Paycheck Protection Program: What Is Forgiven and Dangerous Pitfalls

What is the Paycheck Protection Program (PPP):

The Paycheck Protection Program or PPP is a program that provides forgivable loans to small businesses (fewer than 500 employees) without the need for collateral. These loans are to be used during an 8-week period also known as the coverage period. The loan can only be used on qualified expenses during the coverage period. At least 75% of the loan must be used for payroll costs and up to 25% of the loan may be used for other expenses such as rent/mortgage and utilities. After the coverage period is completed, you are able to apply for forgiveness and potentially have the entirety of the loan forgiven. Loan forgiveness is based on meeting the criteria enclosed below. 


Do I qualify for the Paycheck Protection Program (PPP):

If you have a small business (fewer than 500 employees) than the answer is yes. There are is no requirement for collateral. The interest rate for all loans will only be 1%.  


What are considered qualified expenses under the Paycheck Protection Program?

  1. Payroll Costs (75%)
    1. Employee salaries, commissions, and similar compensation such as severance pay, retirement benefits, and paid vacation.
    2. State and local taxes assessed on the compensation of employee takes. This does NOT include Federal taxes.
    3. Group health care benefits including premiums
    4. Paid Sick Medical Leave and FMLA
  2. Rent, Mortgage and Utilities (25%)
    1. Utilities include electricity, gas, water, transportation, telephone or internet access.


Paycheck Protection Program Downfalls and Potential Pitfalls:

  1. You have to reestablish employee headcount (FTE) by June 30, 2020 or the amount forgiven is reduced.
  2. You have to reestablish employee salaries by June 30, 2020 or the amount forgiven is reduced.
  3. 75% of the loan must go to payroll and only 25% can go towards rent, mortgage and utilities.
  4. PPP only provides coverage for 8 weeks. 
  5. You are only eligible for 1 PPP loan.
  6. Document and Substantiate: you need to document and substantiate every expense. Consider opening a separate bank account.
  7. You must apply to have the loan forgiven. Loan forgiveness is not automatic.
  8. Any portions of the loan not forgiven must be paid back in full by the end of two years and in equal amounts immediately after the deferment period ends.
  9. For new hires, loan forgiveness only applies when replacing an existing employee.  
  10. PPP will use 40 hours worked per week to calculate FTE


Employee Headcount Calculation:

Under the Paycheck Protection Program (PPP) you must reestablish your employee headcount or the amount of the loan forgiven may be reduced. To calculate use the following formula:

Step 1: Average FTE During Look Back Period/ Average FTE During Coverage Period = Percentage of loan forgiven

Step 2: Percentage of loan forgiven * Principal Loan Amount= Loan Amount Owed

Average FTE During Look Back Period is based on the following dates:

  • The average number of full-time equivalent employees of the borrower between Feb. 15, 2019 and June 20, 2019 
  • The average number of full-time equivalent employees of the borrower between Jan. 1, 2020 and Feb. 29, 2020 


Employee Salary Calculation:

Any employee whose annualized wages in 2019 drop 25% or more will be used to reduce the amount the loan is forgiven dollar for dollar. The SBA has already announced that additional guidance will be issued to further clarify.



Please note: I am an HR professional. This is my opinion. I am not a CPA, attorney, insurance, contractor, lender, or financial advisor. The content featured in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health & safety, electrical, financial advice, or other and may be outdated or inaccurate; it is your responsibility to verify all information yourself.

Leave a comment

Please note, comments must be approved before they are published