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How Some Businesses May Be Smaller Come January

I’m not referring to the implementation of Weight Watchers regimes post-holiday, but the new Final Rule that will effective as of January 6, 2020. From now on, business size under NAICS codes will be calculated by looking at the last five completed years, not three (though businesses may elect to use the latter calculation until January 2022, during a “phase-in” period).

As some of you may know, a rule change has been in the works for a while now. Under this new rule, until January 2022, the SBA will give firms the OPTION to either calculate their size under a given NAICS code by utilizing a five-year, or a three-year, calculation (meaning that the SBA will either look at annual receipts from the last five completed fiscal years, or three years, depending on the firm’s election). After January 2022, a straight five-year rule applies across the board, meaning that a firm will no longer be able to make this election.

During the rule making and comment stage, the SBA noted that the proposed rule would benefit small businesses that have experienced significant growth over the last three years. The idea is that by adding in the lower-revenue years, the average of the five years would still allow a firm to qualify as “small” under its NAICS codes. By allowing a firm to choose between a calculation based on five versus three years, this allows firms a chance to prepare for (and possibly avoid) qualifying as “large,” and in the interim, potentially remain small. There is, of course, the opposite end of the stick – some firms were happy to shed earlier, higher-revenue years that are now back in receipts calculation and affecting a size standard).

You know what this means: do your homework! Considering this goes into effect as of January 6, 2020, get with your CPA or comptroller to figure out which calculation is more advantageous for your business. Also, for those businesses that self-certify as “small” or are VetBiz-verified under specific NAICS codes, take a look at your list and see if any changes are warranted. In particular, the VA’s Center for Verification and Evaluation is going to experience a huge backlog in adding and deleting NAICS codes based on changes due to size, so get on the bandwagon early by submitting a Change Request.

For more information (and detailed commentary, history, and reasoning for these changes), access the Final Rule here. Also, for those traveling to the VA’s National Veterans Small Business Engagement, safe travels! (Also, good luck navigating the hotel – it’s a beautiful labyrinth!)

2 Responses to “How Some Businesses May Be Smaller Come January”

  1. I have been under the impression that ‘small’ meant under $33,000,000 a year. Thats not small to us. Is this changing now?

    • I assume you’re referring to a particular NAICS code. This isn’t changing the standard for any individual NAICS code, but how a business is categorized under the NAICS code. So, say for example your NAICS is $33 mill. Under the new standard, until January 2022, you can choose to calculate size by looking at three years, or five. Then, upon January 2022, the measurement is five years.

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