PPP and ERC Loans: Affiliation and Aggregation Considerations


Many companies have assessed their eligibility for various benefits under the Coronavirus Aid, Relief and Economic Security Act (“CARES”). Two popular incentives include the Paycheck Protection Program (“PPP”) and the Employee Retention Credit (“ERC”). The rules and requirements for each form of assistance differ, including the number of employees, eligible salaries and expenses, the ability to keep employees on the payroll, and the reasons for seeking assistance. To further complicate matters, the PPP and ERC provisions of the CARES Act each include membership and aggregation rules, taking into account both domestic and foreign related parties, which must be taken into account when determining many thresholds that affect a company’s eligibility for each incentive. Exacerbating the complexity, the rules of affiliation and aggregation differ between PPP and ERC. Companies are not eligible for ERC if they receive a PPP loan.

This alert provides an overview of the affiliate and aggregation rules for PPP and ERC, respectively, highlighting the notable differences and considerations that businesses should understand before taking advantage of either. Additional information on COVID-19 related tax legislation and guidelines can be found here.

Membership and aggregation rules under the CARES Act

Paycheque Protection Program

Generally speaking, an entity is eligible for a PPP loan if it and its affiliated entities have a total of 500 employees or less. The membership rules for PPP are derived from existing regulations of the Small Business Association (“SBA”), which is not surprising since PPP is based on the SBA 7 (a) loan scheme. As established by the SBA, business affiliation is based on (1) ownership, including the ability to prevent a quorum or block certain actions of the board of directors or shareholders (i.e. negative control); (2) stock options, convertible securities and merger agreements; (3) joint management; and (4) identity of interest. In general, the membership rules under the SBA are broader and more likely to sweep multiple entities as “affiliates” compared to the IRS rules governing the ERC. SBA rules focus on the ability to control or influence rather than on the actual exercise of control.

Certain types of businesses can avoid an affiliate analysis. The CARES law derogates from the rules of affiliation for certain catering and accommodation companies with no more than 500 employees at each site, certain companies operating as franchises and other companies having received financial assistance from a company of investment in small businesses.

Other candidates who must navigate the rules of affiliation often find themselves in a difficult analysis. Although the SBA and the Department of the Treasury (“Treasury”) have issued several interim final rules1 and FAQ2 which explain how the affiliate rules apply, complex rules and conflicting guidance have raised many questions and left some companies in doubt as to their eligibility for a PPP loan, especially when foreign parties are involved. For example, companies, as well as their subsidiaries, that have 500 or fewer employees are eligible for a PPP loan. The first two IFRs and SBA FAQ # 3 appeared to state that only “employees whose principal place of residence is in the United States” should be considered for the purposes of the 500 employee threshold. Thus, many claimants did not include employees of foreign affiliates (whose primary places of residence were outside the United States) in determining the number of employees. However, SBA FAQ No.44 (as of May 5, 2020) and another IFR (dated May 18, 2020) specify that employees of a subsidiary, regardless of their place of primary residence, count towards the threshold of 500 employees. Due to the apparent inconsistency in guidelines, the SBA created a safe zone and said applicants who submitted an application before May 5 will not be subject to the revised standard. While it reassured previous applicants, the Safe Harbor also resulted in disparate treatment between companies with foreign affiliates depending on when they applied for a PPP loan.3

Employee retention credit

The aggregation rules under the ERC are derived from the existing provisions of the IRC. In accordance with the CARES law, all (1) employees and members of the same controlled group of companies, (2) employees of trades or companies (incorporated or not) which are under common control, and (3) employees and members of an affiliated service group, are treated as one employer for the purposes of the EWC. In general, the ERC’s aggregation rules are more formally oriented than those of the SBA and focus on employer status and actual voting control to determine whether the company is a sole employer.

On April 29, 2020, the IRS published an FAQ4 provide guidance on which entities are considered sole employers under the aggregation rules for the purposes of the ERC and how those rules apply for the purposes of determining certain thresholds and eligibility for the ERC , notably :

  • If the employer has a trade or business that has been fully or partially suspended due to government orders related to COVID-19;

  • If the employer has a significant drop in gross revenue;

  • If the employer has more than 100 full-time employees for the purposes of determining “eligible wages”; and

  • If the employer is prevented from claiming the ERC if a member of its aggregate group receives a PPP loan.


Taxpayers considering PPP and ERC should realize that the membership and aggregation rules for each benefit are inconsistent. The PPP membership rules focus more on the power of control and the ERC rules focus more on the effective exercise of control. It is important to understand the rules applicable to each incentive so that companies do not inadvertently exclude applicable affiliates that they have some power to control or influence (or that have the capacity to control or influence them. influence) and potentially claim a benefit to which they are not entitled.

1 Small Business Administration: IFR “Temporary Changes to the Business Loan Program; Paycheck Protection Program ”(85 FR 20811, effective April 15, 2020), https://www.govinfo.gov/content/pkg/FR-2020-04-15/pdf/2020-07672.pdf; Small Business Administration: IFR Supplement “Temporary Changes to the Business Loan Program; Paycheck Protection Program ”, Paycheck Protection Program Membership Rules (85 FR 20817, effective April 15, 2020), https://www.govinfo.gov/content/pkg/FR -2020-04-15 / pdf / 2020-07673 .pdf; Small Business Administration, IFR “Temporary Changes to the Business Loan Program; Paycheck Protection Program – Processing of Entities with Foreign Affiliates ”(dated May 18, 2020), https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Treatment- of-Entities-with-Foreign Affiliates.pdf.

2 Paycheck Protection Program Loan Frequently Asked Questions (as of May 19, 2020), https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked- Questions.pdf.

3 Small Business Administration, IFR “Temporary Changes to the Business Loan Program; Paycheck Protection Program – Treatment of Entities with Foreign Affiliates ”(dated May 18, 2020), https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Treatment-of-Entities-with -Foreign-affiliates.pdf.

4 The IRS posted a warning on its website that the FAQs were not included in the Internal Revenue Bulletin and cannot be relied on as legal authority.

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