[Federal Register Volume 66, Number 110 (Thursday, June 7, 2001)]
[Rules and Regulations]
[Pages 30646-30649]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14222]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 107 and 121


Size Eligibility Requirements for SBA Financial Assistance and 
Size Standards for Agriculture

AGENCY: Small Business Administration.

ACTION: Direct final rule.

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SUMMARY: This final rule implements legislative changes to size 
eligibility requirements for assistance from Small Business Investment 
Companies (SBICs) and Certified Development Companies (CDCs), and for 
the Agriculture industry.
    The Small Business Investment Improvement Act of 1999, codified in 
sections 103(5) and 103(12) of the Small Business Investment Act of 
1958, as amended, established a method for determining the eligibility 
of a business that is not required to pay Federal income tax at the 
corporate level, but that is required to pass income through to its 
shareholders or partners. The new method treats ``pass-through'' 
enterprises the same as firms that pay Federal taxes for the purpose of 
size standard determinations.
    The Small Business Reauthorization Act of 2000, codified in section 
3(a)(1) of the Small Business Act, increases the size standards used 
for Agriculture from $500,000 to $750,000 in average annual receipts.

DATES: The rule will become effective August 6, 2001, unless adverse 
comment is received prior to July 9, 2001. If an adverse comment is 
received, SBA will publish a timely withdrawal of the rule in the 
Federal Register. The Agency may proceed to publish a proposed rule 
following notice and comment procedures.

ADDRESSES: Send written comments to Gary M. Jackson, Assistant 
Administrator for Size Standards, U.S. Small Business Administration, 
409 Third St., SW., Mail Code 6530, Washington, DC 20416; or via e-mail 
to [email protected].

FOR FURTHER INFORMATION CONTACT: Diane Heal, Office of Size Standards, 
(202) 205-6618.

SUPPLEMENTARY INFORMATION:

SBIC/CDC

    A business seeking financial assistance from an SBIC or a CDC must 
qualify as a ``small-business concern'' as defined in section 103(5) of 
the Small Business Investment Act of 1958, as amended (the Act), and as 
implemented by 13 CFR 121.301(b) for CDCs and 13 CFR 121.301(c) for 
SBICs. For SBIC financial assistance, a business also may need to 
qualify as a ``smaller enterprise'' as defined in section 103(12) of 
the Act, and as implemented by 13 CFR 107.710(a). Each of these 
definitions requires a firm to meet either the size standard for its 
primary industry or certain net worth and net income tests. The net 
income tests measure the firm's average net income after Federal income 
taxes for the preceding 2 years.
    On April 5, 1999, Public Law 106-9, the ``Small Business Investment 
Improvement Act of 1999'' which expands opportunities for small 
businesses to receive investment capital from banks and traditional 
investment sources, became effective. This legislation established a 
new method for applying the net income test to a business that is not 
required to pay Federal income tax at the enterprise level, but that is 
required to pass income through to its shareholders, partners, or other 
owners. This new method permits such businesses to use a specified 
formula to impute a tax to the business and to compute ``after-tax'' 
net income. The intent is to permit ``pass-through'' enterprises to be 
treated the same as concerns that pay Federal income taxes for purposes 
of SBA size standard determinations.
    As authorized by Public Law 106-9, this final rule revises 
121.301(b), 121.301(c) and 107.710(a) to permit a business concern that 
does not pay Federal income taxes at the enterprise level to deduct an 
imputed Federal income tax expense from its net income. The business 
concern computes this deduction by multiplying its net income

[[Page 30647]]

by the marginal Federal income tax rate that would have applied if the 
concern were a taxable corporation. If the business concern is also 
treated as a pass-through entity for State and local income tax 
purposes, it can compute an additional deduction equal to its net 
income multiplied by the State income tax rate (or combined State and 
local income tax rate, if applicable) that would have applied if it 
were a taxable corporation. In this case, the State/local tax deduction 
must be computed first and then subtracted from net income before 
computing the deduction for Federal income taxes.

Agriculture Industry

    On December 21, 2000, Public Law 106-554, the ``Small Business 
Reauthorization Act of 2000'' became effective. Section 806(b) of this 
legislation increases the size standard for small businesses in the 
Agriculture industry from $500,000 in average annual receipts to 
$750,000 in average annual receipts. This change affects Agriculture 
industries under North American Industry Classification System (NAICS) 
codes, Sector 11, ``Agriculture, Forestry, Fishing and Hunting,'' 
Subsector 111 ``Crop Production'' (NAICS Codes 111110 through 111998) 
and Subsector 112, ``Animal Production'' (NAICS Codes 112111 through 
112990). Not affected by this legislative change are NAICS codes 
112112, ``Cattle Feedlots'' and 112310, ``Chicken Egg Production'' as 
their size standard is currently above $750,000. Those size standards 
remain at $1.5 million and $9.0 million, respectively.
    The SBA is publishing this regulation as a direct final rule 
because the SBA believes the rule is non-controversial. It is merely 
implementing provisions of Public Laws 106-9 and 106-554. As such, SBA 
believes that this rule will elicit no significant adverse comment.

Compliance With Executive Orders 12866, 12988, and 13132, the 
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35)

    This final rule is not a ``significant'' regulatory action for 
purposes of Executive Order 12866 and therefore was not reviewed by the 
Office of Management and Budget.
    SBA has determined that this final rule will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. This rule 
is merely implementing provisions of Pub. L. 106-9 and 106-554. This 
rule does not impose costs upon the businesses that might be affected 
by it. The rule will have no effect on the amount or dollar value of 
any contract requirement or on the number of requirements reserved for 
the small business set-aside program. Therefore, it will not have an 
annual economic effect of $100 million or more, result in a major 
increase in costs or prices, or have a significant adverse effect on 
competition or the United States economy.
    For purposes of Executive Order 12988, SBA has determined that this 
final rule is drafted, to the extent practicable, in accordance with 
the standards set forth in Section 3 of that Order.
    For purposes of Executive Order 13132, SBA has determined that this 
final rule will have no federalism implications.
    For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, 
SBA has determined that this final rule contains no new reporting or 
recordkeeping requirements.

List of Subjects in 13 CFR Parts 107 and 121

    Investment companies, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.


    For the reasons stated forth above, SBA amends 13 CFR parts 107 and 
121 as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

    1. The authority citation for 13 CFR Part 107 continues to read as 
follows:

    Authority: 15 U.S.C. 662, 681 et seq., 683, 687(c), 687b, 687d, 
687g and 687m.

    2. In Sec. 107.710, revise paragraph (a) to read as follows:


Sec. 107.710  Requirement to finance smaller enterprises.

* * * * *
    (a) Definition of Smaller Enterprise. A Smaller Enterprise means 
any small business concern that:
    (1) Both together with its Affiliates, and by itself, meets the 
size standard of Sec. 121.201 of this chapter at the time of Financing 
for the industry in which it is then primarily engaged; or
    (2) Together with its affiliates has a net worth of not more than 
$6 million and average net income after Federal income taxes (excluding 
any carry-over losses) for the preceding two years no greater than $2 
million. If the applicant is not required by law to pay Federal income 
taxes at the enterprise level, but is required to pass income through 
to its shareholders, partners, beneficiaries, or other equitable 
owners, the applicant's ``net income after Federal income taxes'' will 
be its net income reduced by an amount computed as follows:
    (i) If the applicant is not required by law to pay State (and 
local, if any) income taxes at the enterprise level, multiply its net 
income by the marginal State income tax rate (or by the combined State 
and local income tax rates, as applicable) that would have applied if 
it were a taxable corporation.
    (ii) Multiply the applicant's net income, less any deduction for 
State and local income taxes calculated under paragraph (a)(2)(i) of 
this section, by the marginal Federal income tax rate that would have 
applied if the applicant were a taxable corporation.
    (iii) Add the results obtained in paragraphs (a)(2)(i) and 
(a)(2)(ii) of this section.
* * * * *

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for 13 CFR Part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and 
662(5).


    2. In Sec. 121.201, revise the referenced NAICS Codes and size 
standards in the table ``SMALL BUSINESS SIZE STANDARDS BY NAICS 
INDUSTRY,'' under the heading Sector 11--Agriculture, Forestry, and 
Fishing--Subsector 111--Crop Production, and Subsector 112--Animal 
Production, to read as follows:


Sec. 121.201  What size standards has SBA identified by North American 
Industry Classification System codes?

* * * * *

[[Page 30648]]



                                 Small Business Size Standard by NAICS Industry
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                                                                                                  Size standard
                                                                                                  in number of
                      NAICS code                          Description  (N.E.C.=not elsewhere      employees or
                                                                     classified)                   millions of
                                                                                                     dollars
----------------------------------------------------------------------------------------------------------------
                                  Sector 11--Agriculture, Forestry, and Fishing
 
                                         Subsector 111--Crop Production
----------------------------------------------------------------------------------------------------------------
111110...............................................  Soybean Farming........................             $0.75
111120...............................................  Oilseed (except Soybean) Farming.......              0.75
111130...............................................  Dry Pea and Bean Farming...............              0.75
111140...............................................  Wheat Farming..........................              0.75
111150...............................................  Corn Farming...........................              0.75
111160...............................................  Rice Farming...........................              0.75
111191...............................................  Oilseed and Grain Combination Farming..              0.75
111199...............................................  All Other Grain Farming................              0.75
111211...............................................  Potato Farming.........................              0.75
111219...............................................  Other Vegetable (except Potato) and                  0.75
                                                        Melon Farming.
111310...............................................  Orange Groves..........................              0.75
111320...............................................  Citrus (except Orange) Groves..........              0.75
111331...............................................  Apple Orchards.........................              0.75
111332...............................................  Grape Vineyards........................              0.75
111333...............................................  Strawberry Farming.....................              0.75
111334...............................................  Berry (except Strawberry) Farming......              0.75
111335...............................................  Tree Nut Farming.......................              0.75
111336...............................................  Fruit and Tree Nut Combination Farming.              0.75
111339...............................................  Other Noncitrus Fruit Farming..........              0.75
111411...............................................  Mushroom Production....................              0.75
111419...............................................  Other Food Crops Grown Under Cover.....              0.75
111421...............................................  Nursery and Tree Production............              0.75
111422...............................................  Floriculture Production................              0.75
111910...............................................  Tobacco Farming........................              0.75
111920...............................................  Cotton Farming.........................              0.75
111930...............................................  Sugarcane Farming......................              0.75
111940...............................................  Hay Farming............................              0.75
111991...............................................  Sugar Beet Farming.....................              0.75
111992...............................................  Peanut Farming.........................              0.75
111998...............................................  All Other Miscellaneous Crop Farming...              0.75
----------------------------------------------------------------------------------------------------------------
                                        Subsector 112--Animal Production
----------------------------------------------------------------------------------------------------------------
112111...............................................  Beef Cattle Ranching and Farming.......              0.75
112112...............................................  Cattle Feedlots........................              1.50
112120...............................................  Dairy Cattle and Milk Production.......              0.75
112210...............................................  Hog and Pig Farming....................              0.75
112310...............................................  Chicken Egg Production.................              9.00
112320...............................................  Broilers and Other Meat Type Chicken                 0.75
                                                        Production.
112330...............................................  Turkey Production......................              0.75
112340...............................................  Poultry Hatcheries.....................              0.75
112390...............................................  Other Poultry Production...............              0.75
112410...............................................  Sheep Farming..........................              0.75
112420...............................................  Goat Farming...........................              0.75
112511...............................................  Finfish Farming and Fish Hatcheries....              0.75
112512...............................................  Shellfish Farming......................              0.75
112519...............................................  Other Animal Aquaculture...............              0.75
112910...............................................  Apiculture.............................              0.75
112920...............................................  Horse and Other Equine Production......              0.75
112930...............................................  Fur-Bearing Animal and Rabbit                        0.75
                                                        Production.
112990...............................................  All Other Animal Production............              0.75
 
*                  *                  *                  *                  *                  *
                                                        *
----------------------------------------------------------------------------------------------------------------


    3. In Sec. 121.301, revise paragraphs (b) and (c) to read as 
follows:


Sec. 121.301  What size standards are applicable to financial 
assistance programs?

* * * * *
    (b) For Development Company programs, an applicant must meet one of 
the following standards:
    (1) The same standards applicable under paragraph (a) of this 
section; or
    (2) Including its affiliates, tangible net worth not in excess of 
$6 million, and average net income after Federal income taxes 
(excluding any carry-over losses) for the preceding two completed 
fiscal years not in excess of $2 million. If the applicant is not 
required by law to pay Federal income taxes at the enterprise level, 
but is required to pass income through to its shareholders, partners, 
beneficiaries, or other equitable owners,

[[Page 30649]]

the applicant's ``net income after Federal income taxes'' will be its 
net income reduced by an amount computed as follows:
    (i) If the applicant is not required by law to pay State (and 
local, if any) income taxes at the enterprise level, multiply its net 
income by the marginal State income tax rate (or by the combined State 
and local income tax rates, as applicable) that would have applied if 
it were a taxable corporation.
    (ii) Multiply the applicant's net income, less any deduction for 
State and local income taxes calculated under paragraph (b)(2)(i) of 
this section, by the marginal Federal income tax rate that would have 
applied if the applicant were a taxable corporation.
    (iii) Sum the results obtained in paragraphs (b)(2)(i) and 
(b)(2)(ii) of this section.
    (c) For the Small Business Investment Company (SBIC) program, an 
applicant must meet one of the following standards:
    (1) The same standards applicable under paragraph (a) of this 
section; or
    (2) Including its affiliates, tangible net worth not in excess of 
$18 million, and average net income after Federal income taxes 
(excluding any carry-over losses) for the preceding two completed 
fiscal years not in excess of $6 million. If the applicant is not 
required by law to pay Federal income taxes at the enterprise level, 
but is required to pass income through to its shareholders, partners, 
beneficiaries, or other equitable owners, the applicant's ``net income 
after Federal income taxes'' will be its net income reduced by an 
amount computed as follows:
    (i) If the applicant is not required by law to pay State (and 
local, if any) income taxes at the enterprise level, multiply its net 
income by the marginal State income tax rate (or by the combined State 
and local income tax rates, as applicable) that would have applied if 
it were a taxable corporation.
    (ii) Multiply the applicant's net income, less any deduction for 
State and local income taxes calculated under paragraph (c)(2)(i) of 
this section, by the marginal Federal income tax rate that would have 
applied if the applicant were a taxable corporation.
    (iii) Add the results obtained in paragraphs (c)(2)(i) and 
(c)(2)(ii) of this section.
* * * * *

    Dated: May 30, 2001.
John Whitmore,
Acting Administrator.
[FR Doc. 01-14222 Filed 6-6-01; 8:45 am]
BILLING CODE 8025-01-P