The "Small Business Runway Extension Act of 2018," which would expand the period of measurement for small business status from three years to five, is one step closer to becoming law, having recently passed the House and Senate. This Act provides small businesses with the opportunity to extend their small business status until they are better situated to compete outside of small business set asides. The Act may also provide recent small business graduates with a reprieve, as they may again qualify as small.
What is the status quo? To qualify as a small business under the Small Business Act, a concern must meet certain receipts or employee size standards based on the North American Industry Classification System (NAICS) code associated with the work they do. Typically, manufacturing work has employee-based size standards and services work has receipts-based size standards. For example, NAICS code 541513 is for Computer Facilities Management Services, with a size standard of $27.5 million, and 339992 is Musical Instrument Manufacturing, with a size standard of 1,000 employees. The receipts standard is currently calculated by averaging the annual gross receipts of the business over the last three years.
What may be changing? This Act changes the look-back period for calculating average gross annual receipts from three to five years. If the Act becomes law, annual receipts will be averaged over five years, which, for many businesses, will mean including lower revenue years in the calculation.
Why is this important? Many small and medium-size businesses have reached out to Congress to complain that the government contracting landscape is harsh for a newly graduated small business. Often, small businesses that graduate from the program are unable to compete with large businesses, resulting in bankruptcy or acquisition by a large business. This is especially true for those small businesses that win particularly large contracts that all but instantly jettison them out of the program. Contract award values are increasing, and small businesses that win these awards are graduating too early to have adequate systems in place to compete and comply with all regulations. A five-year average receipts review will give small businesses slightly more flexibility when winning large awards and allow them to better prepare themselves for post-graduation competition.
What's next? If and when the president signs the Small Business Runway Extension Act into law, the Small Business Administration will need to promulgate regulations to iron out the details, such as what to do with those businesses that have not yet been in business for five years. We will keep you updated on future developments.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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