In 2020, New Methods for Calculating Small Business Size Based on Annual Receipts

December 19, 2019 | By Maria L. Panichelli, Michael A. Richard

Several months ago, we blogged about the status of the Small Business Runway Extension Act, a law that could be a game changer for small businesses. As a refresher – the Small Business Runway Extension Act was signed into law at the end of last year. It amended the Small Business Act, to modify the method for measuring a small business’ size. Specifically, the Act mandated that, for receipts-based size standards, a company’s size will no longer be calculated on the basis of a 3-year average; instead, size will be calculated on the basis of a 5-year average. The purpose of this change was to allow small businesses who experience growth to remain “small” a little longer.

Some contractors were in favor of this change, but many others were not. In addition, the SBA originally came out as an opponent of the change. There was also some confusion over when this change would go into effect. Certain commentators believed that the 5-year calculation was in effect as soon as the Act was signed; however, the SBA – and subsequently, the GAO – took the position that the shift to the 5-year calculation would not occur until the SBA formally changed the SBA small business regulations.

After a hearing before the U.S. Senate Committee on Small Business and Entrepreneurship, the SBA issued a proposed rule, implementing the Act. That started the ball rolling towards implementation, but contractors were warned not to calculate their size using the 5-year method just yet, and to wait until the SBA finalized the related regulatory changes. Well, it looks like we have finally arrived at that much-anticipated point.

On December 5, 2019 the SBA published a final rule, implementing the receipts-based calculation shift from the Small Business Runway Extension Act. The rule explains that, effective January 6, 2020, “SBA is changing its regulations on the calculation of average annual receipts for all of SBA’s receipts-based size standards, and for other agencies’ proposed receipts-based size standards, from a 3-year averaging period to a 5-year averaging period.”

Interestingly, the rule also states that the SBA will adopt a two year “transition period.” This means that between January 6, 2020 and January 6, 2022, businesses can choose whether they want to calculate their size using a 3-year average or a 5-year average. This gives firms a little more flexibility, and should allow more firms to remain “small.”

If you have questions about how to calculate your size, or other questions about your small business program eligibility, Obermayer’s government contracting team is here to help!

About the Authors

Maria L. Panichelli

Partner

Maria is a partner and the Chair of the Government Contracting department.   She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their...

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Michael A. Richard

Associate

Michael is an attorney in Obermayer’s Government Contracting Department, where he excels at getting clients to the settlement table. Michael’s tenacity is truly a force to be reckoned with. Over the past...

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