When exploring the world of SBA socioeconomic programs, the Historically Underutilized Business Zone (HUBZone) Program isn’t always the first program on a business’ radar. One reason for this could be the distinct eligibility requirements an applicant must meet to qualify for HUBZone certification.
This is the only socioeconomic program where SBA requires a company’s principal office and employees to reside in a designated area, i.e., a HUBZone. SBA provides a HUBZone map showing the areas designated as a HUBZone. Keep in mind that this map is reevaluated every five years, so it’s important to stay up-to-date on any updates made to the map.
We have previously covered the basics and overall benefits of the HUBZone Program. Here, we’ll go through the eligibility requirements more in-depth.
There are four main requirements to qualify for HUBZone certification:
- Ownership
- Small Business
- Principal Office
- Employees
This blog will focus primarily on the last two criteria as they are unique to the HUBZone Program and more complicated. But to learn more about each criteria, the HUBZone qualifications can be found under 13 C.F.R. § 126.200.
Ownership
HUBZone certified concerns must be at least 51% owned (but not necessarily directly owned) by one or more of the following:
- U.S. citizens
- Alaska Native Corporations (ANC) or a wholly owned business entity of an ANC
- Indian Tribal Governments or a corporation that is wholly owned by one or more Indian Tribal Governments
- Certified Development Company (CDC)
- Small agricultural cooperatives organized or incorporated in the United States; or
- Native Hawaiian Organization (NHO)
Size
Like the other socioeconomic programs, a concern seeking HUBZone certification, including its affiliates, must qualify as a small business concern under SBA’s size regulations.
Principal Office
SBA regulation explains that “[i]n order to be eligible for HUBZone certification, a concern’s principal office must be located in a HUBZone.” Often, potential applicants have a lot of questions about the qualifications for a principal office. What if I work from home? What if my job requires working at different job-sites? In today’s world, “principal office” can look different for everyone. Lucky for us, SBA defines principal office in the regulation.
What qualifies as a principal office?
Principal Office means the location where the greatest number of the concern’s employees at any one location perform their work. The regulation notes that “[i]n order for a location to be considered the principal office, the concern must conduct business at this location.” 13 C.F.R. § 126.103.
What if a company conducts business at more than one location?
When an employee works at more than one location, SBA will use the location where the employee spends more than 50% of their time. The employee will not be deemed to work in a HUBZone location if the employee doesn’t have a specific location where they spend more than 50% of their time, and one of those locations is not located in a HUBZone.
For companies whose “primary industry classification” is in services or construction, SBA applies a different principal office determination:
[T]he determination of principal office excludes the concern’s employees who perform more than 50% of their work at job-site locations to fulfill specific contract obligations. If all of a concern’s employees perform more than 50% of their work at job sites, the concern does not comply with the principal office requirement.
The regulations give an example of how this is applied:
Example 1. A business concern whose primary industry is construction has a total of 78 employees, including the owners. The business concern has one office (Office A), which is located in a HUBZone, with 3 employees working at that location. The business concern also has a job-site for a current contract, where 75 employees perform more than 50% of their work. The 75 job-site employees are excluded for purposes of determining principal office. Since the remaining 3 employees all work at Office A, Office A is the concern’s principal office. Since Office A is in a HUBZone, the business concern complies with the principal office requirement.
Long-term investments
SBA will recognize long-term investments that participants have made in properties that are in a HUBZone. If the concern has purchased a building or entered a long-term lease of at least 10 years for property in a HUBZone, then the concern may be deemed to have its principal office located in a HUBZone.
The long-term investment can satisfy the principal office requirement for up to 10 years from the date the building was purchased, or the lease was signed, “as long as that building or property qualifies as the concern’s principal office and continues to qualify as the concern’s principal office, and as long as the firm maintains the long-term lease or continues to be the sole owner of the property.” 13 C.F.R. § 126.200(c)(1)(i).
SBA refers to this as the 10-year principal office long-term investment protection period. If the investment was made prior to the HUBZone’s certification, the 10-year period starts on the concerns HUBZone certification date. If the investment was made after the concern’s HUBZone certification, then the 10-year period starts on the date of investment.
Before deciding on making a long-term investment for HUBZone certification, be aware that the following do not qualify under the long term investment rule:
- An office located in a Redesignated Area or Qualified Disaster Area at the time of initial HUBZone certification;
- An office that is shared with one or more other concerns or individuals;
- Any location being used as a personal residence; or
- An investment made within 180 calendar days of the expiration of an area’s designation as a Qualified Census Tract, Qualified Non-Metropolitan County, Governor-Designated Covered Area, or Qualified Base Closure Area.
Tribally-Owned Concerns
For concerns owned in whole or in part by one or more Indian Tribal Governments, a different principal office requirement applies. The concern must either (1) Maintain a principal office located in a HUBZone and ensure that at least 35% of its employees reside in a HUBZone or (2) Certify that when performing a HUBZone contract, at least 35% of its employees engaged in performing that contract will reside within any Indian reservation governed by one or more of the Indian Tribal Government owners, or reside within any HUBZone adjacent to such Indian reservation.
HUBZone Resident Employees
In order to be eligible for HUBZone certification, SBA requires at least 35% of a concern’s employees must qualify as HUBZone resident employees. When determining the percentage of employees that must reside in a HUBZone to meet the 35% HUBZone residency requirement, if the percentage results in a fraction, SBA rounds to the nearest whole number, except for a firm with only one employee. For firms with only one employee, that one employee must reside in a HUBZone. 13 C.F.R. § 126.200(d)(1).
Who qualifies as an “employee?”
Like “principal office,” SBA defines “employee”:
Employee means an individual employed on a full-time, part-time, or other basis, so long as that individual generally works a minimum of 10 hours per week during the four-week period immediately prior to the relevant date of review. SBA may permit an individual to count as an employee if that individual works less than 10 hours in any week during the four-week period immediately prior to the relevant date of review provided the individual works at least 40 hours during that four-week period and the concern demonstrates a legitimate business reason for that work schedule.
SBA considers the following employees:
- Individuals hired through temporary employment agencies, leasing firms, unions, or co-employment agreements
- An individual with ownership in the company who works at least 10 hours per week, even if unpaid
- An owner working under 10 hours per week if no one else manages and directs the company’s employees
- Reservists or National Guard members called to active duty
- Individuals on paid leave (sick, maternity, or annual leave)
SBA does not consider the following employees:
- Unpaid non-owners of the company
- Individuals whose pay is deferred
- Independent contractors paid via IRS Form 1099
- Subcontractors
Legacy HUBZone Employees
What happens if a concern meets the 35% requirement of HUBZone resident employees, but one of those employees later moves to a non-HUBZone location? Or, what if the employee’s residence is in an area that no longer qualifies as a HUBZone?
SBA may still consider the employee a HUBZone resident employee, if the employee qualifies as a Legacy HUBZone Employee. The individual must remain in a HUBZone for at least 180 days after the certification date and maintain continuous employment status without interruption.
A certified HUBZone company is allowed up to four legacy HUBZone employees at one given time. But the company must have at least one other HUBZone employee for SBA to count the legacy employees as HUBZone employees.
SBA excludes legacy HUBZone Employee status for anyone who either (1) originally qualified by living in a Redesignated Area or Qualified Disaster Area, or (2) works fewer than 30 hours per week. 13 C.F.R. 126.200(d)(3)(v).
While most of SBA’s socioeconomic programs share similar eligibility requirements, the HUBZone Program has two distinct requirements that may feel unfamiliar or daunting to navigate at first. But if your company does meet these criteria, the benefits of the program far outweigh the time spent trekking through the regulations.
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