Assuming Congress refills the PPP bucket,
should I apply for a PPP loan or an EIDL?
Congress is likely to refill the Paycheck Protection Program (“PPP”) bucket this week. Many small businesses were not able to take advantage of the first round of PPP loans and are most likely eager to get a jump on the second batch before the funding dries up. That raises a thorny question for many small businesses: Is a PPP loan the best option? The answer requires careful consideration of an employer’s particular situation and consultation with the employer’s CPA and attorney. At the end of the day, however, it may make more economic sense for a small business to forgo the PPP loan and apply for an Economic Injury Disaster Loan (“EIDL”) from the SBA instead. Here’s why.
To be eligible to claim the ERC, an employer must have been in business during 2020, meaning start-ups can be eligible. Eligible employers are permitted to claim this refundable payroll tax credit equal to 50% of wages paid to employees for any quarter in which they have either had to fully or partially suspend operation of their business because of governmental orders due to COVID-19, or if they have had more than a 50% decline in gross receipts as compared to the same quarter a year ago. So, to claim the credit, an employer must have been in operation in 2020 and either had its operations fully or partially suspended or have its gross receipts decrease by at least 50% during a given quarter. The amount of compensation for each employee to determine the credit is limited to $10,000.
If an employer averaged 100 or less full-time employees in 2019, the credit for that employer is based on the qualified wages paid to all employees during these periods. If, on the other hand, an employer averaged more than 100 full-time employees in 2019, the credit is based on qualified wages paid to those employees not providing services due to the suspension of operations or decline in gross receipts.
For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get immediate access to this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due to COVID-19 . Click here for instructions on filling out the Form 7200.
The refundable credit is capped at $5,000 per employee (i.e., a 50% credit multiplied by a maximum of $10,000 of qualified wages) and applies against certain employment taxes on wages paid to all employees. Eligible employers can reduce federal employment tax deposits in anticipation of the credit. They can also request an advance of the employee retention credit for any amounts not covered by the reduction in deposits. In other words, employers should be able to receive the $5,000 maximum amount per employee either through the reduction advanced employment tax deposits or by payment from the IRS.
Here’s how employers can receive advanced payment of the ERC. If an employer is entitled to an ERC of $5,000 and is otherwise required to deposit $8,000 in employment taxes, the employer could reduce its federal employment tax deposits by $5,000. The employer would only be required to deposit the remaining $3,000 on its next regular deposit date. For information about additional relief that may be available to employers that allows them to delay the deposit of certain employment taxes, go to this link. If an employer is entitled to an ERC of $10,000 and was required to deposit $8,000 in employment taxes, the employer could retain the entire $8,000 of taxes as a portion of the refundable tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using Form 7200.
But here’s the catch. Employers who receive a PPP loan under the CARES Act can’t claim the Employee Retention Credit. An employer should be able to obtain an EIDL and still claim the ERC, however. So, while some or all of a PPP loan may be forgivable—and as we explained in our recent alerts—if an employer cannot retain or rehire a sufficient number of employees, the amount forgiven under a PPP loan will be reduced and the employer will have to repay that portion of the loan. Depending on a particular employer’s situation, including whether it has had to let go and may not be able to rehire a significant number of employees, it may make more economic sense to take out an EIDL and use the $5,000 credit per employee than risk having a portion of a PPP loan not be forgivable.
Further, if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for an employee, that employee may not be included as an employee for purposes of the ERC. And, government entities aren’t entitled to the ERC. The employer should, therefore, carefully examine whether it meets the criteria for the ERC and whether that tax credit would be larger than the potentially forgivable portion of an anticipated PPP loan.
COVID-19 and return-to-work considerations
Louisiana’s stay-at-home order is set to expire next week on Thursday, April 30, 2020. Whether the order will be extended remains to be seen. Indeed, some municipalities, including the City of New Orleans, have already extended the stay-at-home directive until mid-May. Regardless of when the order is lifted, however, Louisiana businesses should begin planning now for transitioning back to work to ensure that the transition is both safe and efficient. Here are a few considerations as Louisiana businesses return to work:
Ensure that your business is maintaining a safe work environment
Under the Occupational Safety and Health Act (“OSHA”), employers are required to provide their employees with a workplace free from recognized health hazards likely to cause death or serious physical harm. In light of COVID-19, employers should implement basic infection prevent measures to both prevent the spread of COVID-19. These measures should include, at a minimum, basic hygiene and infection control practices, such as frequent and thorough hand washing and social distancing. Employers should also develop policies and procedures for the prompt identification and isolation of sick people, if appropriate. As always, you should encourage employees to stay home if they are sick and until they have fully recovered.
Businesses should be prepared to comply with any future government regulations or mandates concerning their business activities. Several authorities have cautioned that businesses and daily life will not automatically return to normal. Instead, it will be a slow, gradual process, with some businesses having to implement new safeguards. For example, restaurants may be required to limit the number of dine-in customers and to require servers to wear face masks.
Consider a gradual and flexible return-to-work process
To comply with social distancing guidelines, some businesses should consider adopting a gradual and flexible return-to-work process to reduce face-to-face contact between employees and the public. If your employees are currently teleworking and can continue to efficiently do so as workplace operations return to normal, you may consider having employees return to work in gradual waves, rather than all at once.
Communicate with key stakeholders
Finally, businesses should remain in contact with key stakeholders, including employees and customers. You should communicate to your employees the plan forward, especially as it relates to work hours, leave or vacation policies, and overall expectations. Additionally, it is important to reinforce your business’s infection prevention measures by communicating them to your employees. With respect to clients or customers, social media is a quick and helpful tool to spread the word about when your business could potentially reopen. Likewise, you should remind customers to practice social distancing and other preventative measures when they return to your physical location.
What you can and can’t do
In this time of social distancing, it may not always be possible to meet face-to-face to sign that important contract or financial document. Fortunately, however, the Louisiana Uniform Electronic Transactions Act (“LUETA” or “Act”) provides some reprieve. This article discusses LUETA, including when electronic signatures are allowed under Louisiana law.
Are electronic signatures legally binding under Louisiana law?
Yes, but there are some exceptions. Generally speaking, a record or signature may not be denied legal effect or enforceability solely because it is in electronic form. Additionally, a contract may not be denied legal effect or enforceability solely because an electronic signature was used in its formation. If a law requires a record to be in writing, then an electronic record satisfies the law. Likewise, if a law requires a signature, then an electronic signature satisfies the law.
What are the exceptions?
LUETA does not apply to:
• Wills, codicils, or testamentary trusts;
• Adoptions, divorces, or other family law matters;
• Utility service (e.g., water, heat, and power) terminations;
• Default, acceleration, repossession, foreclosure, or eviction under a credit agreement secured by a primary residence of an individual;
• Health or life insurance benefit terminations;
• Product recall notices; and
• Documents accompanying toxic or hazardous materials.
Am I required to use electronic records or signatures?
No. LUETA does not require an electronic record or signature to be created or used. Rather, the Act merely allows parties to elect to use electronic records or signatures. Whether parties have agreed to conduct a transaction by electronic means depends on the context and surrounding circumstances, including the conduct of the parties.
How are electronic records retained?
If a law requires that a record be retained, the requirement is satisfied by retaining an electronic record of the information in the record which: (1) accurately reflects the information set forth in the record after it was first generated in its final form as an electronic record or otherwise; and (2) remains accessible for later reference.
Are electronic records and signatures admissible in court?
Yes, assuming it is relevant and otherwise admissible. An electronic record or signature may not be excluded from evidence solely because it is in electronic form.
While the coronavirus pandemic has underscored the importance of transacting business electronically, it is equally important to remain mindful of the various state and federal laws governing electronic transactions, such as LUETA.
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