The Small Business Runway Extension Act, signed into law earlier this week, changes the small business size calculation under revenue-based NAICS codes from a three-year to five-year average.
The new law has sparked a great deal of discussion in the government contracting community, with some commentators pointing out that not all small businesses will benefit. But how does the SBA–the agency tasked with implementing the new law–feel?
Well, according to commentary published earlier this year, the SBA thinks the five-year period is a bad idea.
You probably know this already—from what we can tell word is spreading like wildfire—but Monday (Dec. 17, 2018) the president signed the “Small Business Runway Extension Act of 2018” into law.
This changes the period of time the U.S. Small Business Administration uses to measure a business’s size in revenue-based size standards from three years to five years. The law doesn’t say that there will be a period of implementation, so it’s reasonably safe to assume the effect is immediate.
With the stroke of a pen, Congress may have just paved the way for some soon-to-be large businesses to remain small for longer.
Both the House of Representatives and the Senate have passed a bill that would amend the Small Business Act to change the period of measurement used to determine the size of a business from three years to five. The bill awaits the president’s signature to become law.
Contrary to common misconception, a contractor’s small business status under a receipts-based size standard ordinarily is based on the contractor’s last three completed fiscal years–not the last three completed fiscal years for which the contractor has filed a tax return.
In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that a contractor cannot change the relevant three-year period by delaying filing a tax return for the most recently completed fiscal year.
A firm’s small business size status for federal procurements is measured by the firm’s revenues, not by its profits.
As the SBA Office of Hearings and Appeals explained in a recent size determination, measuring small business status by reference to profits would allow some very large companies to qualify as “small.”
I’m a government contracts lawyer these days, but when I was much younger, I was a would-be prime contractor. During my senior year of high school, I took a part-time job at the Grand Forks Herald, my hometown newspaper in North Dakota. Flush with cash (at least compared to where I’d been before), I then attempted to subcontract my household chores—things like taking out the trash and feeding the dog—to my younger brother.
My parents put the kibosh on that one, explaining that as a member of the family, I needed to personally contribute some labor to it (as a dad now, I can see where they were coming from). But imagine I had been successful, paying Pete, say, $20 weekly to toil on my behalf for the Koprince household. Could I have told the IRS, come tax season, that the money I paid Pete didn’t count toward my income, because I passed it through to him?
“Of course not,” you’re probably saying, and you are right. And, on a much larger scale, the same is true when it comes to a small government contractor’s subcontract costs. As the SBA Office of Hearings and Appeals has held, all of a company’s receipts—with very limited exclusions—count toward its size under a revenue-based SBA size standard. Just because you subcontract a portion of a government contract to another company does not mean that the money you pay your subcontractor doesn’t count toward your own receipts.