PPP Loans – Forgivable or Not?

June 9, 2020

Written by Tracy Sternbach


By now, most small businesses in the United States that applied for federal assistance under the Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL) have been funded.  For those who were fortunate enough to get a PPP loan, whether in Round 1 or Round 2, their attention is now focused on the tricky process of deploying those funds in compliance with strict Small Business Association (SBA) guidelines and thresholds that need to be met to achieve forgiveness of the loan*.

In general, the forgiveness of the PPP loan is predicated on deployment of 75% of the funds on payroll-related expenses within 8 weeks of the loan funding date, which includes salaries, wages, and employer-funded portion of benefits, but excludes the employer portion of federal taxes.  Therefore, companies will need to be careful to rely on their payroll summary reports to ensure proper utilization of 75% of the funds, rather than rely on the cash requirements for payroll runs or the corresponding payroll debits in their bank account.  The remaining 25% of the funds can be used to pay operating expenses such as rent, utilities, and mortgage interest (provided that those obligations existed prior to February 15, 2020).  Strangely, while garbage removal is not considered an eligible utility expense, the SBA will allow the inclusion of transportation expenses, such as gas and mileage reimbursement in the non-payroll costs.

There are several caveats that apply as well as other tests that need to be met concurrently to achieve forgiveness.  Chief among them is the SBA’s requirement that in addition to deploying 75% of the funds on payroll, the company’s average full-time equivalent (FTE) headcount during the 8-week post-funding window must be greater than or equal to the average FTE headcount during the period of February 15 to June 30 in the prior year. The rationale for such a requirement is evident. The government wants businesses to employ (or re-employ) as many people as possible and prevent a select group of employees from receiving the lion’s share of the economic benefit.  To further constrict over-paying employees, any compensation above the annualized threshold of $100,000 per employee is specifically excluded.

The guidelines for loan forgiveness appear to have been eased recently, especially for companies that received less than $2 million in PPP funds.  One of the critical representations made by companies applying for PPP or EIDL funding is that they suffered demonstrable economic injury as a result of the COVID-19 pandemic.  In a bulletin issued on May 13, the SBA appears to indicate that companies that received less than $2 million in PPP funds will be assumed to have made the good-faith certification that the funds received were vital to the company’s continued viability.   In other words, these small businesses will be automatically granted Safe-Harbor status with respect to fulfilling this obligation towards qualifying for forgiveness.  Just remember that any portion of the loan that is forgiven must be reported as income.

None of the foregoing precludes the SBA from auditing any of the loan recipients to confirm their bona fide need for the loan or investigate their use of funds.  Therefore, it is strongly discouraged to count on the premise of an automatically forgivable loan. Employers should be sure to obtain and maintain proper documentation with each payment made using PPP or EIDL loan funds to ensure compliance with the stringent criteria for forgiveness. Since HRchitect works with hundreds of clients to implement, optimize and support HCM systems, including payroll systems, we have created a useful complimentary tracking tool to help you monitor these disbursements as a portion of the loan funds you received.  Please reach out to your HRchitect contact and ask for the PPP Disbursement Schedule, and let us know if there is anything else we can do to help optimize and support your payroll system.

*The guidelines are the PPP are constantly changing. We are not attorneys or accountants, as such, the information in this blog post should not be taken as legal advice. Readers should check with their own accountants and attorneys for comprehensive rules and regulations, as this post shares information specifically related to HR and payroll systems expertise.


Tracy Sternbach brings over 20 years of professional Human Resources experience, with a focus on payroll and HRIS, to the HRchitect team. Tracy’s HR experience spans a wide variety of industries including technology, healthcare, finance, and education. This functional and technical expertise, along with experience gained working for Ultimate Software, provides Tracy with a unique perspective on how HR organizations work. Tracy has a proven ability to design and operate highly effective HCM systems.

Learn more about Tracy Sternbach