In August, SBA proposed new rules on a wide range of topics. Some of the proposed rules, like the significant changes to the recertification rules that we blogged about here, have been getting most of the headlines so far. The purpose of this client alert is to put the spotlight on one of the less talked about proposals, a seemingly minor proposed change to how SBA calculates annual receipts. SBA’s proposal may seem like a small change, but it has the potential to cause big (and unwelcome) impacts for IT Value-Added Resellers (ITVARs) and other types of resellers to the federal government.
Under SBA’s current regulations, it calculates annual receipts using the firm’s tax returns filed with the IRS. In August, SBA proposed to add language stating that “SBA may also consider other relevant information where it appears that the tax return does not properly capture a concern’s total revenue.”
In the past, SBA’s rules gave it flexibility to look outside a firm’s tax returns when there is reason to believe the tax returns are false. This language was removed a few years ago and since then the rules require that SBA exclusively focus on the tax returns filed with the IRS. At first blush, the proposed addition may not seem like a big deal because it might appear that SBA is simply adding similar flexibility back into the regulations. As SBA explained in the August proposed rule, it wants to add this language to clear up “confusion” SBA believes exists over whether it is permitted to look outside a firm’s tax returns to determine its annual receipts for small business purposes.
However, the new language SBA proposed does not apply simply when SBA has reason to believe the tax returns are false. The new language would give SBA almost limitless discretion to go outside of a firm’s tax returns as long as SBA has a reason to believe the tax returns do not “properly capture a concern’s total revenue.”
Most troubling for ITVARs, this proposed language appears to be a direct response to an SBA Office of Hearings and Appeals (OHA) ruling form earlier this year called Size Appeal of Colossal Contracting, LLC, SBA No. SIZ-6285 (2024). In Colossal, SBA did not accept the ITVAR’s revenues reported on its tax returns filed with the IRS because the company used ASC 606, a method of recognizing revenue from customer sales. SBA believed that use of ASC 606 is not permitted under the regulatory definition of “receipts” in 13 C.F.R. § 121.104(a). In SBA’s view, it does not matter if Generally Accepted Accounting Principles or the IRS rules allowed the ITVAR to exclude value-added reseller costs of goods sold because this is not a permitted exclusion from receipts under 13 C.F.R. § 121.104(a). The ITVAR appealed SBA’s ruling and OHA overturned SBA’s determination because SBA’s rules require it to use receipts on the firm’s tax returns filed with the IRS. Thus, OHA found that, under the current rules, SBA should not have gone outside of the firm’s tax returns to determine its annual receipts.
If SBA’s August proposed rule change is finalized, SBA’s rules will give it wide discretion to go outside of a firm’s tax returns when SBA does not believe the tax returns properly capture the firm’s total revenue. Given SBA’s position in the Colossal case, it is likely that SBA would determine that a firm’s tax returns that utilized ASC 606 do not properly capture the firm’s total revenue and, as a result, SBA would look to the firm’s financial statements to determine its annual receipts without accounting for adjustments made based on ASC 606.
For ITVARs and other resellers that are currently relying on ASC 606 to qualify as a small business under revenue-based size standards, SBA’s proposed rule—if finalized—may effectively end a firm’s ability to qualify as a small business.
SBA is seeking public comments which are currently due by October 7, 2024. If you are potentially impacted by the proposed rule and would like PilieroMazza’s help to submit comments, or if you would like to share your concerns for us to include in our comments, please contact Jon Williams at [email protected].
