Today, the U.S. Small Business Administration ("SBA") issued its final rule implementing the Small Business Runway Extension Act of 2018, Public Law 115-324, which was signed into law on December 17, 2018. The final rule changes the lookback period from a three-year averaging period to a five-year averaging period for purposes of calculating the size of a small business under receipts-based size standards.
The final rule is effective on January 6, 2020.
Importantly, while the final rule changing the lookback period from three years to five years is effective on January 6th, it also contains a two-year transition period until January 6, 2022. During this two-year transition period, contractors are permitted to choose between calculating receipts using the 3-year average or the 5-year average.
SBA implemented the transition period to protect small businesses who are experiencing declining revenues from immediately turning into an "other than small" business as a result of the change. In this regard, SBA provided the following:
SBA acknowledges that the move from a 3-year averaging period to a 5-year averaging period could, as an unintended negative impact, cause some small businesses that are close to their size standard to lose their small business status immediately or subsequently during the period of declining annual revenues. SBA agrees that a firm that exceeds the size standard based on a 5-year average, but then has subsequent years of declining revenues, will face a longer period before regaining its small business status. In order to mitigate this impact, in this final rule, except for the Business Loan and Disaster Loan Programs, SBA is providing a transition period until January 6, 2022, during which firms will be allowed to choose either the 3-year receipts average or 5-year receipts average for size eligibility purposes.
For many government contractors, the final rule is welcome news as it will allow them to stay small or become small––and thus compete for set-aside contracts––for a longer period of time. Interestingly, as SBA points out, the change may also result in Federal agencies choosing to set-aside more contracts for small businesses because the pool of eligible contractors would increase. As a reminder, until January 6, 2020, contractors should continue to use the three-year averaging period when calculating your size.
Small Business Size Standards: Calculation of Annual Average Receipts
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