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 approval may want to include a conditional clause into any transfer agreement to disclose SBA approval is required for the transfer to occur.
For aggregate equity transfers of less than 20 percent, there is no requirement to obtain SBA or lender approval. Also, if the PPP borrower has fully satisfied the loan requirements—either repaying the loan or completing the loan forgiveness process—prior to completing the equity transfer, prior approval is not required by the SBA or PPP lender. 
For total transfers between 20 percent and 50 percent, the PPP lender must be given advance notice of the transaction, including copies of any proposed transfer agreements. The PPP lender can approve the equity transfer without obtaining SBA consent, but must notify the SBA of the transaction within five business days of the transaction’s closing, providing details of the ownership transfer.
For transfers of more than 50 percent in equity or assets, a PPP lender can approve the transfer without prior SBA consent if the PPP borrower has fully repaid the PPP loan or has completed the loan forgiveness process. Otherwise, the SBA must provide consent prior to the transaction.

Non-compliance with SBA Approval
Notice 5000-20057 does not specifically discuss the consequences of not meeting the SBA’s approval requirements. However, a likely outcome could be that the PPP loan proceeds would have to be repaid immediately or a request for loan forgiveness could be denied.

Advising Your Clients
When advising business owner clients planning to transfer a 20 percent or greater equity or asset ownership in these businesses, a key question is whether the business holds a PPP loan and if so, where the owner is in the SBA’s forgiveness process. If the PPP loan has not been repaid or if the forgiveness has not been finalized, the owner may want to consider delaying the equity transfer until then.  
Christine S. LeGrand, CPA, MST is a senior tax consultant.