5-Year Receipts Calculation Period Effective January 6, 2020

At SmallGovCon, we’ve closely followed the SBA’s implementation of the Small Business Runway Extension Act. After much confusion caused by the delayed implementation of the Act, there’s finally a light at the end of the tunnel: the 5-year receipts calculation period will become effective January 6, 2020.

Importantly, the SBA’s final rule implements relief for businesses that will be adversely affected by the change to a 5-year receipts calculation period.

Let’s take a look.

By way of background, Congress passed the Small Business Runway Extension Act on December 17, 2018, seeking to give growing small businesses additional “runway” before graduating out of their size standard. To do so, it changed the time for which receipts must be calculated—from “not less than 3 years” to “not less than 5 years.”

The SBA, however, balked at making the 5-year receipts calculation period immediately effective. In doing so, it advanced a series of arguments that (much to my chagrin) were later upheld by the SBA’s Office of Hearings and Appeals.

Even though the SBA is adamant that the Runway Extension Act doesn’t apply to the SBA, it nonetheless issued a proposed rule in June 2019 that would change the receipts calculation period set forth in 13 C.F.R. § 121.104, from 3 years to 5.

The SBA has now published the final rule to implement the 5-year receipts calculation, which will become effective on January 6, 2020. The rule clarifies that the 5-year calculation period applies to all receipts-based size standards, regardless of industry. Beginning January 6, therefore, the SBA will determine a company’s size by calculating its average annual receipts (that is, its total income added to its cost of goods sold, as reported on the company’s tax returns) over its preceding five completed fiscal years—if this amount falls below the corresponding size standard, the company is considered a small business.

Though helping small businesses remain competitive for as long as possible is certainly an admirable goal, a switch to a 5-year receipts calculation period would undeniably hurt some businesses. To address this issue, the SBA will allow firms to choose either a 3-year or a 5-year receipts calculation period until January 6, 2022.

This two-year transition period will help prevent small businesses with declining revenues from being penalized through the automatic inclusion of higher-year revenues. But candidly, I’m not yet sure how it will work. The SBA will modify its (infamous) Form 355, to allow contractors to elect a 3-year or a 5-year calculation period. But will this be a one-time election, or will contractors be able to switch back and forth between the different calculation periods as it suits their needs? Will the election be an option for contractors to select in beta.sam.gov? Can a contractor argue that it’s small under either standard if faced with a size protest, or must it identify the receipts calculation period in advance before submitting a bid?  

The final rule doesn’t really answer these questions, so I’ll be interested to see how the calculation period election process plays out.

There are a few caveats to keep in mind with this new rule:

  1. The change to a 5-year receipts calculation applies (for now) to small business and socio-economic programs and contracting eligibility. It does not impact the size calculation for business loan and disaster loan assistance—although the SBA has said it will seek comment on a modification of those programs in separate rulemaking.
  2. Size under employee-based size standards (i.e., for manufacturing and supply-based NAICS codes) are not affected by the Runway Extension Act or the SBA’s implementation of it; thus, calculation of the number of employees will continue as before under 13 C.F.R. § 121.106.
  3. The SBA clarified that the “former affiliate rule” does not allow a concern to adjust its past receipts after it sells or acquires a segregable division that is not a separate legal entity.

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Overall, the SBA’s implementation of the Runway Extension Act is a positive development. Remember: the 5-year calculation period goes into effect on January 6, 2020; until then, the 3-year calculation period will continue to apply.            

If you have any questions about this proposed rule or size calculations, please give me a call.