If you are a business owner who wants to apply for a Small Business Administration (SBA) program or contract (or participate in a program that relies on SBA size determinations, such as the Disadvantaged Business Enterprise program), you should understand how the SBA determines your business size. This can be based on a calculation of your annual receipts or the number of employees in your business, depending on your North American Industry Classification System (NAICS) code. The most up-to-date table of those size standards can be found in Section 121.201 of the Code of Federal Regulations. The majority of businesses will use annual receipts to determine their size, while businesses in a limited number of industries (such as manufacturing, wholesalers, and certain areas of transportation) must use number of employees.
Annual receipts
According to the SBA, annual receipts are "all revenue in whatever form received or accrued from whatever source," which includes revenue from sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. This means that you have to report all the money that your business earns or is entitled to earn, regardless of how you receive it or what you use it for. However, you can deduct any refunds or discounts that you give to your customers from your total revenue.
The SBA calculates your annual receipts based on the average of your receipts over a certain period of time, depending on how long your business has been in operation. For businesses that have been in operation for five or more completed fiscal years, the SBA uses the most recent five fiscal years to calculate the average annual receipts. For businesses that have been in operation for less than five complete fiscal years, the SBA uses the total receipts for the period of operation and divides it by the number of weeks in business, then multiplies it by 52. A fiscal year is a 12-month period that you use for accounting purposes, which may or may not coincide with the calendar year.
To calculate your annual receipts, you need to use the most recent Federal income tax return that you filed with the IRS. The SBA will not accept any tax returns or amendments that you file after the initiation of a size determination (the process that the SBA or a third party uses to verify size status).
There are some specific items that you have to include or exclude from your receipts, according to the SBA's rules. For example, you must include:
- Net capital gains or losses, which are the difference between the selling price and the purchase price of an asset, such as a stock or a property.
- Taxes collected for and remitted to a taxing authority, such as sales tax or value-added tax, if they are included in your gross or total income.
- Proceeds from transactions between your business and its domestic or foreign affiliates, which are entities that are controlled by or under common control with your business.
- Subcontractor costs, reimbursements for purchases that you make at a customer's request, investment income, and employee-based costs, such as payroll taxes.
On the other hand, you can exclude amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder, or customs broker, which are considered pass-through charges and not revenue for your business.
If your business has affiliates (read my prior blog post explaining affiliation), you must add their average annual receipts to your own to determine your size status. Affiliates are entities that are controlled by or under common control with your business, either directly or indirectly, through ownership, management, or contractual relationships.
Number of Employees
The SBA calculates the number of employees by counting all individuals employed on a full-time, part-time, or other basis. This includes employees obtained from a temporary employee agency, professional employee organization, or leasing concern. This means that you cannot exclude any workers who receive compensation from your business, regardless of how often or how long they work for you.
The method for determining a concern's size includes the average number of employees (including the employees of its domestic and foreign affiliates) based upon the numbers of employees for each of the pay periods for the prior 24 calendar months. This means that you need to add up the number of employees for each pay period in the past two years and divide by the total number of pay periods to get the average number of employees. Part-time and temporary employees are counted the same as full-time employees.
If a concern has not been in business for 24 months, the average number of employees is used for each of the pay periods during which it has been in business. This means that you need to use the same method as above, but only for the pay periods that you have been in operation.
The average number of employees of a business concern with affiliates is calculated by adding the average number of employees of the business concern with the average number of employees of each affiliate. This means that you need to consider not only your own employees, but also the employees of any other business that you control or that controls you, or that you and another business jointly control.
Knowing how the SBA calculates your size is important for determining whether your business qualifies as a small business and become or remain eligible for various SBA programs and contracts.
