The CARES Act: Know Your Numerator and Maximize Your Loan Forgiveness

Section 1106 of the CARES Act deals with loan forgiveness. The purpose of this post is to simplify and give you the big picture, as in the “349 Billion Foot View,” of how this works. Make no mistake, knowing this information and planning and managing for your business is critical to maximizing the potential forgiveness of the borrowed amounts.

Here are the two simple steps that are required:

Step One:  Apply for and make sure you are doing everything you can to get the max loan amount. You can find this information in our last thought leadership article “Know your Denominator.” Hopefully most of you have already submitted your application to your bank or are “just” about there. Remember that it’s first come, first served according to the Treasury Secretary and SBA administrator, so don’t miss out!

Step Two:  Know your denominator. This was also covered previously: basically, the Full Time Equivalent (FTE) employees in the “base period.” For most, that’s going to be the average of FTE per month during the period of February 15, 2019 to June 30, 2019. Please contact us if you have questions as you really want to get this right and not overstate your FTE. We’ve heard a lot of interesting ways of counting, let’s make sure what we are doing is reasonable, supportable, and generating the lowest number possible.

How the Forgiveness Calculation Works

Once we are in the covered 8 week “spending” period, it will be essential to keep track of spending for payroll (as defined by CARES and used in your application) and other covered costs, like utilities, rent, etc. The SBA guidance indicates that the “covered” spending should be at least 75% payroll (remembering that the definition of payroll is somewhat broader than the accounting meaning of that term). We are going to call this pool of money the “covered spending”.


You are going to subject the covered spending to a ratio. That ratio cannot be more than 1.0, period. Getting this ratio to 1.0 is the most important thing to get maximum forgiveness. Forgiveness can’t exceed the loan amount, only the government would document this. We include it here for your reference.

The ratio has a numerator that is your FTE in the covered 8 week period divided by your denominator. By knowing your denominator, you know you want your numerator to be at least equal to your denominator so your ratio is 1.0. Please read this, memorize it, and make sure you follow.

Simple Illustrations:

You spend $800,000 in the covered period on allowable categories. You have an FTE denominator of 60, and FTE numerator of 57. Your forgiveness is $800,000 x 57/60 = $760,000.  Let’s say your loan was $900,000, so now its $140,000. Since you did not “theoretically” spend $100,000, you can prepay that and you’re left with a $40,000 loan. Pretty good, silver star.  You can and should do better.

I know my denominator is 60, I have 57 FTE and my loan is going to be funded any day now. I “rehire” (not necessarily the same people) 3 FTE, and they are costing $1,000/week. Now let’s update and run the numbers:

Spend = $824,000, FTE denominator = 60, FTE numerator = 60. Loan forgiveness:

$824,000 x 60/60 = $824,000 (your forgiveness increased $64,000, even though spend only increased $24,000, and better yet, that $24,000 is getting forgiven.)  Your loan is $900,000 less $824,000 = $76,000. You should be able to pre-pay that because you did not spend it out of the loan proceeds.

There could be strategies you might want to put into place to make sure you spend the entire loan (properly). However, you must know your numerator and manage that to get the ratio of 1.0, so make sure you do that, then set your spending targets.

We are in this together. At PBO Advisory, we appreciate all feedback so that we can continue to hone the message to ensure we maximize the benefits under this program and use the funds to get business back to where it needs to be.

The PBO Advisory Group team is available to assist you with the PPP loan or any aspect of the CARES Act. Please contact us today at 858-622-1681.