Expertise Beyond the Numbers

Understanding the Small Business Runway Extension Act of 2018

Closing out 2018, government contractors in the small businesses category were rewarded with the passing of legislation that would significantly assist in the long-run performance and success of their businesses. Titled the “Small Business Runway Extension Act of 2018”, the US government has changed the look-back period for the Small Business Administration’s (SBA) determination of the size status of small businesses from three years to five years.

This new modification means that the size of a contractor’s business will be based on the average of their annual gross receipts over a longer look-back period of five years. In order to qualify as a small business, a business must meet certain size standards based on the North American Industry Classification System (NAICS) code associated with its industry. SBA’s size standards are stated either in the number of employees or annual receipts. SBA’s size standard represents the largest size that a business (including its affiliates) may be in order to remain classified as a small business for federal contracting programs and set-asides.

The intention of the Small Business Runway Act is to reduce the impact of unexpected and rapid growth a small business may experience.  This rapid growth could potentially distort the company’s look-back revenue, causing it to prematurely lose its small business status and the incentive that status provides.

The implications for this change are profound for contractors with the small business designation. The SBA works with federal agencies in order to meet goals to award prime government contract dollars to eligible organizations that qualify as a small business based on their NAICS codes. The SBA also provides valuable counseling and help to small business contractors to ensure their continued success in the government contracting industry.

But, to the surprise of many, the law has yet to go into effect. Despite the act being signed into law on December 17, 2018, there is no word from the SBA as to when the change will be officially recognized. Robb Wong, Associate Administrator of SBA’s Office of Government Contracting and Business Development (GCBD) issued a notice explaining, “The change made by the Runway Extension Act is not presently effective and is therefore not applicable to present contracts, offers, or bids until implemented through the standard rulemaking process. The GCBD is drafting revisions to SBA’s regulations and forms to implement the Runway Extension Act. Until SBA changes its regulations, businesses still must report their receipts based on a three-year average.”

For organizations hoping to take advantage of the Runway Extension Act immediately, they will have to wait until the SBA changes regulations, including 13 C.F.R. § 121.104 (“How does SBA calculate annual receipts?), and potentially also issue guidance to contractors on how to use the new rule.

However, there is a point of contention around the effective/start date of the Runway Extension Act. Federal courts have previously ruled in Johnson v. United States that, “absent clear congressional direction, it [the act] takes effect on its enactment date,” which for the Runway Extension Act would be as of the date the act was enacted. Based on this legal understanding, some contractors may choose to make bids on contracts based on the five-year look-back period. Doing so may have consequences for a contractor’s proposals and their standing with the SBA.

Regardless of how contractors interpret the legal positioning of the Runway Extension Act, SC&H Group is always available to assist and consult organizations on how to make the best steps forward. For a detailed consultation, contact SC&H Group.

2019 Tax Planning