CRITICAL UPDATE:
On Monday, June 24, 2019, The U.S. Small Business Administration (SBA) issued its Proposed Rule implementing the Small Business Runway Extension Act (the Act), signed into law by the President in late 2018. It is not final yet. Businesses must continue to report their annual receipts based on a 3-year average until SBA amends its regulations. The SBA is requesting comments by August 23, 2019. CAVU will keep you updated.
In the world of federal government contracting, size matters—a lot. If your company meets the standards for a “small business,” it can qualify for set-aside contracts, loans, research grants, and more.
A new law is about to change how the Small Business Administration (SBA) calculates a company’s size, and it may move your firm into or out of designation as a small business. Here’s the low-down on this change and what to look out for as the year progresses:
SBA to Accommodate Revenue Spikes in High-Growth Years
SBA is the federal agency that sets the standards for defining a small business. Size is generally based on two factors—number of employees and annual receipts—and varies by industry designation under the North American Industry Classification System (NAICS) codes.
Under current rules, SBA measures a company’s revenue based on annual average gross receipts over the past three years. The Small Business Runway Extension Act (Pub L. No. 115-324), signed into law by President Trump on December 17, 2018, changes that revenue measurement to annual average gross receipts over the past five years.
Runway Act proponents designed the law to allow more contracting flexibility by reducing the impact of revenue spikes in a company’s high-growth years. These spikes can move a firm out of the small business category practically overnight. The new law will allow many high-growth companies to retain their small business designation.
Right now, however, SBA is still drafting size revisions. Until they become effective, the agency directs businesses to continue reporting their receipts based on a three-year average.
Run Your Numbers Now to Preview Revenue Changes
While SBA conducts its rulemaking process, you can preview how your business will fare under the new five-year average:
- Pull out company tax returns and total the annual gross receipts over the latest completed five fiscal years. Divide that total by five.
- Find the definition and reporting directions for receipts on the following Internal Revenue Service tax return forms (see 13 CFR 121.104 for more details):
- Form 1120 for corporations
- Form 1120S and Schedule K for S corporations
- Form 1120, Form 1065, or Form 1040 for limited liability corporations
- Form 1065 and Schedule K for partnerships
- Form 1040, Schedule F for farms
- Form 1040, Schedule C for other sole proprietorships.
- If you’re a cash-basis taxpayer, you may find that your gross receipts are lower than your accrual receipts, particularly if your company is growing. While this may be a plus for high-growth organizations, the size standard also considers affiliates. The SBA code discusses how to include the “proportionate share” of receipts for a joint venture based on ownership share.
SBA has the final word on whether your company qualifies as a small business based on the measurement rules. As you plan your bidding for 2019 and beyond, keep an eye on the SBA rulemaking process and be ready for change. SBA contacts are Khem Sharma, Chief, Office of Size Standards, (202) 205-7189 or Sam Le, Office of General Counsel, (202) 619-1789. In a recent conversation with the SBA, the rulemaking process is likely to be complete in 2019, however, it could extend beyond this year.
CAVU stands ready to help you navigate successfully through the federal contracting process. Feel free to reach out for guidance on SBA’s measurement rules or any other concern.