Per an interim final rule published on November 17, 2022, the Small Business Administration (SBA) is adjusting the three economic disadvantage thresholds applicable to the 8(a) and Economically Disadvantaged Women-Owned Small Business (EDWOSB) programs for inflation. SBA’s interim final rule will also increase its receipts-based small business size standards. These changes will be effective on December 19, 2022. SBA’s changes should be welcomed by small businesses and participants in the 8(a) and EDWOSB programs and those looking to apply.
Economic Disadvantage Thresholds for 8(a) and EDWOSB Programs
SBA revised its regulations in 2020 to make its economic disadvantage thresholds the same for 8(a) initial and continuing eligibility, as well as for the EDWOSB program. Other than the change for 8(a) companies for initial eligibility, the thresholds themselves were not revised. Now, SBA has increased the thresholds for both programs.
Specifically, SBA has increased the adjusted net worth threshold from $750,000 to $850,000; the adjusted gross income threshold from $350,000, averaged over a three-year period, to $400,000, averaged over a three-year period; and the total assets threshold from $6 million to $6.5 million. This will likely make more companies eligible for participation or continued participation in the 8(a) and EDWOSB programs.
As relevant background, for firms owned by individuals, the 8(a) and EDWOSB programs have limits on the net worth, income, and total assets of the qualifying owner(s) for them to qualify as economically disadvantaged. In calculating adjusted net worth, SBA excludes equity in the primary residence of the applicant or participant and the value of funds invested in official retirement accounts. In calculating adjusted gross income, SBA excludes income that was reinvested in the firm or used to pay taxes arising in the normal course of firm operations. While adjusted gross income in excess of the limit creates a “rebuttable presumption” that an individual is not disadvantaged, there are certain exceptions, such as when the income was unusual and unlikely to reoccur. In calculating an individual’s total assets, SBA considers the fair market value of all assets, whether encumbered or not, including ownership in the business and primary residence. The only assets excluded for total assets purposes are funds invested in qualified retirement accounts.
Adjustment of Monetary-Based Size Standards
SBA is also adding an additional 13.65% inflation increase to its monetary (i.e. receipts-based) small business size standards. This adjustment accounts for inflation that has occurred since 2019. To implement this, all receipts-based size standards were multiplied by 1.1365 and rounded to the nearest $500,000 (except for the agricultural industries, which were rounded to the nearest $250,000).
For a couple examples, North American Industry Classification System (NAICS) code 236220 currently has a size standard of $39.5 million, but when the adjustment goes into effect, the new size standard will be $45 million. NAICS code 541611 currently has a size standard of $21.5 million, but with SBA’s adjustment, the new size standard will be $24.5 million. SBA’s adjustment to the receipts-based size standards will likely allow more companies to stay small longer or may even return some to small business status.
While these changes have been published as an interim final rule, SBA is requesting comments by January 17, 2023. If you have questions about summitting comments or how SBA’s rule may impact your business, please contact Meghan Leemon, the author of this client alert, or another member of PilieroMazza’s Government Contracts Group.
Special thanks to James Rhodes for his assistance with this client alert.