Avoiding Common Small Business Size Calculation Errors

A new calendar year is underway, and for many federal government contractors, it may mean recalculating whether they qualify as small businesses in their industries. For contractors working in the construction and services industries, where small business status is based on a company’s average annual receipts under rules established in 13 C.F.R. 121.104, it can be easy to misunderstand the requirements–and make an erroneous calculation as a result.

With that in mind, let’s take a look at two common misunderstandings of government contractors when it comes to calculating small business size.

Misunderstanding #1: Receipts Don’t Count Until the Contractor Files Its Tax Return.

The U.S Small Business Administration’s size calculation regulations require the SBA to use a company’s tax returns when they are available, unless the SBA has reason to suspect that they are false. However, delaying filing a tax return does not mean that the receipts for the underlying year don’t count. Instead,13 C.F.R. 121.104(a)(2) provides:

When a concern has not filed a Federal income tax return with the IRS for a fiscal year which must be included in the period of measurement, SBA will calculate the concern’s annual receipts for that year using any other available information, such as the concern’s regular books of account, audited financial statements, or information contained in an affidavit by a person with personal knowledge of the facts.

In other words, once a company’s fiscal year closes, that fiscal year’s receipts count toward the five-year calculation (assuming that the company has been in business for at least five years), regardless of whether the company has filed its tax returns for that year. From a policy perspective, this makes sense: the government doesn’t want its regulations to encourage companies to delay filing their taxes.

Misunderstanding #2: If a New Business Has No Receipts in a Covered Year, It Uses “$0” in the Five-Year Average.

A second common misunderstanding is that a contractor’s average annual receipts are based on the last five completed fiscal years, no matter how long a contractor has been in business.

While this method may have some logical appeal, it’s not the rule. When a company has been in business for less than five years, the SBA requires an alternative calculation that essentially seeks to prorate the company’s receipts.13 C.F.R. 121.104(c)(2) says:

Except for the Business Loan, Disaster Loan Programs, Surety Bond Guarantee, and SBIC Programs, annual receipts of a concern which has been in business for less than 5 complete fiscal years means the total receipts for the period the concern has been in business divided by the number of weeks in business, multiplied by 52.

For example, if a government contractor has been in business for 52 weeks and generated $1 million in those weeks, the required alternate calculation produces a size of $1 million—not $200,000.

Getting your average annual receipts right isn’t just a math exercise—it can determine whether you’re eligible for set-aside opportunities, or whether you’re exposed to size protests and penalties. As the new year kicks off, take a few minutes to double-check your calculation approach against 13 C.F.R. § 121.104. A little upfront accuracy can save a lot of pain later.