repaid immediately or a request for forgiveness could get rejected