Nonprofit Resources


Payroll Costs and Paycheck Protection Program Loan Forgiveness

NOTE: See our article on Applying for PPP Loan Forgiveness for the latest PPP loan forgiveness information, including changes arising from the enactment of the Paycheck Protection Program Flexibility Act and subsequent Small Business Administration (SBA) guidance.

Organizations that received Paycheck Protection Program (PPP) loans are now left with questions about loan forgiveness. This includes questions about what costs can be included in allowable payroll costs in order to maximize loan forgiveness.

The U.S. Treasury Department and the Small Business Administration (SBA) have been providing some clarification and guidance, but the answers to many PPP questions, including those about payroll costs, remain unanswered and coming up with an answer is complicated. Below, we outline some general principles and then discuss examples of proposed expenditures our nonprofit clients have been asking about.

General Principles

First, it’s worth noting that in the absence of further guidance, it’s unlikely that expenses created solely for the purpose of loan forgiveness will meet the criteria for forgiveness. Any expenses your organization includes should have an objective and rational basis for inclusion in the final payroll costs calculation.

There are two items of written guidance we can reference to aid us in developing an answer:

  1. In the Paycheck Protection Program section of the CARES Act, “payroll costs” are defined as “salary, wage, commission, or similar compensation” (emphasis added). When calculating this amount to reach the average monthly payroll costs and determine the maximum loan amount, the Act makes no mention of eliminating bonuses, hazard pay, vacation buyouts, or other sorts of ancillary payments to employees. All of those elements (if applicable) are included when arriving at the average number to calculate the maximum loan amount.
  2. The SBA has been updating its Paycheck Protection Program Loans Frequently Asked Questions (FAQs) document, and FAQ 32 notes that “payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.” This answer was in response to a question regarding the inclusion of a housing allowance, but it serves as a helpful guide for the specific instances of employee costs we look at below.

Therefore, we have two elements of written guidance — calculation of maximum loan amount and the FAQ definition of payroll costs — that would seem to weigh in favor of the inclusion of various types of employee compensation.

Specific Payroll Costs

Now we’ll take a look at the specific payroll costs our nonprofit clients have been asking about and whether they can be included in allowable payroll costs in order to maximize loan forgiveness.

Scheduled Raises, Position Changes, and Merit-based Raises

A normal cost-of-living-adjustment (COLA), scheduled raise, or position shift that was scheduled prior to the covered period and paid during it should be includable in forgivable payroll costs. If the employee’s position needs to change and there is a corresponding compensation adjustment, that amount should be included in the payroll costs calculation as long as the position change is a real change in job responsibilities and not merely a change in name only.


We think some types of bonuses will be more likely to pass muster for inclusion in payroll costs than others:

  • Bonuses that were earned prior to the covered period and contractually required to be paid during it should be included.
  • Bonuses that are earned because of extra effort or on the basis of performance during the covered period should also pass muster. The employer should be able to point to some real measurement of performance, and maybe even a policy that describes how bonuses are granted.
  • Retention bonuses that are based on a desire to have the employee continue working and not on merit-based grounds should only be included with great caution. Since these are not tied to an objective measurement of performance, it may appear that they are included merely to raise the amount of the loan that could be forgiven.

Hazard Pay

We think that increased compensation for an employee who is facing a verifiable increased amount of risk could be included in the payroll costs calculation. However, the risk should be objective. An employee receiving hazard pay because of generalized worries about infection will probably not be considered includable.

Note that for raises, bonuses, and hazard pay, the extra compensation will count toward the $100,000 annualized compensation limitation. So if during a given pay period a raise, bonus, or hazard pay will result in the employee making more than $100,000 on an annualized basis, the excess amount will need to be excluded from the payroll costs amount.

Extraordinary Retirement Plan Contribution

If the employer can articulate a reason why these funds are being distributed now, then we think that they may be included with caution. If the employer says that the funds are being included now due to stock market fluctuations or some other objective and rational basis for the contribution, that would weigh in favor of including them since it is not merely an attempt to increase the amount that could be forgiven. We hesitate to be more definitive with this example for two reasons: first, it is an element of compensation that may be exploited by employers wishing to maximize their payroll costs because it is excluded from the $100,000 annualized limitation on compensation; and second, we simply do not know what may be an acceptable rationale.


It’s important to keep the overarching purpose of the PPP in mind. The PPP was created to preserve jobs and help employers maintain normal operations as much as possible during the COVID-19 crisis.

Given the personal, financial, and health pressures many employees are facing, there may be instances where compensation adjustments are necessary in order to achieve the overarching purpose of the PPP. However, the program was not designed to encourage employers to shoehorn expenses into the covered period or to create significant windfalls for employees. Employers should keep these overarching principles, as well as the general principles outlined at the start of this article, in mind as they navigate the PPP loan forgiveness process in the absence of more direct guidance.


Chris Purnell

Chris serves as Partner and Tax Counsel at CapinCrouse. A licensed attorney, he advises exempt organizations of all sizes on a wide range of issues, including tax and employee benefit related matters, representation before state and federal tax authorities, and assistance with firm audit or advisory engagements to formulate advice and counsel on important operating and tax issues. Chris also assists clients with general tax issues, unrelated business income, charitable solicitation, and missionary employment structures. Prior to joining CapinCrouse in 2019, Chris served as the Executive Director of the Neighborhood Christian Legal Clinic, the nation’s largest Christian legal aid organization. Note: Although licensed to practice law in Indiana, Chris’s services through CapinCrouse do not involve the practice of law and consequently do not result in the creation of an attorney-client relationship.


  • I can’t begin to thank CapinCrouse enough for all of the informative webinars, emails, and alerts to help us navigate the PPP landscape. So far your guidance has been amazing.

    My question is, we are a school and the majority of our staff goes out a few days after our fifty-six day window closes for the loan. We will make sure they are completely paid on the 56th days for all of the salary they earned within the 56 days to ensure we are in compliance. Staff will all be returning in August, but how does that effect the recording of my retained FTEs when I submit my loan forgiveness application?
    Thank you in advance for any guidance you can provide.

  • Ted R. Batson, Jr. Ted Batson says:


    Thank you for the feedback.

    Your question is one of the questions to which we do not know the answer. We are hopeful the forgiveness guidance will address it.

  • Thank you for all the excellent information in the recent webinar. Learned so much!
    One question: one of the ideas to help our church employees and increase our loan forgiveness percentage is to “buy” vacation time. Several employees were not able to take vacation as planned and will struggle to use their vacation time within the year once restrictions are loosened. Helps us with planning for vacation amidst a complicated ministry year. We would only offer this option, along with an option of extending vacation time into next year further than our current 1st quarter requirement. We do not normally offer this option, but rather encourage time away from work. But some of our employees can use the money more than the time given the circumstances.
    Do you think this would be an allowable expense for loan forgiveness?

    • Ted R. Batson, Jr. Ted Batson says:


      We do not have an authoritative answer to this question. However, we do know that pay for vacation time is permitted and to be included in payroll costs and this would be in the same general area as a form of cash compensation. So it is likely that it would be eligible for inclusion. My concern is that without a firm rule that speaks specifically to this point, a lender may not allow it. If they were to disallow it, you would have to appeal to the SBA.

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