Wednesday, December 19, 2018

SBA - Size Restrictions Now Based on 5-Year Averaging

On Monday, this week, the President signed into law several bills, one of which was H.R. 6330, the Small Business Runway Extension Act of 2018" (SBREA). The SBREA modifies the method for prescribing size standards for small businesses. Basically, this is a one-word change but it will, in most cases, benefit small businesses. The Law amends 15 USC 14A, Section 632(a)(2)(C)(ii)(iii) by changing the number '3' to '5'.

For purposes of 15 USC 14A, a small-business concern is one that is independently owned and operated and is not dominate in its field of operations. To be a small business, the firm must not exceed certain size standards consisting of employment numbers and average annual average gross receipts over a period of time. Previously, the average was calculated over a period of three years. Under the new law, the average is to be calculated over a five-year period.

The objective of the legislation is to allow small business to stay small businesses longer. Instead of calculating revenues based on the trailing three-year average, small businesses can calculate average revenues based on the last five years. This works for growing companies - those who the Government has chosen to benefit. However, the converse is also true. Companies that are losing revenues may well stay in the non-small business category longer.

Calculating annual revenues based on averages, whether three or five years, smooths out a lot of the volatility in revenue recognition inherent in small businesses and start-ups. Far more companies will benefit from a five-year averaging scenario than those that might be harmed by it.

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