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.