3 Steps to Understanding Paycheck Protection Program (PPP) Loans

3 Steps to Understanding Paycheck Protection Program (PPP) Loans

If you are a small to mid-size business owner with under 500 employees, it probably did not escape your attention that Friday April 3rd was the start date for applications for PPP loans. Starting April 10th independent contractors and self-employed individuals can also apply. We know there still is a tremendous amount of misunderstanding about how the program works. On April 8, 2020 the SBA in consultation with the Treasury Department updated their FAQ. View the PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs)

Here is a breakdown of the three steps for understanding Paycheck Protection Program loans. Below is the process for a normal small to mid-size business with full and part time employees for an entire operating year. It is over simplified, leaving out many of the outliers like affiliates, seasonal employees, employees outside the country, businesses operating only for part of the year, family leave, PTO and so on. If you need to understand the rules related to the unusual, sole proprietorships and self-employed, please contact your CPA or email Stimulus@HaynieCPAs.com.

First – How Much Can I Borrow?

To start with, recognize this has nothing to do with what you can spend the money on once you have it. This is only about calculating how much of a loan you can get.

Though the CARES Act specifically indicates the measurement period should be the prior twelve months, the SBA Loan Application indicates:

For purposes of calculating “Average Monthly Payroll,” most Applicants will use the average monthly payroll for 2019, excluding payroll over $100,000 on an annualized basis for each employee.”

Additionally, guidance provided on the April 8, 2020 FAQ update indicated in Question 14 that either the prior twelve-month period OR 2019 may be used. Your bank will probably dictate which period they will accept, but most seem to be using 2019 data. If the prior twelve-month period provides significantly more beneficial results, you should approach your bank about utilizing those calculations instead.

For the same period, add group-term health costs, employer retirement contributions and any state and local taxes.

For the same period subtract the excess of any payroll over $100,000 for any individual employee(s). There were questions as to whether the $100,000 limitation was inclusive of any health insurance, retirement contributions and state and local taxes. Question 7 of the FAQ Update clarified that health insurance, retirement plan contributions and state and local taxes were in addition to the $100,000 in salary.

Question 16 of the FAQ Update also clarified that no payroll tax withholdings should be subtracted for the loan or forgiveness amounts and Gross Payroll should be used in the calculations.

The sum of the above establishes your annual “payroll costs” that you will need to divide by twelve to get your average monthly payroll costs.

The maximum amount you can borrow is 2.5 times this average monthly payroll costs.

The Interim Final Rule and the FAQ Update both specifically indicated that payments to independent contractors are not to be included in the loan amount calculation.

Second – What is the Loan Amount That Could Possibly be Forgiven?

The amount that could possibly be forgiven is not necessarily the amount that will be forgiven.

The amount that can potentially be forgiven is the amount spent during the eight-week period following the date of the loan on (1) “payroll costs” using the same definition as above, (2) rent, (3) utilities and (4) interest on mortgage obligations or debt (specifically stating that this does not include any prepayment of principal). The rent, utilities and debt must all be on contracts and services already in place as of February 15, 2020.

At least 75% of the expenditures considered for forgiveness must be for “payroll costs”.

Third – What Amount Can Actually be Forgiven?

Once the amount of potential forgiveness has been determined above, that amount is then multiplied by the following factor:

The average number of full-time equivalent employees per month during the eight-week period following the date of the loan.

Divided by the borrower’s choice of:

(1)  The average number of full-time equivalent employees per month employed during the period from February 15, 2019 through June 30, 2019.


(2)  The average number of full-time equivalent employees per month employed during the period from January 1, 2020 through February 29, 2020.

The average number of full-time equivalent employees shall be determined by calculating the number of full-time equivalent employees for each pay period falling within a month.

Obviously, the maximum forgiveness will occur when the measured employees in the eight-week period is equal to or greater than the measured employees in the chosen time frame of either 2/15/19 through 6/30/19 or 1/1/20 through 2/29/20. So, if you have 30 employees now and had 30 or less before, you could have 100% forgiveness, based on this portion of the calculation. If you have 32 employees now and had 40 before, only 80% of the loan could be forgiven, based on this portion of the calculation.

If this was the only measurement, an employer could terminate 6 high paid employees and hire 6 lower paid employees and be okay for forgiveness purposes. The rules anticipated that as a possibility and implemented a wage requirement as well.

In addition to the employee count analysis, loan forgiveness will also be reduced if salaries and wages are decreased by more than 25% for any employee that made less than $100,000 annualized in 2019.

For purposes of both the employee count and the wage reduction calculations, the employer has until June 30, 2020 to restore full time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020 and eliminate any reduction in forgiveness. For purposes of the wage reduction calculation on an employee that was let go, the same person does not have to be rehired, the position could be rehired.

As a result of the above, an employer who spends 100% of the loan proceeds on qualified expenses within the eight-week period and does not reduce its employee count or reduce its wages by more than 25% could have 100% forgiveness of the loan.

U.S. Department of the Treasury Assistance for Small Businesses


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