Transition From A 3-Year Averaging Period To A 5-Year Averaging Period
As reported in the Federal Register, the U.S. Small Business Administration (SBA or Agency) is modifying its method for calculating average annual receipts used to prescribe size standards for small businesses. Fed. Reg. Vol. 84, No. 234, Dec. 5, 2019. Specifically, in accordance with the Small Business Runway Extension Act of 2018, 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. SBA is adopting a 5-year averaging period for calculating the annual receipts of businesses. SBA adopts a transition period through January 6, 2022, during which firms may choose between using a 3-year averaging period and a 5-year averaging period.
In response to comments received concerning its earlier Proposed Rule, SBA also clarifies how it believes annual receipts should be calculated in connection with the acquisition or sale of a division. Specifically, the final rule provides that the annual receipts of a concern would not be adjusted where the concern sells or acquires a segregable division during the applicable period of measurement or before the date on which it self-certified as small. This would be different from how SBA treats the sale or acquisition of a subsidiary, which is a separate legal entity and an affiliate. In the case of a subsidiary, SBA’s regulations provide that ”[t]he annual receipts of a former affiliate are not included if affiliation ceased before the date used for determining size. This exclusion of annual receipts of a former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased.” 13 CFR 121.104(d)(4).
This final rule is effective January 6, 2020, and resolves the controversy regarding the impact of the Runway Extension Act on Small Business Size Standards. You should perform comparative calculations to determine the effect on your business and which method will be more advantageous to use during the two year transition period.