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PPP is complicated enough

February 18, 2022

In 2021, Paycheck Protection Program loan recipients were hit with two pieces of important news:

  • First, the obvious: Many PPP loan holders entered the period where they could apply for loan forgiveness. Borrowers can apply once all loan proceeds have been used, any time up to the loan’s maturity date.
  • Second, the unexpected: The Small Business Administration has been more aggressive than anticipated about auditing PPP loans. In fact, all loans in excess of $2 million will be audited.

On paper, PPP loan forgiveness seems simple enough:

Forgiveness criteria for first and second draw PPP loans

  • Employee and compensation levels are maintained.
  • Loan proceeds are spent on payroll and eligible expenses.
  • At least 60% of the proceeds are spent on payroll costs.

“Other eligible expenses” in the Paycheck Protection Program include electricity, water, gas, transportation, and telephone or internet—costs directly necessary to operate the business.

For many businesses, PPP was a valuable lifetime. Lots of small and mid-sized companies spent 100% of their PPP proceeds on payroll, maintaining their team in an uncertain time.

It may seem proving the use of PPP funds for compensation should be an open and shut case. But some leaders find their PPP spending has been misclassified—potentially requiring them to repay 100%.

The top two mistakes companies are making with PPP

If you have not applied for PPP loan forgiveness yet, there may still be time to undo the PPP loan mistakes causing chaos on many balance sheets. There are two issues to watch out for:

  1. Necessary withholding
    When salaries are paid out from PPP loan proceeds, businesses must ensure that 401(k) plan withholding meets their plan requirements.

In practical terms, that means two things:

  • Withholding 401(k) plan contributions.
  • Funding respective match contributions (if applicable).

Once a company adopts a 401(k) plan, retirement plan contributions are mandatory, regardless of how salaries are funded. Auditors often find definition of compensation issues as the root cause.

  1. Definition of compensation
    Many companies treated PPP loan proceeds as grants in their internal accounting system. By classifying PPP-funded checks as bonuses or other compensation types, they may have failed to withhold properly.

This concern is not limited to PPP. Any time a new pay code is entered into your system, it is crucial to make sure it is set up with appropriate withholding levels.

That’s easy to overlook when there are two paychecks in a cycle or an employee receives a manual bonus. Luckily, these problems are easily corrected. A pervasive pattern of withholding failures with PPP loans may not be.

There may still be time to correct PPP loan errors

If you received $2 million or more in PPP proceeds, it is especially vital that you verify how every penny of your funding was used—don’t wait for the Small Business Administration to do it for you!

But even smaller PPP recipients should double-check their figures.

Misclassification of compensation can often be resolved by amending filings and performing required withholding. The sooner oversights are addressed, the faster and less expensive they are to fix.


Contact Cassell Plan Audits at 630.886.7669 to learn more or schedule your virtual appointment.

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