August 21, 2023 The United States Small Business Administration (SBA) plays a pivotal role in shaping the landscape for small businesses across the country. Established in 1953, this independent agency of the federal government has the mandate to assist and protect the interests of small businesses, help victims of natural disasters, and strengthen the nation’s economy. Most recently, they assisted small businesses through the implementation of the CARES Act and Paycheck Protection Program. One of the key roles of the SBA is to define and set the size standards that determine what constitutes a “small business.” These standards are not only crucial for businesses to understand their market positioning but are also particularly significant for government contractors, known as GovCons. SBA’s size standards have far-reaching implications, affecting businesses’ eligibility for SBA programs and federal contracting opportunities. The standards, which vary by industry, dictate the largest size a business entity can be while still being classified as a small business. These are typically based on the average annual receipts or the average number of employees. Therefore, a comprehensive understanding of these standards is essential for businesses, especially GovCons, to maximize their opportunities and navigate the market effectively. Table of Contents Recent Changes to SBA Standards The Small Business Administration defines what qualifies as a small business using specific size standards. These standards are usually based on the average annual receipts or the average number of employees a company has, and they are used to determine if a business is small enough to qualify for certain SBA programs and federal contracting opportunities. The definition of a “small business” can vary greatly depending on the industry. This is because different industries have different scales of operation, and what is considered small in one industry might be considered large in another. For example, a manufacturing company might be considered small if it has fewer than 500 employees, while a retail business could be considered small with annual receipts under $7 million. In December 2022, the SBA introduced new size standards, and businesses registered in the System for Award Management were required to update their SAM registration to reflect their status based on these new size standards. Until a business updates its SAM registration, the SAM profiles will continue to display the small business status under the old size standards. Impact of SBA Standards on GovCons The regulations implemented by the U.S. Small Business Administration (SBA) significantly impact government contractors. The fundamental goal of these regulations is to ensure that a considerable portion of government contracting money – around 23% of approximately $450 to $500 billion spent annually – is allocated to small businesses. This aim is pivotal in promoting entrepreneurship and fostering the growth of small businesses in various sectors of the economy. New regulations introduced by the SBA have already begun shaping strategies for GovCons. In 2020, the SBA published regulations that included the merger of two existing mentor-protégé programs, revisions to affiliation laws, and clarifications on the SBA’s size requirements for government contractors. These regulations have direct implications for both small and large GovCons, affecting their strategic planning and operations. One significant issue that has arisen in the context of government contracting is the practice of category management. Defined by the U.S. General Services Administration as the collaborative management of entire categories of purchases across government, category management represents a shift away from managing individual purchases across thousands of procurement units. This practice has had a substantial impact on small GovCons. While category management has led to larger contracts, it has also driven smaller government contracting companies out of the marketplace. The contracts have become so large that only companies that are significantly larger than small business GovCons – those that can undertake about ten times the amount of work – are eligible for them. This shift has posed a challenge for small GovCons who may excel in specific areas but find their opportunities reduced due to the broader scope of contracts under category management. In essence, the SBA’s regulations and standards significantly influence the landscape of government contracting. They play a crucial role in defining who can compete for contracts, how businesses strategize, and ultimately, the success and growth of small businesses in the marketplace. It’s critical for all GovCons, regardless of size, to stay informed about these regulations and adapt their strategies accordingly. Nexus Codes and Their Application Nexus codes, or simply “nexus,” is a term that defines the level of connection between a taxing jurisdiction, such as a state, and an entity like a business. This connection is crucial as it determines whether the jurisdiction can impose its sales taxes on the business. The nexus is primarily controlled by the U.S. Constitution, where the Due Process Clause requires a definite link or minimal connection between a state and the entity it wants to tax, and the Commerce Clause requires substantial presence. Nexus Determination The determination of nexus is not uniform across all 50 states in the U.S., and the rules for determining nexus are constantly changing. This means that a business must look at each state individually when determining sales tax nexus and must stay constantly updated with a slew of changing regulations and interpretations. SBA Standards in the Construction Industry In the construction industry, the SBA standards play a crucial role in determining eligibility for specific contracts and programs. The definition of a small business in this sector can differ significantly from that in the GovCon space. For instance, a construction company’s size standard might be based on its average annual receipts over the past five years, while a GovCon might be evaluated based on the number of employees. The Role of NAICS Codes The North American Industry Classification System (NAICS) codes are instrumental in determining the specific SBA size standards for each industry. Each industry has a unique NAICS code, and the SBA’s table of small business size standards provides the classification requirements according to individual NAICS codes. For instance, the construction industry has several NAICS codes, each with different size standards based on annual receipts or the number of employees. The Impact of SBA Standards on Other Industries The SBA standards have a profound impact on businesses across various industries. By defining what constitutes a small business in each sector, these standards determine eligibility for government contracts and programs aimed at supporting small businesses. They also influence business strategies, as government contracting companies often strive to maintain their “small” status to continue benefiting from these opportunities. In conclusion, while the SBA standards are a common thread across all industries, their application and impact can vary significantly. Understanding these nuances is essential for businesses in any sector, not just those in the GovCon space. By staying informed about these standards and how they apply to your industry, you can better position your business for success. HOW KATZABOSCH CAN HELP Navigating the complexities of SBA standards, nexus codes, and other business regulations can be challenging. But you don’t have to do it alone. KatzAbosch is here to help. Our mission is to provide the highest quality government contract accounting, tax, financial, and management consulting services to our clients. We understand the unique needs and challenges of businesses across various industries, including GovCon, construction, and more. Our team of experts can offer insight and guidance to help your business scale regionally, nationally, and globally. We pride ourselves on progress and never lose sight of the personal commitment we make to our clients. To learn more about how KatzAbosch can help your business navigate SBA standards contact us today.