What is an Allowable Expense, and How Does the New FTE Calculation Come into Play?

Navigating loan forgiveness for Paycheck Protection Program funds is becoming a complex and confusing process. Borrowers weren’t given much guidance when loans were disbursed except general allowances for payroll and non-payroll expenses. And since forgiveness is handled by individual lenders, documentation requirements can vary.

On June 3, 2020, Adams Brown hosted a webinar to help small business owners and managers interpret loan forgiveness guidance. Even though they were working with proposed guidelines at the time, the PPP Flexibility Act was made law just two days later without significant changes from its draft form.

During the webinar, our team received more than 120 questions ranging from records retention to allowable costs. These FAQs represent the most commonly asked questions about loan forgiveness. If you don’t see what you’re looking for here, reach out to your Adams Brown representative anytime for additional guidance.


  • Q: What is the record retention requirement?

    A: PPP loans can be audited for up to six years after the loan is paid off or when loan forgiveness is granted, whichever is later. For example, if the full amount of PPP funds is forgiven, the audit timeframe is six years from the point that the lender issues the loan forgiveness letter. If any amount of PPP funds is converted into a two-year (or five-year) loan, then the record retention period is six years from the point that the entire loan is paid off.

  • Q: What if I sell my business within the six-year period that the loan proceeds are subject to an SBA audit?

    A: Talk to an attorney. This hasn’t been covered in any existing guidance yet, but the thinking is that whoever owns the entity, owns the liability. However, in the case of a stock sale, liability could be shifted. But again, there’s nothing concrete about this yet.

Payroll Expenses

  • Q: What are some strategies related to bonuses?

    A: There are some considerations whether bonuses meet eligible payroll expenses, and the general answer is yes. Bonuses can potentially be given to hourly employees, perhaps at a multiple of their regular rate at five or ten hours, or bonuses can be given to owner employees, with exceptions. Business owners struggling to utilize the payroll portion of PPP funds can look at a few different options depending on their individual circumstances.

  • Q: Can bonuses be paid to owner employees?

    A: Yes. But the bonuses must fall under the $15,385 threshold or the lesser of your annualized wages for that eight-week period. If the wages don’t exceed that threshold even once the bonus is paid, then it is an allowable payroll expense.

  • Q: Is there a threshold for what constitutes an owner employee?

    A: At this point, no. If an individual holds any stake in the business, he or she is an owner employee. There has been no guidance on an associative rule for ownership currently.

  • Q: Is worker’s comp a payroll expense?

    A: No; only gross wages would be considered.

  • Q: Are healthcare and retirement expenses allowable?

    A: Yes. Businesses can claim the employer’s portion of healthcare and retirement contributions as allowable payroll expenses.

  • Q: How does the paid versus incurred expenses work regarding payroll?

    A: When the SBA modified the language to say paid “or” incurred, versus paid “and” incurred, they gave borrowers additional flexibility in how to use the loan proceeds. For example, businesses no longer need to run a special payroll, as long as employees worked those hours within the covered period and are paid on their next regularly scheduled payroll. This would eliminate the need to shift to an alternate payroll period.

  • Q: Regarding owner employee compensation, are shareholder distributions a qualified payroll expense?

    A: No, because the distributions aren’t running through payroll.


  • Q: Is there any type of penalty if we have more employees than we did prior to February 15, 2020?

    A: No.

  • Q: How does the new, simplified method of calculating FTEs factor into the total amount of PPP loan proceeds?

    A: Essentially, the simplified FTE count would reduce the number of FTEs required to be on the payroll. If you already received the loan proceeds, then that portion – calculating FTEs – is done, except that you want to make sure your FTEs are back at pre-COVID-19 capacity at the end of the covered period. However, if you calculated your FTEs based on a good faith estimate, you’ll be fined, and the forgiveness portion will be considered completely separate.

  • Q: Is there going to be an issue with FTEs or payroll if I hire totally new employees?

    A: No. The only time you’re looking at 2019 payroll numbers is if you are an owner employee. There’s a limitation there. You’re also looking at whether you reduced someone’s wages from the prior year or prior period. If you reduce someone’s wages by more than 25%, there is a limitation. But if it’s a totally new employee, that wouldn’t count because you’re not reducing wages at that point.  

  • Q: How do I calculate my FTEs if I have seasonal employees?

    A: Use the FTE calculation for seasonal employees and compare that with the other two options for look-back periods. Finding the lowest FTE baseline should help to calculate the number of employees that should be back on payroll by the end of the covered period to still qualify for loan forgiveness.

  • Q: Can I choose the look-back period for purposes of calculating FTEs?

    A: Yes. There are three options. The first is if you’re a seasonal employer; in that case, contact your Adams Brown representative for guidance. The other two options for regular employers are to use either February 15, 2019, through June 30, 2019, OR January 1, 2020, through February 29, 2020.

  • Q: How would a company treat FTEs if their normal, full-time workweek is, say, 35 hours instead of the mandated 40?

    A: The law defines a full-time workweek as 40 hours. The FTE calc for loan forgiveness will not involve how the employer defines full-time for their benefits.

PPP Forgivable Expenses

  • Q: For partners in an LLC, will health care insurance premiums and retirement contributions be included in the loan forgiveness?

    A: Generally, no, because there is a limitation based upon self-employment income that you’re limited to your self-employed income. Guidance further states that health insurance and retirement are included in self-employment and therefore ineligible for loan forgiveness. If the LLC is taxed as an S-Corp, then the answer is yes.

  • Q: How should PPP funds be treated now that the covered period is being extended to 24 weeks instead of the initial 8 weeks?

    A: Businesses that have completely used all of their PPP funds and are ready to file for loan forgiveness can go ahead and get the forgiveness application going once an updated application is provided by SBA. Businesses that have not used all of their PPP funds on eligible expenses should wait, given the extension.

  • Q: Does an EIDL grant reduce the amount of PPP loan forgiveness?

    A: Yes, dollar for dollar, unless the EIDL grant was converted to a loan.

  • Q: Are transportation costs a non-payroll qualified expense?

    A: This can be interpreted in different ways. Our viewpoint does not assume transportation costs, whether gas, vehicle expenses, and so forth, are a sure thing. Use the PPP loan for other qualified non-payroll expenses first. Since the guidance is vague on this point, if you do use PPP funds for transportation costs, go ahead and submit them in the loan forgiveness application. The worst that can happen is that they don’t get forgiven.

  • Q: Is a monthly payroll eligible to use in an alternate pay period?

    A: No, semi-monthly or monthly payrolls are not allowed under alternate payroll. It would need to be bi-weekly or weekly.

  • Q: For an LLC taxed as an S-Corp, can the entire amount of the owner’s health insurance premium be included in the forgiveness calculation?

    A: Yes. Remember that insurance is separate from an employee owner’s limitation calculation for pass-through entities. Use Box 3 calculation from 2019 for your limitation on wages.

  • Q: Where can I get PPP loan forgiveness application forms?

    A: You can visit the SBA here, get a copy from your lender, or let us know and we will get you a copy.

    More information about coronavirus business resources and strategy can be found on our COVID-19 Resource Center webpage.

Adams Brown is working with more than 160 clients on loan forgiveness packages. We work with them to ensure documentation is in order, help track expenses, take care of the forgiveness application, and talk to the lender about any special circumstances. If you’re interested in learning more about package pricing, let us know.

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