Paycheck Protection Program Loan Forgiveness Accounting For the Funds and Best Practices

The CARES Act provides small businesses with paycheck protection program (PPP) loans.  Application and funding of the loans is the first step for small businesses.  The second step is to properly account for these funds to ensure maximum forgiveness.

Disclaimer – The content below is based upon published authoritative guidance as of April 23, 2020.  There are still many unknowns and unanswered questions.  Additional guidance from SBA is expected to provide further clarification.

Accounting for the loan funds:

  • Consider having the PPP loan funds deposited into a new account with the lender bank
    • Only disburse from this new account for forgivable uses (described below)
    • Any disbursement for allowable uses related to payroll costs, rent, interest and utilities should be supported by the appropriate documentation (described below)
    • If your payroll processor automatically pulls from a pre-existing bank account then the disbursement from this new account will merely be a transfer to the pre-existing account for PPP allowable payroll costs (the PPP payroll costs will not be the same as the Payroll Provider draw)
    • This will provide a better audit trail for loan forgiveness
  • Record the loan as a new debt within the liabilities section of the balance sheet
  • Record expenses as you normally would in your general ledger thereby ensuring comparability in the current and future years
  • Once an amount is forgiven, the new debt is reduced and an “other income” account is used to record the loan forgiveness
    • The loan forgiveness is not taxable – make the notation “non-taxable” income as part of your account description
  • Any unforgiven amount remains as a loan that is to be repaid
    • You may pay loan back immediately or over 2 years at 1.00% interest with an initial repayment deferral of 6 months however interest will still accrue
    • No prepayment penalties

Allowable uses include:

  • Payroll costs:
    • Payroll costs include:
      • Gross compensation to employees, including owners
        • Includes vacation, PTO and severance
      • Employer portion of payments for health and retirement plans
      • Employer payments for state and local taxes assessed on compensation for employees (e.g. state unemployment insurance)
      • Self-employment income reported in K-1’s to partners or members
    • Payroll costs exclude:
      • Payments made to an independent contractor or sole proprietor, regardless of whether those payments are reported on Form 1099-MISC
      • Employer-paid FICA (Social Security and Medicare) or FUTA (unemployment)
    • Limit of $100k annual compensation rate per employee/member/partner
      • Applied to compensation prior to health and retirement benefits
      • Works out to $15,385 for the 8-week forgiveness period or $1,923 for each weekly payroll or $3,846 for each bi-weekly payroll
    • Rents – for real and personal property
    • Utilities – payment for service for distribution of electricity, gas, water, transportation, telephone or internet access
      • Transportation utility represents fuel used for business-use vehicles
    • All interest on secured debt (whether secured by real or personal property) – but not principal
    • All rental, utility and debt agreements eligible for allowable uses must have been in place before 2/15/20

Loan forgiveness:

  • Loan is forgiven to the extent of payments for allowable uses made in the 8-week period after the loan is funded
    • Forgiveness can’t exceed loan amount
  • At least 75% of allowable uses to be used for payroll costs; meaning no more than 25% of the total forgiveness, not loan amount, could be used for other allowable uses (rents, utilities or interest).
  • Forgiveness is reduced if:
    • Average FTE’s during 8-week period after loan is lower than either:
      • Average FTE’s from 2/15/19 – 6/30/19; or
      • Average FTE’s from 1/1/20 – 2/29/20
      • FTE’s are measured as 30 hours per week
      • Forgiveness reduction is measured as a % of reduction of FTE’s
    • Payroll decreases by >25%
      • Compensation paid in 8-week period compared to most recent full calendar quarter which is 13 weeks.
      • Measured on employee by employee level basis yielding dollar for dollar reduction of forgiveness
      • Employees receiving over $100,000 rate of compensation in 2019 are excluded from this potential forgiveness reduction
    • Exceptions to forgiveness reduction:
      • If there is a reduction in FTE’s from 2/15/20 to 4/26/20 and that reduction is completely eliminated by 6/30/20 then forgiveness reduction may be avoided
      • If there is a reduction in compensation from 2/15/20 to 4/26/20 for any employee and that reduction is completely eliminated by 6/30/20 then forgiveness reduction may be avoided
      • Reminder that full spend of the loan amount on allowable uses is required to achieve full forgiveness


  • PPP loan of $1,000,000
  • Spend on allowable uses in 8-weeks after loan is funded:
    • Payroll costs:
      • Gross compensation to employees – $550,000
        • Reduced by $50,000 for certain employees who were paid over $15,385
        • Eligible gross compensation $500,000
      • Employer portion of medical benefits – $60,000
      • Employer portion of retirement benefits – $35,000
      • Employer paid state unemployment insurance – $5,000
      • Total payroll costs – $600,000
    • Non-payroll costs:
      • Rent – $220,000 (building, vehicle, copier)
      • Utilities – $30,000 (gas, electric, water, phone, internet, gas)
      • Interest – $10,000 (building mortgage, equipment loan)
      • Total non-payroll costs – $260,000
    • Payroll costs must be at least 75% of loan forgiveness
      • Non-payroll costs reduced to $200,000
      • Maximum forgiveness – $800,000 ($600,000 payroll costs and $200,000 non-payroll costs)
    • FTE’s:
      • During 8-week forgiveness period (and at 6/30/20) – 60 FTE’s
      • Based period:
        • 2/15/19 – 6/30/19 – 90 FTE’s
        • 1/1/20 – 2/29/20 – 75 FTE’s – this base period is selected as it yielded the lower FTE’s
      • 15 FTE reduction
      • Forgiveness reduction = 20% or 15/75 (FTE reduction / FTE’s from base period)
    • $640,000 loan forgiveness = $800,000 maximum forgiveness * 20% reduction


  • Your lender is responsible for approving forgiveness and is obligated to determine amount within 60-days of the Company’s submission of information
  • In addition to the separate bank account noted above and only having disbursements for allowable uses from it, your bank will likely require certain documentation such as:
    • Calculation of forgiveness
    • Payroll registers
    • Medical insurance invoices – along with breakdown of employer vs. employee funded portions
    • Employer retirement contribution confirmation
    • Lease agreements
    • Debt agreements
    • Utility invoices
    • Rent invoices
    • Debt statements showing interest paid

Best practices:

  • Monitor FTE counts
  • Ensure no significant reduction of pay for employees
  • Maximize payroll costs
  • Monitor $15,385 compensation cap per employee
  • Maximize 2020 employer retirement contribution (THIS MAY BE SUBJECT TO CHANGE)