Congress is considering changing the receipts calculation for small businesses. Currently, a company’s size is determined based on the average annual receipts of the three recently completed fiscal years. However, in the Small Business Runway Extension Act of 2018, H.R. 6330, which the House passed on September 25, 2018, the House of Representatives proposes amending the Small Business Act to change this time period to five years.

In a Report dated September 12, 2018, the House Small Business Committee (“HSBC”) observed that the bill “will allow small businesses at every level more time to grow and develop their competitiveness and infrastructure, before entering the open marketplace.” The HSBC also noted the challenges faced by recently graduated mid-sized businesses that might be barely over the applicable size standard, but still forced to compete with billion-dollar enterprises. The proposed legislation is intended to address this issue by providing a longer time period for which a business may be qualified as small. However, by extending the time period for the receipts calculation, lawmakers assume that revenues grow year-to-year at a steady rate. While this may be true for some companies, it is certainly not true for all.

To illustrate, let’s say Company A is performing information technology (“IT”) contracts and its revenues have grown by exactly 9% every year for the last five years:

Company A’s current size calculation is $27,768,407, based on its three recently completed fiscal years, and it is therefore considered other than small for IT contracts under the $27.5 million size standard. But if Company A’s size is calculated based on the last five fiscal years, as H.R. 6330 proposes, Company A’s current size is $25,813,044, which would make Company A a small business again under the $27.5 million size standard. So Company A is a winner under H.R. 6330.

Now let’s consider Company B, another IT firm, which has had extreme growth and downturns over the last five years:

Company B is currently small under the $27.5 million size standard. If Company B’s receipts for the last five fiscal years are averaged, though, Company B will be over the $27.5 million size standard and no longer considered small. Company B, therefore, is a loser under H.R. 6330.

In anticipation of H.R. 6330 getting passed in the Senate and signed into law, we are collecting comments from companies of all sizes about whether the five-year calculation will help or hurt them. To implement this change in its regulations, SBA will need to go through the rulemaking and comment process, and we believe SBA will be open to some type of prospective application or “grandfathering.” Therefore, please reach out to us and let us know how this proposed new receipts calculation will affect your company.