Runway Extension Act Update: SBA Says Three-Year Reporting Period Still Applies

In late 2018, Congress passed the Small Business Runway Extension Act, which had a single purpose: change the three-year average annual receipts calculation period (for determining small business eligibility) to a five-year calculation period.

Small businesses, for the most part, have been watching with bated breath for the SBA to comply with the Runway Extension Act. But as we’ve previously written, the SBA has thus far refused to do so (albeit under shifting rationale).

Now, the SBA has cemented its position against applying the Runway Extension Act—according to the SBA, “[b]usinesses must continue to report their annual receipts based on a 3-year average until the SBA amends its regulations.”

I’m not convinced the SBA has it right.

The SBA’s latest statement on the Runway Extension Act is from an April 10, 2019 whitepaper, discussing its revised size standard methodology. Responding to a comment about its proposal, the SBA briefly discussed the Runway Extension Act:

The [Runway Extension Act] amended section 3(a)(2)(C)(ii)(II) of the Small Business Act by changing the period for calculation of average annual receipts of businesses providing services from three (3) years to five (5) years. This change to the calculation of annual average receipts requires the issuance of a proposed rule and approval by the SBA Administrator. Accordingly, SBA will be initiating a rulemaking to implement the new law into SBA’s regulations. Businesses must continue to report their annual receipts based on a 3-year average until SBA amends its regulations.

This statement is notable for two reasons.

First, it suggests the SBA has abandoned its argument that Runway Extension Act doesn’t apply to the SBA. By confirming that it will take some action in response to the Runway Extension Act, the SBA must agree that the Act applies to the SBA—if the SBA thought otherwise, one would assume that its whitepaper would have said so.

Second, it (again) confirms the SBA’s belief that its rules—as opposed to a law, passed by Congress and signed by the President—carry the day. This belief, however, seems dubious: because the Runway Extension Act should be considered effective as of the date it was signed, see Gozlon-Peretz v. United States, 498 U.S. 935, 404 (1991) (“It is well established that, absent a clear direction by Congress to the contrary, a law takes effect on the date of its enactment.”), and because a statute trumps over an inconsistent regulation, see Farrell v. United States, 313 F.3d 1214, 1219 (9th Cir. 2002) (“It is well-settled that when a regulation conflicts with a subsequently enacted statute, the statute controls and voids the regulation.”), the SBA’s insistence that it must first amend its regulations for the Runway Extension Act to become applicable seems misplaced.

In any event, the SBA’s latest statement shows that, as of now, it still believes the 3-year reporting period applies.

For some businesses, it might not matter whether their size is calculated under a three-year or five-year period—they’d be small (or large) regardless.

For others, though, application of one reporting period over the other could make all the difference in its small business eligibility. And though the SBA says that it will issue a rulemaking to incorporate the Act, it hasn’t said when that rulemaking might come; small businesses who might benefit from the Runway Extension Act are therefore still in a lurch, waiting for the SBA to comply.

If you have questions about the Runway Extension Act, or how its application might impact your business, please give us at a call at 785-200-8919.

Update: On April 11, 2019, the SBA’s whitepaper was formally published in the Federal Register. It’s available at 84 Fed. Reg. 14587 (see page 14588 for the cited text about the Runway Extension Act).

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