The U.S. Small Business Administration (SBA) issued a final rule on June 6, 2022, making significant changes to its methodology for calculating the size of certain businesses. The rule becomes effective July 6, 2022.
The primary change is to shift the period of calculation for employee-based size standards to a 24-month trailing average basis from the current period of 12 months. SBA's employee-based size standards apply primarily (but not exclusively) to manufacturing. Historically, SBA has calculated size for these industries based on a 12-month lookback. Section 863 of the 2021 National Defense Authorization Act (NDAA) amended the Small Business Act to require a 24-month lookback for these industries. The change applies across all of SBA's programs.
SBA recently changed its period of calculation for receipts-based size standards from a three-year to a five-year lookback, as directed by the 2018 Small Business Runway Extension Act (SBREA). In implementing SBREA, SBA provided a phase-in period during which businesses could elect to use either the three-year or five-year lookback. That phase-in period expired in January 2022, and all firms are now required to use the five-year lookback for receipts-based size calculations. The SBA considered, but declined to provide, a phase-in period for the new employee-based rule.
The final rule also makes changes to size calculation rules for its Business and Disaster loan programs, as well as the Small Business Investment Company program. Specifically, the SBA extended the five-year lookback for receipts-based size standards to these programs. These programs were not covered by SBA's initial rule change implementing SBREA and are now subject to the same periods of calculation for both employee-based and receipts-based size standards that apply for SBA's procurement programs.
Small business program fraud remains a top priority for enforcement and oversight agencies. The rules governing eligibility for these programs are complex and nuanced. Companies claiming small business status should ensure that they have a firm understanding of these rules and document their compliance with them.
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