The U.S. Small Business Administration (SBA) has released its final rule implementing a new five year measurement period for all small business contractors whose size calculation is based upon the firm’s receipts.

Under current receipts-based size standards, the SBA determines a company’s size by calculating its average annual receipts (i.e. total income plus cost of goods sold as reported to the IRS in the firm’s tax returns) over the last three completed fiscal years. Under the new rule, that measurement period will be extended to five years.

The final rule will become effective on January 6, 2020, ending the uncertainty that has surrounded receipts-based small business size standards since the passage of the Small Business Runway Extension Act nearly one year ago. Congress had expected the law’s mandate for a new five year measurement period to be applied immediately. SBA, however, took the position that rulemaking by the agency was required. It then took until June of this year for SBA to release its proposed rules.

The final rule differs from the proposed rules in a couple of important respects:

First, because SBA acknowledges that this change could be detrimental to some small business contractors, it has built a two year transition period into the new rule. That means between January 6, 2020 and January 6, 2022, contractors whose businesses are subject to receipts-based size standards will have the ability to choose between having their size calculated based upon a three year measurement period or a five year measurement period.

Second, SBA has decided against having this rule change apply to its Small Business Loan Programs or its Disaster Loan Programs. Separate rulemaking regarding these programs is expected in the coming months.

Until the new rule’s effective date, SBA will continue to apply the three year averaging period included in the current version of 13 C.F.R. § 121.104 for all receipts-based size standards. Since business size is determined as of the date a firm certifies its size, the three year calculation period will apply to any bid or proposal submitted prior to January 6, 2020.

For more information, contact MWL Partner Peter Fish.