As PilieroMazza covered here on December 17, 2024, SBA issued its much-anticipated final rule in response to the proposed rule it issued in August and the hundreds of public comments it received. One area of particular interest for IT value-added resellers (ITVARs) is how SBA finalized its proposed rule pertaining to the use of tax returns to determine a firm’s annual revenue for small business purposes. At first blush, we think the final rule—which will take effect on January 16, 2025—is good news for ITVARs.
In our September 19th client alert, we questioned the proposed rule that would have given SBA wide discretion to go outside of a firm’s tax returns when determining its revenues for small business purposes because of the potential adverse impact this could have on ITVARs. Fortunately, in the final rule, SBA moved away from the proposed language and limited its discretion to go outside of a firm’s tax returns. The final rule states that SBA will generally rely on a concern’s federal income tax returns and any amendments on file with the IRS. Notably, the final rule goes on to state that “[w]here a concern may legally exclude certain revenue for tax purposes, SBA will not include that revenue in its analysis. However, SBA may consider other relevant information where there is a reasonable basis to believe the tax filings are false.”
PilieroMazza believes this change signals that SBA will accept use of ASC 606—or Accounting Standards Codification (ASC) Topic 606—the revenue recognition standard established by the Financial Accounting Standards Board (FASB). SBA did not explicitly address use of ASC 606 in the final rule, which leaves some uncertainty. However, we think there is a good argument that use of ASC 606 is permitted under the final rule. ASC 606 is permitted by IRS and is consistent with GAAP. Therefore, in our view, a firm that uses ASC 606 is “legally exclude[ing] certain revenue for tax purposes,” and under the final rule, “SBA will not include that revenue in its analysis.” As further support, because ASC 606 is an accepted method of revenue recognition, a firm’s use of ASC 606 would not provide a basis for SBA to believe the firm’s tax return is false.
SBA’s changes to the proposed rule, which came as a result of public comments, shows the value of participating in the rulemaking process. It is not always the case, but in this instance, it appears that SBA listened to the concerns that commenters like PilieroMazza expressed and made welcome changes to the final rule.
At PilieroMazza, our Government Contracts attorneys are ready to help ITVARs and other small businesses understand and leverage this rule to maximize opportunities. Please contact Jon Williams at jwilliams@pilieromazza.com if you have questions about this alert.
