Earlier this month, we wrote about the internal SBA Information Notice (Information Notice), which clarifies that the changes made by the Small Business Runway Extension Act (Runway Extension Act) are not effective immediately. The Runway Extension Act requires that receipts-based size standards be based on annual average gross receipts over five years. SBA’s regulations currently require a three-year lookback for size standards based on annual receipts. And, according to the Information Notice, until SBA revises its regulations through the rulemaking process, businesses must continue to report their receipts based on a three-year average.
Although the Information Notice does not specify the extent of the regulatory changes that need to be made in response to the Runway Extension Act, SBA needs to revise its identity of interest based upon economic dependence rule. This affiliation rule stipulates that SBA may presume an identity of interest if the business in question generated 70% or more of its receipts from another business over the previous three fiscal years. The presumption of affiliation may be rebutted by showing that the business at issue is not solely dependent on that other business.
Notably, when SBA proposed this rule, it contemplated that the 70% revenue threshold would be measured over just one year. However, in response to comments that SBA should use a three-year time frame because of the three-year lookback already used for size calculation purposes, SBA adopted a three-year measuring period in the final rule. Thus, it is safe to assume that the rule on economic dependence affiliation will need to be revised to change the measuring period from three years to five years. And a five-year measuring period for economic dependence would be a welcomed change for small businesses that regularly act as subcontractors to large primes, as affiliation would only be presumed if a small business derived 70% or more of its revenues from another business over the five (not three) most recently completed fiscal years.
About the Author: Peter Ford heads our Colorado office and is a partner in our government contracts group. He may be reached at [email protected].