SBA Hot Topic Tuesday — US Court of Federal Claims Clarifies SBA Size Determination Methodology

September 17, 2019

By Caity Witucki
Contributing Editor, SBA Hot Topic Tuesday

SBA Hot Topic Tuesday — US Court of Federal Claims Clarifies SBA Size Determination Methodology

A recent decision from the U.S. Court of Federal Claims clarifies that companies filing for small business size determinations must properly apply the SBA’s detailed circulation methodology for “annual receipts,” and ensure that such receipts are derived from income tax returns for the calculation period.

According to the court opinion written by Justice Margaret M. Sweeney, “SBA’s size standards define whether a business entity is ‘small’ and, thus, eligible for Government programs and preferences reserved for ‘small business’ concerns.” She goes on to say, “size standards are expressed in either ‘number of employees’ or ‘annual receipts’, which represent the maximum allowed for a concern and its affiliates to be considered ‘small’ under the applicable NAICS code.”

Upon careful review of the Code of Federal Regulations (CFR), the court determined that the SBA specifically requires size determinations to be based on “annual receipts” rather than just “gross receipts.” Annual receipts are defined in CFR §121.104 as: “all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions reduced by returns and allowances. Generally, receipts are considered ‘total income’…plus ‘cost of goods sold’ as these terms are defined and reported in Internal Revenue Service (IRS) tax return forms.”

The court also clarified that -for size determination purposes- the only exclusions from receipts are those specifically provided for in CFR §121.104 (a) which states: “Receipts do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provides, freight forwarder or customs broker.”

In order to avoid the denial of an SBA guaranteed loan due to an applicant business’ size, lenders should refer to the SBA’s size determination rules in 13 CFR 121.104.

Kingfisher Systems, Inc. v. United States
Electronic Code of Federal Regulations
IRS Form 1120-S
Morgan Lewis

Previous Reporting on Size Determination:
Nearly 90,000 Businesses Will Gain Small Business Status Under Adjusted Size Standard – August 27, 2019