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President Trump signed into law the Small Business Runway Extension Act of 2018 on December 17th, 2018. The Act modified how the SBA calculates a business’ size for revenue-based size standards. The Act also increased the period of time used in the calculation of a firm’s receipts from three years to five.

Regulations implementing the Act go into effect on January 6th, 2020. However, the final rule permits contractors to elect to use either the three-year or five-year period of measurement for certifications submitted on or before January 6th, 2022. The election period is intended to soften the effect of the Act on contractors with a recent history of declining revenue that may lose small business status as a result of the change.

The final rule also creates a distinction in the effect on size calculations of the acquisition of an affiliate and the acquisition of a segregable business unit. If a concern acquires or is acquired by a separate legal entity prior to the date it self-certifies as small, then the receipts of the newly acquired affiliate are included in the receipts of the concern for the entire period of measurement. Similarly, the seller of the acquired entity no longer includes in its receipts the receipts generated by the acquired concern. Under the new rule, however, if a concern acquires a “segregable division” of another concern, the receipts attributable to that division are not included in the receipts of the acquiring concern. The seller of the segregable division continues to include the receipts attributable to that division in the calculation of its size.

The new rule creates opportunities for structuring transactions to achieve favorable size calculations.

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