SBA Issues Guidance on New HUBZone Rules

Can a business seeking HUBZone status give employees bonuses or higher wages to entice them to live in a HUBZone?

According to new guidance published by the U.S. Small Business Administration, yes. But that’s not the only question addressed in the guidance.

Last week, the SBA published a list of frequently asked questions about the sweeping changes in the HUBZone program that went into effect late last year.

One of the questions was whether a firm could pay an employee to live in a HUBZone. The response began with a negative saying, “A firm cannot simply pay an individual to live in a HUBZone” without them performing “legitimate work” for the firm.

It then added: “If, alternatively, a firm paid an employee an additional amount beyond the individual’s normal salary/wages to live in a HUBZone, this would not necessarily be a problem.”

In short, despite the SBA beginning its response by saying no, the answer is yes, a firm can pay an employee to live in a HUBZone so long as they perform legitimate work for the firm. That means HUBZone bonuses are on the table. What would be banned, of course, is putting a HUBZone resident on the payroll, but having the person never do any actual work.

The FAQ went into detail on several of the recent changes that have been causing a touch of confusion. The big change, of course, is annual recertification, down from the three-year period that had been a hallmark of the HUBZone program. The FAQ confirmed that for businesses already certified, their annual recertification date will be the anniversary of their original certification.

The FAQ also provided significant detail regarding how employees may qualify as HUBZone residents even if they later move. Basically, the SBA said that a business can continue to count an employee as a HUBZone resident toward the 35% requirement if the employee lived in a HUBZone for 180 days before and after recertification and they continue to work for the business. The SBA will ask for driver’s licenses or voter registration cards for proof, but will accept utility bills or written statements made under penalty of perjury if necessary.

The way I read this is that, so long as the employee continues working for the firm, that employee is considered a HUBZone resident. But, this is an area where yet more clarity may be needed.

The annual certification has apparently led some to worry that bad actors will move their principal office by shifting employees just in time for their annual review. The SBA said that it anticipated just such an issue which is why the new definition of “principal office” includes the fact that the concern must conduct business there and must prove it, for example, by providing utility bills. Likewise, SBA said there is always the threat of an investigation in to those companies that try to game the system.

Speaking of principal office, the new HUBZone regulations allow for a firm to lock down the fact that it is in a HUBZone for up to 10 years if it buys the building (and doesn’t sell it), regardless of whether the area ceases to be HUBZone designated during that time. The SBA noted that signing a long-term lease will have the same effect, though it will last the length of the lease with a 10-year cap. So, for example, a business that signs a seven-year lease may count on its principal office remaining HUBZone designated for seven years.

The FAQ also discussed the Governor’s Designated Covered Areas Initiative, a program stemming from the 2018 NDAA which gives state governors the opportunity to petition the SBA to designate rural areas as HUBZones if they have a low enough population with high enough unemployment.

It makes it clear that as of January 1, any state governor may submit a petition by email to have a rural area considered a HUBZone. The requirements are that the area have a population of less than 50,000 and unemployment of 120% above the national or state average.

Last but not least, the SBA said that it would be doing an economic impact study of the program in the 2020 fiscal year to try to gauge the impact of the rule changes.

Thanks to SBA for providing a few more details on these substantial changes to the HUBZone program.

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