[Federal Register Volume 84, Number 234 (Thursday, December 5, 2019)]
[Rules and Regulations]
[Pages 66561-66579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26041]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AH16


Small Business Size Standards: Calculation of Annual Average 
Receipts

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
modifying its method for calculating average annual receipts used to 
prescribe size standards for small businesses. Specifically, in 
accordance with the Small Business Runway Extension Act of 2018, SBA is 
changing its regulations on the calculation of average annual receipts 
for all of SBA's receipts-based size standards, and for other agencies' 
proposed receipts-based size standards, from a 3-year averaging period 
to a 5-year averaging period, outside of the SBA Business Loan and 
Disaster Loan Programs. SBA intends to seek comment on the Business 
Loan and Disaster Loan Programs in a proposed rule through a separate 
rulemaking. For all other programs, SBA adopts a transition period 
through January 6, 2022, during which firms may choose between using a 
3-year averaging period and a 5-year averaging period.

DATES: This rule is effective January 6, 2020.

FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Ph.D., Chief, Office 
of Size Standards, (202) 205-6618 or [email protected].

SUPPLEMENTARY INFORMATION: 

Background Information

    Public Law 115-324 (the ``Small Business Runway Extension Act of 
2018'') amended section 3(a)(2)(C)(ii)(II) of the Small Business Act, 
15 U.S.C. 632(a)(2)(C)(ii)(II), to modify the requirements for proposed 
small business size standards prescribed by an agency without separate 
statutory authority to issue size standards.
    Under section 3(a)(2)(C)(ii) of the Small Business Act, as amended, 
an agency without separate statutory authority to issue size standards 
must satisfy three requirements to prescribe a size standard. First, 
the agency must propose the size standard with an opportunity for 
public notice and comment. Second, the agency must provide for 
determining the size of a manufacturing concern based on a 12-month 
average of the concern's employment, the size of a services concern 
based on a 5-year average of gross receipts, and the size of another 
business concern on the basis of data of not less than 3 years. Third, 
the agency must obtain approval of the contemplated size standard from 
the SBA Administrator.
    In contrast to agencies subject to section 3(a)(2)(C), SBA has 
independent statutory authority to issue size standards. Under section 
3(a)(2)(A) of the Small Business Act, the SBA Administrator may specify 
detailed definitions or standards by which a business concern may be 
determined to be a small business concern for the purposes of SBA's 
programs or any other Federal Government program. Section 3(a)(2)(B) of 
the Small Business Act further provides that such definitions may 
utilize the number of employees, dollar volume of business, net worth, 
net income, a combination thereof, or other appropriate factors. To 
determine eligibility for Federal small business assistance, SBA 
establishes detailed size definitions for small businesses (usually 
referred to as ``size standards'') that vary from industry to industry 
reflecting differences among the various industries. SBA typically uses 
two primary measures of business size for size standards purposes: (i) 
Average annual gross receipts for businesses in services, retail trade, 
agricultural, and construction industries, and (ii) average number of 
employees for businesses in all manufacturing, most mining and 
utilities industries, and some transportation, information and research 
and development (R&D) industries. SBA uses financial assets for certain 
financial industries and refining capacity, in addition to employees, 
for the petroleum refining industry to measure business size standards 
purposes.
    The SBA's size standards are used to establish eligibility for a 
variety of Federal small business assistance programs, including for 
Federal Government contracting and business development programs 
designed to assist small businesses in obtaining Federal contracts and 
for SBA's loan guarantee programs, which provide access to capital for 
small businesses that are unable to qualify for and receive 
conventional loans elsewhere. The Federal Government contracting 
programs that use SBA's size standards include the SBA's 8(a) Business 
Development (BD) program, the Historically Underutilized Business Zones 
(HUBZone) program, the Service Disabled Veteran-Owned Small Business 
(SDVOSB) program, the Women-Owned Small Business (WOSB) program, and 
the Economically Disadvantaged Women-Owned Small Business (EDWOSB) 
program. SBA's Small Business Investment Company (SBIC), Certified 
Development Company (CDC/504), and 7(a) loan programs use either the 
industry-based size standards or tangible net worth and net income 
based alternative size standards to determine eligibility for those 
programs.
    SBA has long interpreted section 3(a)(2)(C) of the Small Business 
Act as not applying to SBA's size standards issued under section 
3(a)(2)(A). In the preambles to the proposed and final

[[Page 66562]]

rules implementing 3(a)(2)(C), SBA explained that the Small Business 
Act requires that other Federal agencies either use SBA's size 
standards or use their own size standards that meet the requirements as 
set forth in that section. 65 FR 4176 (Jan. 26, 2000) and 67 FR 13714 
(March 26, 2002). In the final implementation in 2002, SBA interpreted 
section 3(a)(2)(C) as applying only to non-SBA agencies, stating, 
``Unless a statute specifies size standards for an agency's program or 
gives an agency direct authority to establish size standards, the 
agency must use the applicable size standards established by SBA.'' 
However, the Act allows an agency to ``prescribe a size standard for 
categorizing a business concern as a small business concern (see sec. 
3(a)(2)(C) of the Act) provided that the contemplated size standard 
meets certain criteria, and the agency obtains approval of the SBA 
Administrator.'' 67 FR 13714. For further details on section 3(a)(2)(C) 
not applying to SBA's size standards, see the proposed rule (84 FR 
29399).
    Nevertheless, to promote consistency government-wide on small 
business size standards, on June 24, 2019 (84 FR 29399), SBA issued for 
comments a proposed rule to change its method for calculating average 
annual receipts for all SBA's receipts-based size standards and other 
agencies' proposed receipts-based size standards for firms in services 
industries from a 3-year averaging period to a 5-year averaging period.
    SBA determined that it would be confusing for a service-industry 
business concern to use a 3-year average for SBA's receipts-based size 
standards and switch to a 5-year average for another agency's receipts-
based size standards. Similarly, it would be confusing to apply SBA's 
size standards for a business that is engaged in both service- and non-
service industries to use a 5-year average for determining small 
business status in a service industry but switch to a 3-year average 
for a non-service industry. Thus, although section 3(a)(2)(C), as 
amended, permits another agency to use a 3-year average outside of the 
service industries, SBA is adopting a 5-year averaging period for 
calculating the annual receipts of businesses for all industries that 
are subject to its receipts-based size standards, including the retail 
trade, agricultural, and construction industries.
    In accordance with Public Law 115-324, SBA proposed to change the 
averaging period for calculating annual receipts for other agencies' 
receipts-based size standards for firms in services-industries from 3 
years to 5 years and to maintain the 3-year averaging period for 
calculating the size for non-services firms. To promote consistency and 
avoid confusion, in this final rule, SBA is adopting the same 5-year 
averaging period for all receipts-based size standards issued by other 
agencies as well. More than 40 comments to the proposed rule, as 
discussed below, expressed support for adopting the same 5-year 
averaging period for all SBA receipts-based size standards. Of those, 3 
also recommended using the same averaging period for all receipts-based 
size standards prescribed by other agencies.
    This final rule carries out the intent of Public Law 115-324, as 
expressed in the Report of the House Committee on Small Business, H. 
Rpt. 115-939, with respect to Federal procurement opportunities. The 
Committee report states that, to help advanced small businesses 
successfully navigate the middle market as they reach their small 
business size thresholds, the bill would lengthen the time in which the 
SBA measures size through revenue, from the average of the past 3 years 
to the average of the past 5 years. The Committee report states that 
the bill would reduce the impact on small businesses from rapid growth 
in some years which would result in spikes in revenue that may 
prematurely eject a small business out of their small business status. 
The Committee report adds that the bill would allow small businesses at 
every level more time to grow and develop their competitiveness and 
infrastructure, before entering the open marketplace. The bill, as the 
Committee report states, would also protect Federal investment in SBA's 
small business procurement programs by increasing chances of success in 
the middle market for newly graduated firms, resulting in enhanced 
competition against large prime contractors.
    As stated in the Committee report, during the period when annual 
revenues are rising, the 5-year average will generally be lower than 
the 3-year average, thereby allowing: (i) Mid-sized businesses who have 
just exceeded size standards to regain their small business status, and 
(ii) advanced small businesses close to exceeding the size standard to 
retain their small business status for a longer period. In the proposed 
rule, SBA noted that, when annual revenues are declining, the 5-year 
average may be higher than the 3-year average. This would cause small 
businesses near the size thresholds to lose their small business status 
sooner under the 5-year average than under the 3-year average. This is 
more likely to happen during economic downturns. Businesses that lose 
their small business status under the 5-year average may be 
disadvantaged further because they may have to wait several years more 
to regain their small business status, as compared to under a 3-year 
average. The proposed rule added that newly established firms that have 
been in business for less than 5 years will receive no benefit from a 
change to a 5-year average. A firm that has been in business for less 
than the averaging period simply annualizes the receipts from its full 
existence.
    Additionally, SBA also stated in the proposed rule that by enabling 
mid-size businesses to regain small business status and by lengthening 
the small business status of advanced and successful larger small 
businesses, the longer averaging period may disadvantage smaller small 
businesses in more need of Federal assistance than their more advanced 
and larger counterparts in competing for Federal opportunities. Similar 
to concerns from mid-size businesses that they lack necessary 
resources, past performance qualifications, and expertise to be able to 
compete against very large businesses in the full and open market, SBA 
has also received concerns from smaller small businesses that they also 
lack resources, past performance qualifications, and expertise to be 
able to compete against more resourceful, qualified, and experienced 
larger small businesses for Federal opportunities for small businesses.
    In its June 24, 2019 proposed rule, SBA sought comments on its 
proposal to change the averaging period for the calculation of average 
annual receipts for all receipts-based size standards from 3 years to 5 
years.
    1. SBA sought feedback, along with supporting facts and analyses, 
on whether the Agency should calculate average annual receipts over 5 
years for all industries subject to receipts-based size standards and 
on whether it should use a 5-year average annual receipts for 
businesses in services industries only and continue using a 3-year 
average annual receipts for other businesses. SBA was concerned that 
the latter option may create confusion for both businesses in reporting 
their size based on average annual receipts and contracting personnel 
in verifying the size of bidders to Federal contracts.
    2. SBA sought input on how the use of average annual receipts over 
5 years instead of 3 years would impact both smaller small businesses 
and more advanced, larger small businesses in terms of getting access 
to Federal opportunities for small businesses.

[[Page 66563]]

    Additionally, SBA requested comments on its clarification of how 
annual receipts should be calculated in connection with the acquisition 
or sale of a division. The proposed rule provided that the annual 
receipts of a concern would not be adjusted where the concern sells or 
acquires a segregable division during the applicable period of 
measurement. This is distinct from how SBA treats the sale or 
acquisition of a subsidiary that is a separate legal entity.
    In this final rule, SBA adopts the changes as stated in the 
proposed rule, with two modifications. First, in response to comments, 
SBA is not including the 7(a) Loan Program, the Microloan Program, the 
Intermediary Lending Pilot Program, and the Development Company Loan 
Program (collectively, the ``Business Loan Programs'') in this present 
change. SBA also is not including Physical Disaster Business Loans, 
Economic Injury Disaster Loans, Military Reservist Economic Injury 
Disaster Loans, and Immediate Disaster Assistance Program loans 
(collectively, the ``Disaster Loan Programs''). At a later date, SBA 
will issue a proposed rule to seek additional input to assess the 
impact of any changes to the Business Loan and Disaster Loan Programs. 
Second, for all other SBA programs, including the Federal procurement 
programs, SBA adopts a two-year transition period through January 6, 
2022. During the transition period, a firm may choose between 
calculating receipts using a 3-year average or a 5-year average.

Discussion of Comments

    SBA received a total of 217 comments to the proposed rule, of which 
5 were not pertinent to the scope of the proposed rule. Of the 212 
comments that were pertinent, 140 commenters (including more than 10 
trade associations, small and mid-size business groups, and small 
business advocacy organizations) fully supported the proposed rule; 5 
comments supported the change to a 5-year averaging period but opposed 
SBA's proposal not to adjust receipts for the sale or acquisition of a 
segregable division; 28 comments did not oppose the change to a 5-year 
averaging period but opposed the use of 5 years of tax returns to 
analyze any loan program requirement other than size; 37 comments 
opposed the change to a 5-year averaging period; and 2 comments could 
not be categorized as either supporting or opposing the proposed rule. 
All of these comments are available at www.regulations.gov (RIN 3245-
AH16), are summarized and discussed below in terms of various 
categories of comments, and are accompanied by SBA's responses.

Comments on Using a 5-Year Averaging Period for All Receipts-Based Size 
Standards

    SBA requested comments on whether it should use a 5-year averaging 
period for all of its receipts-based standards (i.e., for both services 
industries and non-services industries) or only for services 
industries. Forty-one commenters responded to this issue, all of which 
supported using the 5-year averaging period for all SBA's receipt-based 
size standards. Three of those comments also supported using the 5-year 
averaging period for other agencies' size standards for non-services 
industries that are subject to receipts-based size standards.
    Commenters expressed support for expanding the 5-year averaging 
period to all receipt-based size standards for a variety of reasons. 
For example, one organization agreed with SBA that using different 
formulas for calculating size in different industries may create 
confusion, adding that ``using different formulas could incentivize 
NAICS appeals as contractors jockey for a code that not only uses their 
preferred size standard, but also their preferred number of years in 
the calculation of size.'' Similarly, another organization supported 
the expansion of the 5-year averaging period for all receipts-based 
size standards because maintaining a separate averaging period for non-
services industries would lead to confusion for small firms in that 
some firms would be small under one NAICS code but other-than-small 
under another NAICS code with the same or higher size standard. The 
organization explained that maintaining a 3-year averaging period for 
non-services industries would ``leave companies that have multiple 
capabilities to potentially be small under their services NAICS code, 
but not under other NAICS of work they perform.'' Another organization 
supported applying the 5-year averaging period to all receipts-based 
size standards because it would ``reduce the burden on small businesses 
in determining which size standard to apply to a given procurement.''
    However, some commenters opposed the move to a 5-year averaging 
period on the grounds that this would increase paperwork and compliance 
burden on lenders and borrowers of the SBA's loans. These commenters 
suggested, as discussed below, that SBA retain the current 3-year 
averaging period for calculating annual revenues for services firms for 
the SBA's financial assistance programs, if SBA decides to adopt the 
proposed 5-year averaging period elsewhere.
    SBA's response:
    SBA agrees with the commenters that, in applying SBA's size 
standards, separating out services industry firms from non-services 
firms would cause confusion and create a greater compliance burden on 
firms that participate in both services industries and non-services 
industries. SBA also agrees that using a 5-year averaging period for 
services industries and a 3-year averaging period for non-services 
industries can lead to an inconsistent result of making a business 
small in one NAICS code and other than small in another NAICS code with 
a same or higher size standard. SBA also finds that it will be equally 
confusing to use, in the same industry, a 5-year averaging period for 
the SBA's size standard and a 3-year averaging period for other 
agencies' size standards. To avoid such confusion and inconsistency, in 
this final rule, SBA is adopting the 5-year averaging period for 
calculating the average annual receipts for all SBA's receipts-based 
size standards. For the same reason, SBA is also adopting the same 5-
year averaging period for both services and non-services industries 
when approving receipt-based size standards by other federal agencies.

Comments on Moving From a 3-Year Averaging Period to a 5-Year Averaging 
Period

Comments Supporting the 5-Year Averaging Period

    Of the 212 pertinent comments received, 173 (or approximately 82%) 
supported the SBA's proposal to change its method for calculating 
annual receipts from a 3-year averaging period to a 5-year averaging 
period, although some of those comments rejected other aspects of the 
proposed rule. Commenters expressed support for the proposed change for 
a variety of reasons, as discussed below.
    A vast majority of commenters maintained that the proposed change 
would benefit small businesses that are either about to exceed or have 
just exceeded the relevant size standards (often referred to as ``mid-
size businesses'') by allowing them more time to develop capabilities, 
strengthen and diversify experience, and build resources, thus enabling 
them to compete successfully for unrestricted opportunities in the 
full-and-open market with very large businesses that have extensive 
capabilities, experience, and past-performance qualifications. Several 
commenters shared that a

[[Page 66564]]

transition from ``small'' to ``other-than-small'' status is much more 
difficult than a transition from ``very small'' to ``small'' status. 
Some indicated that a longer lookback period would also ameliorate the 
current dilemma growing small businesses face in the Federal market 
when they exceed their size standards: Deciding whether to restrain 
growth to remain small (and avoid the difficulty of competing in a 
full-and-open environment), sell, or go out of business.
    Another common comment was that the change from a 3-year averaging 
period to a 5-year averaging period will be very helpful to small 
businesses of every size, especially those that have successfully grown 
to revenues above the 3-year average for their respective NAICS codes. 
Some commenters expressed support for the proposed change because the 
5-year averaging method would promote fairness and increase the 
accuracy of size representation. For example, one commenter explained 
that ``one abnormally successful year could cause a small business to 
size out of the standard. Amortizing a year of success over five years 
instead of three will likely lengthen a small business' eligibility 
period and be a more accurate reflection of that business' true 
operations.'' Another commenter explained that a firm's temporary spike 
in revenue ``may not have resulted in increased infrastructure for the 
firm such that it will be ready to compete in the open market.'' 
Several other commenters expressed support for the proposed rule 
because it would give advanced small firms more time to take advantage 
of SBA small business assistance programs. Similarly, another commenter 
explained that ``Nurturing small business capabilities is important 
because it results in more price competition, it spurs innovation, and 
helps create jobs.'' Other commenters expressed that growing small 
businesses should be rewarded for their success with a longer lookback 
averaging period.
    Commenters also expressed support for the proposed change because 
it would increase the total number of small businesses and strengthen 
the Federal small business industrial or supplier base. Several 
commenters maintained that, with the availability of more businesses 
qualifying as small, the move to a 5-year averaging period would 
increase set-aside opportunities for all small businesses as the 
agencies are likely to set aside more contracts for small businesses. 
Other commenters expressed that an expanded pool of small businesses 
would benefit the Federal government by providing a larger and more 
stable pool of qualified small businesses in the Federal procurement 
market. The Federal government also will benefit from lower prices for 
its procurements due to increased competition, and from reduced risks 
by allowing agencies to retain their trusted and qualified incumbent 
small business contractors for a longer period. Several commenters also 
maintained that, with more businesses qualifying as small under the 5-
year receipts average, the change also would provide large prime 
contractors with a robust pool of qualified small businesses to draw 
from to meet their small business subcontracting requirements.
    Several commenters also expressed support for the proposed change 
because it would reduce the impacts of unusual spikes in revenues in 
some years on growing small businesses and enable them to adjust to 
revenue swings due to fluctuations in economic conditions, business 
environment, and changes in the Federal market. For example, one 
commenter explained that it is increasingly common for the government 
to utilize larger and longer indefinite delivery, indefinite quantity 
(IDIQ) contract vehicles, where one high-valued contract or task order 
can throw a small business out of its small business status. Some 
commenters supporting the proposed rule also stated that, under the 5-
year averaging period, growing small businesses will be able to 
maintain their small business status for a longer period and, as a 
consequence, achieve and sustain growth. A number of comments also 
supported the SBA's proposal to remove ``Schedule K'' from the 
definition of receipts.
    SBA's response:
    SBA agrees with commenters that this rule will benefit small 
businesses, the Federal Government, and large businesses. With an 
expanded pool of small businesses, the Federal Government will have 
more qualified small businesses to choose from, and as a result, likely 
will set aside more contracts for small businesses. SBA also agrees 
with commenters that the 5-year averaging period will allow more small 
firms to benefit from SBA's small business assistance programs by 
extending their small business status for a longer period. The change 
would also enable small businesses that have just exceeded their size 
standards to regain their small business status and to benefit from 
Federal small business assistance. SBA believes that the change to a 5-
year averaging period will expand benefits to all small businesses over 
the long-run, although the proposed change would have led to some 
negative impacts in the short-run. Accordingly, in this final rule, 
except for the Business Loan and Disaster Loan Programs, SBA is 
amending its regulations on the calculation of average annual receipts 
for all receipts-based SBA size standards from a 3-year averaging 
period to a 5-year averaging period, with a transition period through 
January 6, 2022, during which firms (and their affiliates) can choose 
either a 3-year or a 5-year averaging period. SBA is also removing 
``Schedule K'' from the definition of receipts, as proposed.

Opposing Comments

    Of 212 pertinent comments that SBA received, 37 opposed the change 
to the averaging period for annual receipts calculation from 3 years to 
5 years. Comments that opposed the proposed rule mostly focused on one 
or more of the following three issues: (1) Disadvantages to firms with 
declining revenues, (2) undue advantages to ``larger'' small 
businesses, and (3) additional burden on borrowers and lenders. Below, 
SBA summarizes each of the three comment categories listed above.
    (1) Disadvantages to Firms with Declining Revenues. Of the 37 
comments opposing the shift to a 5-year averaging period, 7 commenters 
opposed the rule based on the reason that a 5-year averaging period 
would disadvantage firms with declining revenues. Of these 7 
commenters, 2 affirmatively stated that their firm's size status would 
change from small to other-than-small as a result of the shift to a 5-
year averaging period. Several commenters opposing the proposed rule 
observed that it will take longer for small businesses to qualify as 
small again once they have exceeded the size standard. Other commenters 
noted that the proposed rule would harm small firms with declining 
revenues, causing them to lose their small business size status sooner 
under the 5-year average receipts as compared to the 3-year receipts. 
One commenter explained that ``while increasing the receipts lookback 
period from 3 years to 5 years will benefit many growing companies, it 
could also be detrimental to businesses that have experienced declining 
revenues, as it would cause many such businesses to lose their small 
business status despite declining receipts.'' Another commenter stated 
that it was unfair for small businesses to be ``penalized'' for having 
declining revenues. The commenter explained that business concerns that 
face a downturn ``should not be penalized, by being excluded from 
eligibility for SBA's small business programs. . . .

[[Page 66565]]

Such an outcome would be an unintended negative consequence of the 
Act.'' Some commenters contended that the proposed change primarily 
benefits growing and more successful larger small businesses by 
enabling them to maintain their small business status longer and better 
prepare for a successful transition to the full-and-open market, but it 
hurts emerging and smaller small businesses that are in need of the SBA 
assistance the most.
    SBA's response:
    SBA acknowledges that the move from a 3-year averaging period to a 
5-year averaging period could, as an unintended negative impact, cause 
some small businesses that are close to their size standard to lose 
their small business status immediately or subsequently during the 
period of declining annual revenues. SBA agrees that a firm that 
exceeds the size standard based on a 5-year average, but then has 
subsequent years of declining revenues, will face a longer period 
before regaining its small business status. In order to mitigate this 
impact, in this final rule, except for the Business Loan and Disaster 
Loan Programs, SBA is providing a transition period until January 6, 
2022, during which firms will be allowed to choose either the 3-year 
receipts average or 5-year receipts average for size eligibility 
purposes.
    (2) Undue Advantages to ``Larger'' Small Businesses. Of the 37 
comments opposing the shift to a 5-year averaging period, 5 comments 
opposed the proposed rule on the grounds that it may give an undue 
advantage to ``larger'' small businesses near the industry size 
threshold to the detriment of ``smaller'' small businesses in competing 
for small business opportunities. One commenter expressed concerns that 
the move to the 5-year averaging period lacked benefits for ``smaller'' 
small firms that need SBA's assistance the most. The commenter 
explained that by extending the measurement period, it only allows for 
companies to resist growth, control revenue and continue to be small. 
This process, if extended, will only provide a further advantage to 
those who are on the upper limit but does nothing to help those who are 
truly small.
    A number of commenters opposed the rule because it will allow 
companies to continue to be small businesses after the period at which 
those businesses should transition to other-than-small business status, 
making it difficult for smaller small businesses to compete against 
their larger counterparts under the 5-year averaging period. One 
commenter, expressing concerns about this issue, explained that the 
proposed rule would ``keep start-up small businesses from competing for 
small business set-aside opportunities . . . and allow `extended' small 
businesses with contracts to out compete those businesses that are 
truly `small.' '' Some of these commenters raised industry-specific 
concerns.
    SBA's response:
    SBA acknowledges that smaller small firms could face some 
disadvantages in competing for set-aside contracts against a larger 
pool of small firms, especially against the newly qualified larger 
small businesses and advanced small businesses who are able to remain 
small for a longer period. However, as detailed in SBA's benefit-cost 
analysis of the proposed rule, the change from a 3-year averaging 
period to a 5-year averaging period will increase the total number of 
small businesses, which would, because of greater potential small 
business competition for government contracts, likely lead to expansion 
of set-aside opportunities for all small businesses. In addition, as 
some commenters stated, that ``smaller'' small firms may not be in 
direct competition with ``larger'' small firms due to differences in 
their missions, capabilities, and resources, and therefore, would not 
face negative impacts from an increase in the number of ``larger'' 
small firms. As one organization commenting on the proposed rule 
explained, ``these emerging small companies tend to have their own swim 
lanes, and do not typically compete against `larger' small businesses 
directly and in some cases do not compete in the federal market all.''
    The contracts awards data also shows that in most industries the 
majority of small business contract dollars go to businesses that are 
substantially smaller than their size standards. The results from some 
industries with recent large increases to size standards also reveal 
that small businesses under the previous size standards continue to 
receive the same amount of contract dollars as before the increase. SBA 
agrees that the move to a 5-year averaging method is likely to benefit 
advanced small businesses that have just exceeded or are about to 
exceed their size standards more than their smaller counterparts in the 
short-run, but in the long-run it will benefit all small businesses at 
every level as they continue to grow and approach the size standard.
    (3) Additional Burden on Borrowers and Lenders. Of the 37 comments 
opposing the shift to a 5-year averaging period, 23 (including one 
trade association representing lenders serving small businesses under 
the SBA CDC/504 loan program) opposed the move to the 5-year average 
because the change would cause undue additional burden on borrowers and 
lenders under the Business Loan Programs. An additional 28 commenters 
(including another trade association representing lenders serving small 
businesses under the SBA's 7(a) loan program) also expressed similar 
concern that the 5-year averaging would result in an undue additional 
burden on borrowers and lenders participating in the Business Loan 
Programs, but they did not specifically oppose the shift to a 5-year 
averaging period for SBA's revenue-based size standards.
    A majority of these commenters included members of those two trade 
associations in support of the position of their respective 
associations. Some commenters opposed the rule on the basis that it may 
require SBA Lenders to collect and review two additional years of tax 
returns or financial statements to establish eligibility for the SBA's 
loan programs. Some of these commenters expressed concerns that this 
will add costs to loan processing, increase turn-around times, and 
discourage small businesses from participating in the SBA's loan 
programs. One trade association commented that ``the process for 
obtaining an SBA loan already requires extensive documentation from a 
small business, and this additional requirement increases that burden 
without any underlying benefit to the small business.'' The trade 
association requested that SBA ``give consideration to allowing the 
service-industry size standard calculation to remain at its current 3-
year averaging period for the SBA loan guarantee programs.''
    Some commenters noted that a central premise of the proposed change 
appears to address the concern that the current 3-year averaging method 
``ejects'' growing small businesses from Federal small business 
contracting programs before they are ready to compete in the full and 
open market. They stated that there is no such concern as it relates to 
the SBA's loan programs, as small businesses seeking or obtaining SBA's 
loans are rarely ``ejected'' from eligibility due to size.
    Several commenters asked that SBA clarify that the 5-year averaging 
period is intended to apply only to SBA's receipts-based size 
standards, not for any other loan application purpose. One trade 
association commented that ``Tax return information is used for 
multiple purposes related to the loan application process,'' including 
verifying an applicant's historical cash flow, income, or tax payment 
history. The trade association further explained, ``None of those 
purposes would require or

[[Page 66566]]

substantially benefit from a look-back period greater than 3 years.'' A 
trade association and a number of other commenters asked that SBA 
exempt the SBA's loan programs from the change, allowing SBA lenders to 
continue to apply a 3-year receipts average. Other commenters 
(including a trade association representing 7(a) lenders) requested 
that SBA's final rule ``[S]pecifically include language clarifying that 
the longer 5-year period is intended to apply only for purposes of 
determining size for loan applicants using SBA's traditional revenue-
based sized standards, and not for any other loan application 
purpose.''
    SBA's response:
    In response to comments regarding the burden of the rule on SBA 
Lenders and loan applicants, SBA has determined that the Business Loan 
and Disaster Loan Programs should not be included in this final rule. 
SBA included the Business Loan and Disaster Loan Programs in the 
proposed rule's cost-benefit analysis, but, otherwise, the initial 
proposed rule did not discuss the effect that the rule would have on 
SBA Lenders and loan program participants. Based on the comments 
expressing that SBA Lenders and loan program applicants would 
experience burden, SBA will seek additional comment and public input 
through a proposed rule at a later date to determine how best to 
consider changes to size eligibility in the Business Loan and Disaster 
Loan Programs. Through this later proposed rule, SBA intends to ask for 
data and additional detail about the burden faced by SBA Lenders and 
applicants, and for comment on any benefit that applicants might obtain 
through a longer averaging period for determining eligibility for SBA's 
Business Loan and Disaster Loan Programs.

Comments on Calculating of Average Receipts After the Sale or 
Acquisition of a Segregable Division

    SBA received 20 comments responding to its proposed clarification 
on the calculation of the annual receipts of a concern where the 
concern sells or acquires a segregable division during the applicable 
period of measurement. Of those 20 comments, 3 comments agreed with 
SBA's proposed clarification, 5 comments disagreed, 11 comments 
requested further clarification, and 1 comment was not clear as to its 
stance on this issue.
    The 3 commenters who agreed with SBA's proposed treatment of the 
sale or acquisition of a segregable division emphasized that the 
receipts of a division remain the receipts of the selling concern even 
after it is sold and that the receipts of an acquired division prior to 
the acquisition do not become the receipts of the acquiring concern 
after the acquisition. One association commenting on the proposed rule 
stated that it supports SBA's position because it ``provides clarity to 
the community with regard to the application of the former affiliate 
rule.'' The same association also requested that SBA expand the scope 
of its clarification to include segregable divisions and ``other assets 
not held as a separate legal entity.'' The association stated that such 
an expansion would ``ensure that SBA's clarification applies to the 
sale or purchase of non-segregable assets as well, e.g., when an entity 
acquires the assets performing a specific contract.''
    The 5 commenters who disagreed with SBA's proposed treatment of the 
sale or acquisition of a segregable division stated that (1) it 
elevates form over substance in distinguishing between a division and a 
subsidiary that is a separate legal entity, (2) it would create a 
burden for businesses seeking to benefit from selling off a division by 
moving all of its assets to a newly created subsidiary, (3) it would 
harm businesses that relied on current SBA policy when selling 
segregable divisions and were small as a result of the sale, and (4) it 
would create unpredictability and uncertainty in good-faith size status 
calculations.
    The 11 commenters who requested further clarification all stated 
(1) that they would have liked to see proposed regulatory text, and (2) 
that the Office of Hearings and Appeals (OHA) cases that SBA cited in 
the proposed rule do not make a distinction between divisions and 
subsidiaries. One commenter cited two additional OHA decisions which it 
believes contradict SBA's distinction between a division and 
subsidiary. The commenter stated that in the proposed rule, ``SBA cites 
a quotation from such a decision which provides that `a firm which 
acquires most of the assets of a subsidiary or division of a larger 
firm is affiliated only with that subsidiary or division, and not with 
the entire parent company' (emphasis added). As such, it appears that 
SBA's Office of Hearings and Appeals does not, in fact, make a 
distinction between divisions and subsidiaries.''
    SBA's response:
    SBA agrees with the commenters who stated that the receipts of a 
sold division remain the receipts of the selling concern after the 
sale, just as the receipts of an acquired division prior to its 
acquisition should not be treated as the receipts of the acquiring 
concern prior to the acquisition. SBA believes that it is not logical 
to allow a firm to exclude the receipts of a former division just 
because that division was sold, since those receipts accrued to the 
concern.
    SBA believes that there really is a difference between the sale or 
acquisition of a segregable division as opposed to the sale or 
acquisition of a separate legal entity. The sale or acquisition of a 
division is not a question of affiliation. It simply represents an 
addition or subtraction to the concern itself. This is distinct from 
the sale or acquisition of a separate legal entity, which implicates 
questions of affiliation.
    Regarding the OHA cases cited by the commenters, none of these 
decisions speak specifically to how receipts should be calculated after 
the sale or acquisition of a segregable division. However, as stated by 
several commenters, SBA is not obligated to follow OHA decisions when 
putting forth changes to its regulations.
    For all the reasons above, SBA is adding the language to Sec. Sec.  
121.104(d)(4) and 121.106(b)(4)(ii) to clarify that the former 
affiliate rule does not permit a concern to adjust its receipts when 
the concern sells a segregable division that is not a separate legal 
entity.

Comments on the Exemption From the 5-Year Averaging Period

    Although not specifically requested in the proposed rule, SBA 
received 31 comments requesting some sort of alternative option which 
would allow firms to use either a 3-year average or 5-year average of 
annual receipts depending on which one would be more advantageous to 
them. The comments proposing such an option suggested that the 3-year 
vs. 5-year option be for available for a specific period or be made 
permanent. Of the 31 total comments addressing this issue, 13 
commenters recommended using a transition period of 2 years or less; 12 
recommended a transition of 3 or more years; 4 suggested making the 
transition period permanent; and 2 did not specify a duration.
    In support of the transition period were commenters both for and 
against the shift to a 5-year averaging period for calculating annual 
receipts. Of the 31 comments supporting a transition period, 20 
supported the proposed rule; 5 opposed the proposed rule; 5 supported 
some elements while opposing others; and 1 comment did not express 
support or opposition to the move from a 3-year averaging period to a 
5-year averaging period but recommended that SBA consider the 
transition period as an alternative to mitigate the impact on 
businesses that

[[Page 66567]]

are currently small under the 3-year receipts average but would become 
other-than-small under the 5-year average receipts.
    SBA found that these commenters supported the adoption of a 
transition period for two reasons: (1) To ensure an organized and 
transparent implementation of the final rule, and (2) to minimize harm 
to small firms with declining revenues or to those becoming other than 
small under the 5-year receipts upon the implementation of the final 
rule.
    For example, one commenter suggested that SBA implement a 2-year 
transition period to reduce confusion and uncertainty for small firms 
that have occurred since the Small Business Runway Extension Act was 
signed into law. The commenter explained that ``some firms have been 
submitting proposals using a 3-year average in accordance with the 
SBA's guidance, while others have used a 5-year average in accordance 
with the new law. Due to this uncertainty, [Commenter] recommends 
allowing a two-year transition period for small companies . . .'' 
Another commenter recommended that SBA ``provide for a reasonable 
transition period for implementation . . . to allow government systems 
to be updated and to give the contractor community time to properly 
implement the size calculation change.''
    One commenter, expressing concern regarding the proposed rule's 
impact on firms with declining revenues, explained that ``While 
increasing the look-back period from 3 years to 5 years will provide a 
benefit to many growing companies, it could be detrimental to 
businesses that have experienced declining revenue.'' The commenter 
further stated that ``SBA should consider a hybrid approach whereby 
contractors are permitted to calculate revenues under both the 3-year 
period and the 5-year period and use the lower of the two results to 
determine its size status. This approach would be beneficial to both 
those small contractors that are experiencing a period of revenue 
growth, as well as those facing declining revenues.''
    SBA's response:
    SBA agrees with the comments supporting a temporary transition 
period under which firms still could choose to use a 3-year averaging 
period. A plurality of commenters asked for a 2-year transition period 
or less, and SBA agrees that a 2-year period is appropriate because 2 
years is an adequate time to allow firms to prepare for a permanent 
transition to a 5-year averaging period. Therefore, for the SBA 
programs affected by this rule, SBA will allow firms to choose either a 
3-year or 5-year averaging period through January 6, 2022. After that 
date, firms with at least 5 years of receipts will be required to use a 
5-year averaging period. A firm with fewer than 5 years of receipts 
will average its annual receipts over its existence.
    SBA does not believe that allowing for alternate averaging periods 
on a permanent basis would be beneficial. Using multiple averaging 
periods in the long term will result in confusion about how to 
determine size for Federal opportunities, including procurements. 
Within a single contract competition, businesses would be able to 
determine size on a separate basis. After the transition period, there 
is not sufficient reason to justify maintaining two separate averaging 
periods.

Other Comments

    SBA received some additional comments that addressed issues which 
did not fit into any of the above categories. One commenter requested 
that SBA change its regulations at 13 CFR 124.112(e)(2) to allow an 
8(a) Business Development (BD) Program participant to change its 
primary industry classification using the last 5 completed fiscal 
years, instead of the current 3 completed fiscal years. This commenter 
stressed the advantage of reconciling this primary industry 
classification calculation period with the size determination 
calculation period, especially at the 5th year annual update for an 
8(a) BD Program participant.
    SBA also received a few comments concerning the timeline for the 
implementation of the final rule. Most of these commenters suggested 
that SBA implement the final rule as soon as possible. One commenter 
stated that it is unlawful to delay the implementation of the new law, 
and the comment from one trade association suggested that SBA make the 
final rule retroactive to December 17, 2018, the date of enactment of 
Public Law 115-324. Another commenter recommended delaying the 
implementation of the final rule until January 1, 2021 if SBA decides 
to not grant a grace period to use the 3-year lookback. The commenter 
stated, ``dropping the 3-year rule `grace period' in the middle of the 
year will only confuse and complicate the implementation of the rule.''
    One commenter suggested that SBA establish a 5-year averaging 
period for employee-based size standards as well.
    SBA's response:
    The comment that SBA update its regulations at 13 CFR 124.112(e)(2) 
is outside the scope of establishing and reviewing size standards. This 
rule is only concerned with the method of calculation of annual 
receipts for size standards purposes. The comment regarding 13 CFR 
124.112(e)(2) concerns a calculation related to the primary industry 
classification under 8(a) BD Program and that is outside the scope of 
this rule. Similarly, this rule does not affect the application of a 3-
year average in the ``economic dependence'' test under 13 CFR 
121.103(f)(2).
    With respect to the comments concerning the implementation 
timeframe of the final rule, Public Law 115-324 did not include an 
effective date for the averaging change. Section 3(a)(2)(C) of the 
Small Business Act requires SBA to provide an opportunity for public 
notice and comment through the rulemaking process prior to implementing 
changes to size standards prescribed through section 3(a)(2). 
Accordingly, on December 21, 2018, SBA issued an Information Notice 
(6000-180023) advising that, until SBA makes necessary changes to its 
regulations, businesses must report their receipts based on a 3-year 
average. Thus, making the rule retroactive to the December 17, 2018, 
enactment date would not only run counter to SBA's guidance, but also 
would require corrections to contracts awards data in the Federal 
Procurement Data System-Next Generation (FPDS-NG) to reflect changes in 
size status of contractors due to the change in the averaging period. 
Conversely, delaying the implementation date would be against the 
interests of many small businesses and Federal agencies that want to 
see the final rule being implemented as soon as possible. Accordingly, 
this final rule will be effective after 30 days from the date of its 
publication in the Federal Register.
    Lastly, this rule does not change the calculation period for 
employee-based size standards. SBA does not find sufficient reason from 
the comments to a propose a change to the period for employee-based 
size standards.

Conclusions

    Based on the analyses of impacts using the latest relevant industry 
and Federal contracting data available to SBA when the proposed rule 
was prepared and thorough evaluation of all public comments on the 
proposed rule, as discussed above, SBA is taking the following actions 
in this final rule, except for the Business Loan and Disaster Loan 
Programs:
    (i) Adopting the 5-year averaging period for calculating annual 
revenues of firms and revenues of their affiliates

[[Page 66568]]

in all industries that are subject to SBA's receipts-based size 
standards;
    (ii) Adopting the 5-year averaging period for calculating annual 
revenues of firms (including affiliates, if any) in all industries for 
prescribing receipts-based size standards by other Federal agencies; 
and
    (iii) Providing a transition period until January 6, 2022, allowing 
firms (and their affiliates, if any) to choose either a 3-year 
averaging period or a 5-year averaging period for calculating average 
annual receipts for size standards purposes.

Section-by-Section Analysis

Section 121.104

    The final rule removes ``Schedule K'' from the definition of 
receipts. SBA has found that reviewing Schedule K is generally not 
useful, but SBA reserves the ability to request a Schedule K as part of 
SBA's review of the other Internal Revenue Service (IRS) forms listed 
in Sec.  121.104(a).
    For consistency with the size standard averaging period being 
changed in Sec.  121.903, for the purposes of applying SBA's receipts-
based size standards, the final rule changes the averaging period for a 
business that has been in business for 5 or more fiscal years to a 5-
year period, i.e., the business calculates its total receipts over the 
5-year period and divides by 5. Under the final rule, if a business has 
been in business for less than 5 complete fiscal years, the business 
calculates its total receipts, divides by the number of weeks in 
business, and multiplies by 52. This is the same process SBA currently 
uses when a business has less than 3 completed fiscal years. If a 
business has a short year as one of its 5 years, the business 
calculates its total receipts over the 5-year period, divides by the 
number of weeks in the short year and its other 4 fiscal years, and 
multiplies by 52. This too is the same process SBA currently uses.
    The 5-year averaging period in Sec.  121.104 would not distinguish 
between firms in service industries and other firms subject to 
receipts-based size standards. SBA believes that, in applying SBA's own 
size standards, separating out service-industry firms would cause 
confusion and create a greater compliance burden on firms that 
participate in both services industries and non-services industries 
(such as agriculture, construction, and retail trade) with receipts-
based size standards.
    This final rule only would affect the application of SBA's new size 
standard rules after its effective date. Thus, until the effective date 
of a final rule, SBA will continue to apply the 3-year averaging period 
in the present Sec.  121.104 for calculating average annual receipts 
for all SBA's receipts-based size standards. Since size is determined 
as of the date when a firm certifies its size as part of its initial 
offer which includes price, the 3-year calculation period will apply to 
any offer submitted prior to the effective date of the final rule. 
Thus, even if SBA receives a request for a size determination or size 
appeal after the effective date of the final rule, SBA will still use a 
3-year calculation period if the determination or appeal relates to a 
certification submitted prior to the final rule's effective date. 
Misrepresentations made under the existing calculation period are 
material for the purposes of criminal, civil, or administrative 
actions.
    SBA also clarifies how it believes annual receipts should be 
calculated in connection with the acquisition or sale of a division. 
Specifically, the final rule provides that the annual receipts of a 
concern would not be adjusted where the concern sells or acquires a 
segregable division during the applicable period of measurement or 
before the date on which it self-certified as small. This would be 
different from how SBA treats the sale or acquisition of a subsidiary. 
In the case of a subsidiary, SBA's regulations provide that ``[t]he 
annual receipts of a former affiliate are not included if affiliation 
ceased before the date used for determining size. This exclusion of 
annual receipts of a former affiliate applies during the entire period 
of measurement, rather than only for the period after which affiliation 
ceased.'' 13 CFR 121.104(d)(4).
    SBA believes that the sale or acquisition of a division is 
different from buying or selling a separate legal entity and, as such, 
should be treated differently. Any receipts attributable to a specific 
division of a concern are certainly receipts earned by the concern. 
Even if that division is later sold, its receipts were always part of 
the receipts directly received by the concern itself, and SBA believes 
that those receipts should remain a part of the concern's receipts 
after the sale for purposes of determining the concern's size. 
Similarly, where a concern acquires a segregable division from another 
business entity during the applicable period of measurement, SBA would 
not increase the concern's overall receipts by the amount of receipts 
attributable to that division.
    SBA understands that some may feel that distinguishing the sale of 
a division from that of a subsidiary would elevate form over substance, 
and would merely require a seller to move assets into a separate 
subsidiary and then sell that subsidiary in order to bring the 
transaction under the rule. However, as noted above, SBA believes that 
there really is an important distinction between a division and a 
separate legal entity.
    The Final Rule adds a transition period through January 6, 2022, 
during which a firm may calculate its receipts and the receipts of its 
affiliates using either a 3-year average or a 5-year average. The Final 
Rule adds a paragraph (c)(4) to use a 3-year averaging period for the 
Business Loan Programs, which are the 7(a) Loan Program, the Microloan 
Program, the Intermediary Lending Pilot Program, and the Development 
Company Loan Program (``504 Loan Program''), and the Disaster Loan 
Programs, which are Physical Disaster Business Loans, Economic Injury 
Disaster Loans, Military Reservist Economic Injury Disaster Loans, and 
Immediate Disaster Assistance Program loans. SBA intends to seek 
comment on the Business Loan and Disaster Loan Programs in a proposed 
rule through a separate rulemaking.

Section 121.903

    As required by Public Law 115-324, SBA is amending the requirements 
for agencies that seek to propose and adopt size standards for their 
own programs, instead of applying SBA's size standards. Under the final 
rule, a non-SBA agency's receipts-based size standard, whether applying 
to services or non-services firms, must be proposed with a 5-year 
averaging period.
    Section 3(a)(2)(ii)(III) of the Small Business Act still provides 
that other agencies prescribe size standards for industries other than 
services or manufacturing using ``data over a period of not less than 3 
years.'' While Congress did not change this statutory language, SBA 
believes that it also can require other agencies establishing size 
standards for industries other than services or manufacturing to use 
data over a 5-year period and specifically solicited comment on whether 
to make such a change. SBA received strong support for applying the 5-
year averaging period for all industries. To avoid confusion from using 
the 5-year average receipts for SBA's size standards and 3-year average 
receipts for other agencies' size standards and promote consistency in 
measuring business size across the Federal government, in this final 
rule, SBA is also adopting the same 5-year averaging period for all 
receipts-based size

[[Page 66569]]

standards proposed by other Federal agencies.
    This new calculation period does not affect existing non-SBA size 
standards that specify a 3-year average unless the responsible agency 
proposes and finalizes changes to the existing specification of a 3-
year average. This is consistent with the change in Public Law 115-324 
to the requirements for prescribing a non-SBA size standard, given the 
lack of any restrictions in the Small Business Act or Public Law 115-
324 on applying an existing size standard. In adopting or proposing a 
change to the averaging period for its existing size standard, the 
responsible agency should coordinate with SBA using the procedure in 
Sec.  121.903.

Response to Office of Advocacy Comments

    In response to the Proposed Rule, the Office of Advocacy of the SBA 
(Office of Advocacy) requested that the SBA update its Initial 
Regulatory Flexibility Analysis (IRFA) to include more relevant 
alternatives to the proposed regulatory change to mitigate negative 
impacts on small businesses. Specifically, the Office of Advocacy 
suggested that SBA allow the public to consider at least 2 specific 
alternatives: (1) A 2-year transition period during which firms could 
use either a 3-year or 5-year averaging period, or (2) allowing a small 
business that has been awarded a contract to recertify its small 
business size status through any option periods.
    As suggested by the Office of Advocacy, SBA has adopted a 2-year 
transition period that will end January 6, 2022. During that period, 
firms will choose either a 3-year or 5-year averaging period. Thus, 
firms that wish to continue using a 3-year average for certifying or 
assessing small business size status may continue to do so until 
January 6, 2022.
    With regard to updating the IRFA, SBA does not believe that it is 
practical to issue a revised IRFA for public comment at this time. 
There is an urgent need to implement the intent of Congress and a 
further delay would result in more uncertainty and confusion for small 
businesses and the Federal contracting community. A number of comments 
to the proposed rule urged SBA to implement the final rule as soon as 
possible. In addition, SBA has adopted one of the relevant alternatives 
discussed by the Office of Advocacy, a 2-year transition period during 
which firms could use either a 3-year or a 5-year averaging period. 
Thus, issuing a revised IRFA for public comment would be superfluous. 
Accordingly, SBA is declining to issue a revised IRFA for public 
comment with the alternatives proposed by the Office of Advocacy.
    With regard to recertification, SBA believes it would be extremely 
complicated to allow a firm that has already been awarded a contract to 
recertify its size status, after the transition period, using either 
the 3-year or 5-year averaging period through the length of that 
contract and any options. This would create extensive tracking and 
recordkeeping requirements that would also result in uncertainty and 
unpredictability for firms trying to determine their size status after 
the end of the 2-year transition period created in this rule. Thus, 
even if a firm initially certified for a contract under a 3-year 
averaging period, a firm must use a 5-year average when it submits a 
new certification or recertification for that contract after the end of 
the transition period.

Compliance With Executive Orders 12866, 12988, 13132, 13563, and 13771, 
the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35)

A. Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
final rule is not a significant regulatory action for purposes of 
Executive Order 12866. Nonetheless, as required by section 3(a)(6) of 
the Small Business Act, 15 U.S.C. 632(a)(6), in the next section, SBA 
provides a benefit-cost analysis of this final rule, including: (1) A 
statement of the need for the proposed action, and (2) an evaluation of 
the benefits and costs--both quantitative and qualitative--of this 
regulatory action. This rule is also not a ``major rule'' under the 
Congressional Review Act, 5 U.S.C. 800, et seq.
a. Benefit-Cost Analysis
1. What is the need for this regulatory action?
    As stated elsewhere, the Small Business Act delegates to SBA's 
Administrator the responsibility for establishing small business size 
definitions (usually referred to as ``size standards''). Recently, 
Public Law 115-324 modified the requirements for proposed small 
business size standards prescribed by an agency without separate 
statutory authority to issue size standards.
    The need of this final rule is to carry out the intent of Public 
Law 115-324 and to ensure consistency in the calculation of average 
annual receipts for size standards across the Federal Government.
    SBA's mission is to aid and assist small businesses through a 
variety of financial, procurement, business development and counseling, 
and disaster assistance programs. This regulatory action promotes the 
Administration's goals and objectives and meets the SBA's statutory 
responsibility to implement a new law impacting size definitions for 
small businesses. One of SBA's goals in support of promoting the 
Administration's objectives is to help small businesses succeed through 
access to capital, Federal Government contracts and purchases, and 
management, technical and disaster assistance.
2. What are the potential benefits and costs of this regulatory action?
    Changing the period for calculating average annual receipts from 3 
years to 5 years may enable some mid-size businesses that have just 
exceeded size standards to regain small business status. Similarly, it 
could also allow some advanced and larger small businesses about to 
exceed size standards to retain their small business status for a 
longer period. However, as stated in the June 24, 2019, proposed rule, 
it could also result in some advanced small businesses having a 5-year 
receipts average that happens to be higher than the 3-year receipts 
average, thus ejecting them out of their small business status sooner. 
Detailed impacts of the proposed change are discussed below.
    It is difficult to determine the actual number of small and mid-
size businesses that would be impacted by Public Law 115-324 and this 
regulatory action because there is no annual data on receipts of 
businesses. The annual receipts data from the Economic Census special 
tabulation are only available once every 5 years. Similarly, the System 
for Award Management (SAM) only records the data on 3-year average 
annual receipts of businesses over their 3 preceding fiscal years, but 
not their annual receipts for each fiscal year. For example, the 
receipts data for year 2018 is an average of annual receipts for 2017, 
2016, and 2015. Similarly, the receipts data for 2017 is an average of 
annual receipts for 2016, 2015, and 2014, and so on. A 5-year receipts 
average for 2018 would be an average of annual receipts for 2017, 2016, 
2015, 2014, and 2013.
    Given the lack of annual receipts for each year, SBA approximated a 
firm's 5-year average annual revenue for 2018 as follows:

[[Page 66570]]

[GRAPHIC] [TIFF OMITTED] TR05DE19.000

    This result may slightly underestimate the 5-year revenue average 
when annual revenues are rising (i.e., 2014 revenue > 2013 revenue > 
2012 revenue) and overestimate it if annual revenues are declining 
(i.e., 2014 revenue < 2013 revenue < 2012 revenue).
    To estimate the 5-year receipts average for 2018 using the above 
formula, SBA analyzed the 2018 SAM extracts (as of September 1, 2018) 
and 2015 SAM extracts (as of September 1, 2015). The above 5-year 
average annual receipts formula would only work for businesses that 
were present in both 2015 and 2018 SAM extracts. One challenge was that 
some businesses found in 2018 SAM could not be found in 2015 SAM and 
vice versa. Excluding entities registered in SAM for purposes other 
than government contracting and entities ineligible for small business 
consideration (such as foreign governments and state-controlled 
institutions of higher learning), there were a total of 346,958 unique 
business concerns in SAM subject to at least one receipts-based size 
standard. Of these concerns, 293,524 (or about 84.6 percent) were 
``small'' in all North American Industry Classification System (NAICS) 
industries, 9,990 (or 2.9 percent) were ``small'' in some industries 
and ``not small'' in other industries, and 43,444 (or 12.5 percent) 
were ``not small'' in any industry.
    Excluding entities with ``null'' or ``zero'' receipts values, 
194,686 firms (or about 56 percent) appeared both in 2018 SAM and in 
2015 SAM and were included in the 5-year average annual receipts 
approximation and calculation of number of businesses impacted. Of 
those 194,686 matched firms subject to a receipts-based size standard, 
154,220 (or about 79 percent) were ``small'' in all NAICS industries, 
8,049 (or 4.1 percent) were ``small'' in some industries and other than 
small (``not small'') in other industries, and 32,417 (or about 17 
percent) were ``not small'' in any industry. In other words, 303,514 
(or 87.5 percent) of 346,958 total concerns in SAM 2018 and 162,269 (or 
83.3 percent) of 194,686 total matched firms were small in at least one 
NAICS industry with a receipts-based size standard. These results are 
summarized in Table 1, ``Size Status of Businesses in Industries 
Subject to Receipts-Based Size Standards,'' below.

                                Table 1--Size Status of Businesses in Industries Subject to Receipts-Based Size Standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Total firms in 2018 SAM       Firms in both 2015 SAM and
                                                          subject to least one receipts-        2018 SAM (matched)
                                                                  based standard         --------------------------------                    Total to
                       Size status                       --------------------------------                                    % Matched     matched ratio
                                                             Number of                       Number of           %                               *
                                                               firms             %             firms
--------------------------------------------------------------------------------------------------------------------------------------------------------
Small in at least one industry..........................         303,514            87.5         162,269            83.3            53.5           1.809
Small in all industries.................................         293,524            84.6         154,220            79.2            52.5           1.903
Small in some and not small in others...................           9,990             2.9           8,049             4.1            80.6           1.241
Large in all industries.................................          43,444            12.5          32,417            16.7            74.6           1.340
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................         346,958           100.0         194,686             100            56.1           1.782
--------------------------------------------------------------------------------------------------------------------------------------------------------
* To be used to translate the results from the matched data to overall 2018 SAM data.

    According to Table 2, ``Distribution of Business Concerns Subject 
to Receipts-Based Size Standards by Number of NAICS Codes,'' below, the 
distribution of firms by the number of NAICS codes in the matched data 
is very similar to that for the overall 2018 SAM data. About 42-44 
percent of firms were in only one NAICS code that has a receipts-based 
size standard, about 35 percent in 2-5 NAICS codes, about 12 percent in 
6-10 NAICS codes, and about 8-10 percent in more than 10 NAICS codes. 
In other words, 56-58 percent of firms were in multiple NAICS codes 
with receipts-based size standards. Thus, it is quite possible that the 
proposed change may impact a firm's

[[Page 66571]]

small business status in multiple industries. For purposes of this 
analysis, an impacted firm is defined as one that would be impacted by 
the change in terms of gaining, regaining, extending, or losing small 
business status in at least one industry with a receipts-based size 
standard.

  Table 2--Distribution of Business Concerns Subject to Receipts-Based Size Standards by Number of NAICS Codes
----------------------------------------------------------------------------------------------------------------
                                                   Total firms in 2018 SAM with   Matched firms between 2018 and
                                                    at least one receipts-based              2015 SAM
              Number of NAICS codes                         NAICS code           -------------------------------
                                                 --------------------------------
                                                       Count             %             Count             %
----------------------------------------------------------------------------------------------------------------
1 NAICS code....................................         153,184            44.2          82,082            42.2
2 to 5 NAICS codes..............................         123,277            35.5          68,458            35.2
6 to 10 NAICS codes.............................          41,518            12.0          24,529            12.6
>10 NAICS codes.................................          28,979             8.4          19,617            10.1
                                                 ---------------------------------------------------------------
    Total.......................................         346,958           100.0         194,686           100.0
----------------------------------------------------------------------------------------------------------------
Note: A business concern is defined in terms of a unique local (vendor) DUNS number.

    A central premise of Public Law 115-324 is that a 5-year annual 
receipts average (as opposed to a 3-year annual receipts average) would 
enable some mid-size businesses who have recently exceeded the size 
standard to regain small business status and some advanced small 
businesses close to exceeding the size standard to retain their small 
business status for a longer period. However, this premise would only 
hold true when businesses' annual revenues are rising. When businesses' 
annual revenues are declining, due to economic downturns or other 
factors, the 5-year annual receipts average could be higher than the 3-
year annual receipts average, thereby causing small businesses close to 
their size standards to lose their small business status sooner. To 
mitigate such negative impacts on small businesses, SBA has decided, in 
consideration of public comments and the results from its own analysis, 
to provide a 2-year transition period in which firms will be allowed to 
elect either a 5-year or 3-year averaging period in calculating their 
average annual receipts.
b. Impacts on Businesses From the Change
    By comparing the approximated 5-year annual receipts average with 
the current receipts-based size standard for each of the 194,686 
matched business concerns in each NAICS code subject to a receipts-
based size standard, in the proposed rule, SBA identified the following 
4 possible impacts from changing the averaging period for annual 
revenues from 3 years to 5 years:
    i. The number of mid-size businesses that have exceeded the size 
standard and would regain small business status in at least one NAICS 
industry with a receipts-based size standard (i.e., 3-year average > 
size standard >= 5-year average)--positive impact;
    ii. the number of advanced small businesses within 10 percent below 
the size standard that would have their small business status extended 
for a longer period in at least one NAICS industry with a receipts-
based standard (5-year average < 3-year average <= size standard and 
0.9*size standard < 3-year average <= size standard)--positive impact;
    iii. the number of currently small businesses that would lose their 
small business status in at least one NAICS industry subjected to at 
least one receipts-based size standard (i.e., 3-year average <= size 
standard < 5-year average)--negative impact; and
    iv. the number of advanced small businesses within 10 percent below 
the size standard that would have their small business status shortened 
in at least one NAICS industry subject to a receipts-based standard (3-
year average < 5-year average <= size standard and 0.9*size standard < 
3-year average <= size standard)--negative impact.
    In this final rule, SBA is changing the period for calculation of 
average annual receipts for all of its as well as other agencies' 
receipts-based size standards from 3 years to 5 years. The purpose of 
Public Law 115-324 is to allow small businesses more time to grow and 
develop competitiveness and infrastructure so that they are better 
prepared to succeed under full and open competition once they outgrow 
the size threshold. However, as stated in the proposed rule, a longer 
5-year averaging period may not always and necessarily provide relief 
to every small business concern. As discussed in the proposed rule, 
when annual revenues are declining or when annual revenues for the 
latest 3 years are lower than those for the earliest 2 years of the 5-
year period, the 5-year average would be higher than the 3-year 
average, thereby ejecting some advanced small businesses out of their 
small business status sooner or rendering some small businesses under 
the 3-year average not small immediately.
    In the proposed rule, SBA described 4 different types of impacts on 
small businesses from changes to the averaging period for annual 
receipts from 3 years to 5 years as follows: (i) Enabling current large 
or mid-size businesses to gain small business status (impact i); (ii) 
enabling current advanced small businesses to lengthen their small 
business status (impact ii); (iii) causing current small businesses to 
lose their small business status (impact iii); and (iv) causing current 
small businesses to shorten their small business status (impact iv).
    However, with the SBA's decision to provide a 2-year transition 
period thereby allowing firms to choose either their 5-year average 
annual receipts or their 3-year average annual receipts, the two 
negative impacts (namely impact (iii) and impact (iv)) do not apply to 
this final rule. Accordingly, this final rule provides the analysis of 
the two positive impacts (namely impact (i) and impact (ii)) only.
    Table 3, `Percentage Distribution of Impacted Firms by the Number 
of NAICS Codes,' below, provides these results based on the 2018 SAM--
2015 SAM matched firms.

[[Page 66572]]



                                     Table 3--Percentage Distribution of Impacted Firms by the Number of NAICS Codes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     % Distribution of impacted firms by number of NAICS codes
                                                             Number of   -------------------------------------------------------------------------------
                        Impact *                          impacted firms                     2-5 NAICS      6-10 NAICS       >10 NAICS
                                                                           1 NAICS code        codes           codes           codes           Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Currently large in all NAICS codes
    Impact (i)..........................................             914            36.0            36.1            13.6            14.3           100.0
Currently small in all NAICS codes
    Impact (ii).........................................           1,255            25.3            39.6            16.3            18.8           100.0
Currently small in some NAICS and not small in others
    Impact (i)..........................................           1,640             0.0            24.6            24.2            51.2           100.0
    Impact (ii).........................................           1,138             0.0            25.0            26.0            49.0           100.0
Total Impact by Impact Type
    Impact (i)..........................................           2,554            12.9            28.7            20.4            38.0           100.0
    Impact (ii).........................................           2,393            13.3            32.6            20.9            33.2           100.0
                                                         -----------------------------------------------------------------------------------------------
        Total positive impact...........................           4,687            13.8            31.8            20.7            33.8           100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Impact (i) = Current large businesses gaining small business status; and Impact (ii) = Current small businesses extending small business status.

    It is highly notable that the distribution of impacted firms by the 
number of NAICS codes, as shown in Table 3, is very different as 
compared to a similar distribution based on the overall matched and 
total 2018 SAM data (see Table 2), especially with respect to firms 
with only one NAICS code and those with more than 5 NAICS codes. For 
example, as shown in Table 2, above, more than 40 percent of all firms 
in the overall data were associated with only one NAICS code, as 
compared to less than 15 percent among impacted firms in Table 3. 
Similarly, firms with more than 5 NAICS codes accounted for about 20 
percent of all firms in the original data, as compared to more than 50 
percent among impacted firms. It is also notable that NAICS Sectors 54, 
56, and 23 together accounted for more than 70 percent of impacted 
firms, with Sector 54 (Professional, Scientific and Technical Services) 
accounting for about 35 percent, followed by Sector 23 (Construction) 
about 25 percent, and Sector 56 (Administrative and Support, Waste 
Management and Remediation Services) about 12-13 percent.
    Each of these impacts was then multiplied by an applicable factor 
or ratio, as shown in the last column of Table 1, to obtain the 
respective impacts corresponding to all firms in 2018 SAM subject to at 
least one receipts-based size standard. These results are presented 
below in Table 4, ``Impacts from Changing the Averaging Period for 
Receipts from 3 Years to 5 Years.'' The last column of the table shows 
the percent of firms impacted relative to all business concerns in 2018 
SAM.
    Because the SAM data only captures businesses that are primarily 
interested in Federal procurement opportunities, the SAM-based results 
do not capture the impacts the proposed change may have on businesses 
participating in various non-procurement programs that apply SBA's 
receipts-based size standards, such as exemptions from compliance with 
paperwork and other regulatory requirements.

            Table 4--Impacts From Changing the Averaging Period for Receipts From 3 Years to 5 Years
----------------------------------------------------------------------------------------------------------------
                                  Firms impacted     Total to       Total firms
           Impact \1\               in matched     matched ratio    impacted in   Total firms in    % Impacted
                                      dataset        (Table 1)       2018 SAM        2018 SAM
----------------------------------------------------------------------------------------------------------------
Entities other than small under
 all NAICS code(s)
    Impact (i)..................             914           1.340           1,225          43,444             2.8
Entities small under all NAICS
 code(s)
    Impact (ii).................           1,255           1.903           2,389         293,524             0.8
Entities small in some NAICS
 code(s) and other than small in
 other(s)
    Impact (i)..................           1,640           1.241           2,035           9,990            20.4
    Impact (ii).................           1,138           1.241           1,412           9,990            14.1
Total positive impact by impact
 type
    Impact (i)..................           2,554  ..............           3,260          53,434             6.1
    Impact (ii).................           2,393  ..............           3,801         303,514             1.3
                                 -------------------------------------------------------------------------------
        Overall total positive             4,687  ..............           6,690         346,958             1.9
         impact \2\.............
----------------------------------------------------------------------------------------------------------------
\1\ Impact (i) = Current large businesses gaining small business status; and Impact (ii) = Current small
  businesses extending small business status.
\2\ Number of firms under total positive impacts refer to the number of unique firms. Some firms could appear in
  both impact types and hence individual impacts may not add up to overall impact.

    The Economic Census, combined with the Census of Agriculture and 
County Business Patterns Reports, provides for each NAICS code 
information on the number of total small and large businesses subjected 
to a receipts-based size standard. Based on the matched SAM data, SBA 
computed percentages of businesses impacted under each impact category 
for each NAICS industry subject to a receipts-based size standard. By 
applying such percentages

[[Page 66573]]

to the 2012 Economic Census tabulation, SBA estimated the number of all 
businesses impacted under each impact type for each NAICS code subject 
to a receipts-based size standard. These results are presented in Table 
5, ``Impacts from Changing the Averaging Period for Receipts from 3 
Years to 5 Years (2012 Economic Census),'' below.

            Table 5--Impacts From Changing the Averaging Period for Receipts From 3 Years to 5 Years
                                             [2012 Economic Census]
----------------------------------------------------------------------------------------------------------------
                                                                                    Estimate of
                           Impact \1\                               Total firms   impacted firms    % Impacted
----------------------------------------------------------------------------------------------------------------
Impact (i)......................................................         271,505           7,822             2.9
Impact (ii).....................................................       6,896,633          62,822             0.9
                                                                 -----------------------------------------------
    Overall positive impact.....................................       7,168,138          70,644             1.0
----------------------------------------------------------------------------------------------------------------
\1\ Impact (i) = Current large businesses gaining small business status; and Impact (ii) = Current small
  businesses extending small business status.

    Currently large or mid-size businesses regaining small business 
status would get various benefits as small business concerns, including 
access to Federal set-aside contracts, and exemptions from various 
compliance and paperwork requirements. With their small business status 
extended, advanced small businesses would continue to receive such 
benefits for a longer period. However, the change from 3-year average 
receipts to 5-year average may also harm some small businesses by 
causing them to lose or shorten their small business status in at least 
one receipts-based size standard, thereby depriving them of access to 
small business assistance, especially Federal set-aside opportunities. 
To mitigate such impacts, SBA is allowing businesses to elect either 
the 3-year average annual receipts or the 5-year average annual 
receipts for 2 years through January 6, 2022. SBA intends to seek 
comment on implementation in the Business Loan and Disaster Loan 
Programs in a proposed rule through a separate rulemaking.
c. The Baseline
    For this new regulatory action modifying an existing regulation 
(such as changing the average annual receipts calculation from 3 years 
to 5 years), a baseline assuming no change to the regulation (i.e., 
maintaining the status quo) generally provides an appropriate benchmark 
for evaluating benefits, costs, or transfer impacts of proposed 
regulatory changes and their alternatives.
    Based on the 2012 Economic Census special tabulations (the latest 
available), 2012 County Business Patterns Reports (for industries not 
covered by the Economic Census), and 2012 Agricultural Census 
tabulations (for agricultural industries), of a total of about 7.2 
million firms in all industries with receipts-based size standards, 
about 96 percent are considered small and 4 percent other-than-small 
under the 3-year annual receipts average. Similarly, of 346,958 
businesses that were subject to at least one receipts-based size 
standard and eligible for Federal contracting, 87.5 percent were small 
in at least one NAICS code and 12.5 percent other than small in all 
NAICS codes.
    Based on the data from the Federal Procurement Data System--Next 
Generation (FPDS-NG) for fiscal years 2015-2017 (the latest available 
when the proposed rule was prepared), on average, about 88,770 unique 
firms in industries subject to receipts-based size standards received 
at least one Federal contract during that period, of which 83 percent 
were small. Businesses subject to receipts-based standards received 
$182 billion in average annual Federal contract dollars during that 
period, of which nearly $64 billion or about 35 percent went to small 
businesses. Of total dollars awarded to small businesses subject to 
receipts-based size standards, $45 billion or 71 percent was awarded 
through various small business set-aside programs and another 29 
percent was awarded through non-set aside contracts.
    Table 6, ``Baseline Analysis of Receipts-Based Size Standards,'' 
below, provides these baseline results. SBA's proposed rule included an 
estimate of the number and total dollar amount of loans issued through 
the Business Loan Programs and the Economic Injury Disaster Loan (EIDL) 
program. These estimates are not presented in this final rule because 
SBA intends to issue a separate rulemaking to consider changes to size 
eligibility for the Business Loan and Disaster Loan Programs.
    Besides set-aside contracting and financial assistance discussed 
above, small businesses also benefit through reduced fees, less 
paperwork, and fewer compliance requirements that are available to 
small businesses through Federal agencies that use SBA's size 
standards. However, SBA has no data to estimate the number of small 
businesses receiving such benefits. Similarly, due to the lack of data, 
SBA is not able to determine impacts the final rule will have on small 
businesses participating in other agencies' programs that are subject 
to their own size standards based on average annual receipts.

       Table 6--Baseline Analysis of Receipts-Based Size Standards
------------------------------------------------------------------------
                         Measure                               Value
------------------------------------------------------------------------
Total industries subject to receipts-based standards....             518
Total firms subject to at least one receipts-based                  7.17
 standard (million)--2012 Economic Census...............
Total small firms subject to at least one receipts-based             6.9
 standard (million)--2012 Economic Census...............
Total small firms subject to at least one receipts-based            96.2
 standard as % of total firms--2012 Economic Census.....
Total business concerns in SAM \1\ (as of September 1,           420,381
 2018)..................................................
Total business concerns subject to a receipts-based size         346,958
 standard in at least one NAICS code \2\ (SAM)..........
Total businesses that are small in at least one NAICS            303,514
 code subject to a receipts-based size standard.........
Small business concerns as % of total business concerns             87.5
 subject to receipts-based standards (2018 SAM).........
Average total number of unique Eligible vendors getting          126,500
 Federal contracts \1\--FPDS-NG (2015-2017).............
Average total number of unique firms with receipts-based          88,770
 size standards getting Federal contracts \2\--FPDS-NG
 (2015-2017)............................................

[[Page 66574]]

 
Average total contract dollars awarded to business                  $182
 concerns, subject to receipts-based standards ($
 billion)...............................................
Average total small business contract dollars awarded to           $63.7
 businesses subject to receipts-based standards ($
 billion)...............................................
Small business dollars as % of total dollars awarded to             34.9
 firms subject to receipts-based standards..............
------------------------------------------------------------------------
\1\ Entities in SAM and FPDS-NG presented above only include business
  concerns that can be eligible to qualify as small for Federal
  contracting. That is, entities that can never qualify as small (e.g.,
  foreign, not-for-profit and government entities) are excluded as they
  are not impacted by this rule.
\2\ A business concern could appear in multiple NAICS industries
  involving both receipts-based and size standards and those based on
  other measures (such as employees). Similarly, a business could be
  small in some industries and other-than-small in others.

    Businesses that would regain or expand their small business status 
can be identified by comparing the estimate of their 5-year receipts 
average with the size standard. That is, if the 5-year receipts average 
of a firm currently above the size standard is lower than the 
applicable size standard, that firm will gain or regain small business 
status. To estimate the number of small businesses that would benefit 
by having their small business status extended for a longer period or 
would be penalized by having their small business status shortened, SBA 
considered small businesses whose 3-year average annual receipts was 
within 10 percent below their receipts-based size thresholds. Depending 
upon whether their annual receipts are growing or declining, small 
businesses that are not immediately impacted may be impacted, either 
positively (i.e., gaining small business status) or negatively (i.e., 
losing small business status) someday as they continue to grow and 
approach the size standard threshold as in the current 3-year averaging 
method. However, SBA is not able to quantify such impacts now.
d. Benefits
    The most significant benefits to businesses from the change in the 
period for calculation of average annual receipts from 3 years to 5 
years include: (i) Enabling some mid-size businesses currently 
categorized above their corresponding size standards to gain or regain 
small business status and thereby qualify for participation in Federal 
assistance intended for small businesses, and (ii) allowing some 
advanced and larger small businesses close to their size thresholds to 
lengthen their small business status for a longer period and thereby 
continue their participation in Federal small business programs. These 
include Federal procurement programs intended for small businesses. 
Federal procurement programs provide targeted, set-aside opportunities 
for small businesses under SBA's various business development and 
contracting programs, including 8(a)/BD, HUBZone, WOSB, EDWOSB, and 
SDVOSB programs. Benefits accruing to businesses gaining and extending 
small business status are presented below in Table 7, ``Positive 
Impacts of Changing the Averaging Period for Receipts from 3 Years to 5 
Years.'' The results in Table 7 pertain to businesses and industries 
subject to SBA's receipts-based size standards only.
    As shown in Table 7, of 43,444 firms not currently considered small 
in any receipts-based size standards, 3,260 (or 7.5 percent) would 
benefit from the proposed change by gaining or regaining small business 
status under the 5-year receipts average in at least one NAICS industry 
that is subject to a receipts-based size standard. Additionally, about 
3,800 or 1.3 percent of small businesses within 10 percent below size 
standards would see their annual receipts decrease under the 5-year 
averaging period, consequently enabling them to keep their small 
business status for a longer period.
    Using the 2012 Economic Census, SBA estimated that about 7,800 or 
2.9 percent of currently large businesses would gain or regain small 
business status and more than 62,800 or 0.9 percent of total small 
businesses would see their small business status extended for a longer 
period as the result of this proposed rule. These results are shown in 
Table 7, below.

         Table 7--Positive Impacts of Changing the Averaging Period for Receipts From 3 Years to 5 Years
----------------------------------------------------------------------------------------------------------------
                                                                                       Firms
                                                                  Firms  gaining     extending         Total
                    Impact of proposed change                          small           small         positive
                                                                     business        business         impact
                                                                      status          status
----------------------------------------------------------------------------------------------------------------
No. of impacted industries......................................             372             361         \1\ 420
No. of large firms becoming small or/and small firms extending             3,260           3,801       \2\ 6,690
 small business status--SAM (as of Sept 1, 2018)................
Large firms becoming small or/and small firms with extended                  7.5             1.3             1.9
 small business status as % of total large or/and small firms in
 the baseline--SAM (as of Sept 1, 2018).........................
No. of large firms becoming small or/and small firms extending             7,822          62,822          70,644
 small business status--2012 Economic Census....................
Large firms becoming small or/and small firms extending small                2.9             0.9             1.0
 business status as % of total large or/and small firms in the
 baseline--2012 Economic Census.................................
No. of large firms becoming small or/and small firms extending               910             838       \2\ 1,700
 small business status for small business contracts (FPDS-NG)...
Additional small business dollars available to newly qualified              $961            $133          $1,094
 firms or/and current small firms with extended small business
 status ($ million).............................................
Additional small business dollars as % total small business                  1.5             0.2             1.7
 contract dollars in the baseline...............................
----------------------------------------------------------------------------------------------------------------
\1\ Total impact represents total unique industries impacted to avoid double counting as some industries have
  large firms gaining small business status and small firms extending small business status.
\2\ Total impact represents total unique firms impacted to avoid double counting as some firms may gain small
  business status in at least one NAICS code, while extending small business status in at least one other NAICS
  code.


[[Page 66575]]

    With more businesses qualifying as small under the 5-year receipts 
average, Federal agencies will have a larger pool of small businesses 
from which to draw for their small business procurement programs. 
Growing small businesses that are close to exceeding the current size 
standards will be able to retain their small business status for a 
longer period under the 5-year receipts average, thereby enabling them 
to continue to benefit from the small business programs.
    Based on the FPDS-NG data for fiscal years 2015-2017, as shown in 
Table 7, SBA estimates that those newly qualified small businesses 
(i.e., large businesses gaining small business status) under this final 
rule, if adopted, could receive $961 million in small business contract 
dollars annually under SBA's small business, 8(a)/BD, HUBZone, WOSB, 
EDWOSB, and SDVOSB programs. That represents a 1.5 percent increase to 
total small business contract dollars from the baseline. Additionally, 
small businesses could receive approximately $133 million in additional 
small business contract dollars because of extension of their small 
business status, which is about a 0.2 percent increase from the total 
small business contract dollars in the baseline. That is, businesses 
gaining or extending small business status could receive about $1.1 
billion in additional small business contract dollars, which is a 1.7 
percent increase to the total small business dollars in the baseline.
    The added competition from more businesses qualifying as small may 
result in lower prices to the Federal Government for procurements set 
aside or reserved for small businesses, but SBA cannot quantify this 
impact. Costs could be higher when full and open contracts are awarded 
to HUBZone businesses that receive price evaluation preferences. 
However, with agencies likely setting aside more contracts for small 
businesses in response to a larger pool of small businesses under the 
proposed change, HUBZone firms might actually end up getting more set-
aside contracts and fewer full and open contracts, thereby resulting in 
some cost savings to agencies. While SBA cannot estimate such costs 
savings, as it is impossible to determine the number and value of 
unrestricted contracts to be otherwise awarded to HUBZone firms that 
will be awarded as set-asides, such cost savings are likely to be 
relatively small as only a small fraction of full and open contracts 
are awarded to HUBZone businesses.
    Additionally, the newly defined small businesses, as well as those 
with a longer small business status, would also benefit from reduced 
fees, less paperwork, and fewer compliance requirements but SBA has no 
data to quantify this impact.
    The change from a 3-year averaging period to a 5-year averaging 
period will also address some of the challenges and uncertainties small 
businesses face in the open market once they graduate from their small 
business status. Small and mid-size businesses experience a 
considerable disadvantage in competing for full and open contracts 
against large businesses, including the largest in the industry. These 
large businesses have several competitive advantages over small and 
mid-size firms, including vast past performance qualifications and 
experience, strong brand-name recognition, a plethora of professional 
certifications, security clearances, and greater financial and 
marketing resources. Small and mid-size businesses cannot afford to 
maintain these resources, leaving them at a considerable disadvantage.
    With contracts getting bigger, one large set-aside contract could 
throw a firm out of its small business status, thereby subjecting it to 
certain requirements that apply to other-than-small firms, such as 
developing subcontracting plans. That firm may not have the 
infrastructure, existing business processes, and/or other resources in 
place in order to comply with such requirements.
    By allowing smaller mid-size companies that have just exceeded the 
size threshold to regain small business status and advanced small 
businesses close to size standards to prolong their small business 
status for a longer period, using the 5-year receipts average can 
expand the pool of qualified small firms for agencies to draw from to 
meet their small business requirements.
e. The Costs
    As stated in the proposed rule, the change enacted under Public Law 
115-324 may not always and necessarily benefit every small business 
concern. When businesses' annual revenues are declining or when annual 
revenues for the latest 3 years are lower than those for the earliest 2 
years of the 5-year period, the 5-year average would be higher than the 
3-year average, thereby ejecting small businesses out of their small 
business status sooner or rendering some small businesses other than 
small immediately. Similarly, small businesses that lose their small 
business status would have to wait longer to qualify as small again. 
Such small businesses would no longer be eligible for Federal small 
business opportunities, such as Federal small business contracts and 
other Federal benefits (such as reduced fees and exemptions from 
certain paperwork and compliance requirements) available to small 
businesses. However, the SBA's decision to grant a 2-year transition 
period allowing businesses to elect to use either the 5-year receipts 
average or the 3-year average receipts will mitigate such impacts. SBA 
believes the transition period provides small businesses with enough 
time to make a permanent transition to the 5-year averaging method 
without facing such impacts.
    By enabling mid-size businesses to regain small business status and 
lengthening the small business status of advanced and successful larger 
small businesses, the final rule may disadvantage smaller small 
businesses in more need of Federal assistance than their larger 
counterparts in competing for Federal opportunities. SBA frequently 
receives concerns from smaller small businesses that they also lack 
resources, past performance qualifications and expertise to be able to 
compete against more resourceful, qualified and experienced larger 
small businesses for Federal opportunities for small businesses. With a 
larger pool of businesses qualifying as small, SBA expects Federal 
agencies to set aside more contracts to small businesses thereby 
expanding opportunities for all small businesses. SBA believes that 
overall benefits to small businesses from this rule change outweigh the 
costs to small businesses.
    Besides having to register in SAM to be able to participate in 
Federal contracting and update the SAM profile annually, small 
businesses incur no direct costs to gain or retain their small business 
status. All businesses willing to do business with the Federal 
Government have to register in SAM and update their SAM profiles 
annually, regardless of their size status. SBA believes that a vast 
majority of businesses that are willing to participate in Federal 
contracting are already registered in SAM.
    The change to the 5-year receipts average may entail some 
additional administrative costs to the Federal Government because more 
businesses may qualify as small for Federal small business programs. 
For example, there will be more firms eligible for enrollment in the 
Dynamic Small Business Search (DSBS) database or in certify.sba.gov; 
more firms seeking certification as 8(a)/BD or HUBZone firms or 
qualifying for small business, WOSB, EDWOSB, and SDVOSB status; and 
more firms applying for SBA's 8(a)/BD and All Small Mentor-
Prot[eacute]g[eacute]

[[Page 66576]]

programs. With an expanded pool of small businesses, it is likely that 
Federal agencies will set aside more contracts for small businesses 
under the new rule. One may surmise that this might result in a higher 
number of small business size protests and additional processing costs 
to agencies. However, the SBA's historical data on size protests 
actually shows that the number of size protests decreased after an 
increase in the number of businesses qualifying as small as a result of 
size standards revisions as part of the first 5-year review of size 
standards. Specifically, on an annual basis, the number of size 
protests dropped from about 600 during fiscal years 2011-2013 (review 
of most receipts-based size standards was completed by the end of 
fiscal year 2013) to about 500 during fiscal years 2014-2016. However, 
with more years of data to be reviewed, 5-year averaging may increase 
time needed by size specialists to process a size protest.
    Additionally, some Federal contracts may possibly have higher 
costs. With a greater number of businesses defined as small under the 
5-year averaging method, Federal agencies may choose to set aside more 
contracts for competition among small businesses only instead of using 
full and open competition. The movement of contracts from unrestricted 
competition to small business set-aside contracts might result in 
competition among fewer total bidders, although there will be more 
small businesses eligible to submit offers under the proposed change. 
However, the additional costs associated with fewer bidders are 
expected to be minor since, by law, procurements may be set aside for 
small businesses under the 8(a)/BD, HUBZone, WOSB, EDWOSB, or SDVOSB 
programs only if awards are expected to be made at fair and reasonable 
prices.
    Costs may also be higher when full and open contracts are awarded 
to HUBZone businesses that receive price evaluation preferences. 
However, with agencies likely setting aside more contracts for small 
businesses in response to the availability of a larger pool of small 
businesses under the 5-year receipts average, HUBZone firms might 
actually end up getting fewer full and open contracts, thereby 
resulting in some cost savings to agencies. However, such cost savings 
are likely to be minimal as only a small fraction of unrestricted 
contracts are awarded to HUBZone businesses.
f. Transfer Impacts
    The change from a 3-year averaging period to a 5-year averaging 
period may result in some redistribution of Federal contracts between 
businesses gaining or extending small business status and large 
businesses, and between businesses gaining or extending small business 
status and other existing small businesses. However, it would have no 
impact on the overall economic activity since the total Federal 
contract dollars available for businesses to compete for will not 
change. While SBA cannot quantify with certainty the actual outcome of 
the gains and losses from the redistribution of contracts among 
different groups of businesses, it can identify several probable 
impacts in qualitative terms. With the availability of a larger pool of 
small businesses under the proposed change, some unrestricted Federal 
contracts may be set aside for small businesses. As a result, large 
businesses may lose access to some Federal contracts. Similarly, some 
currently small businesses may obtain fewer set-aside contracts due to 
the increased competition from some large businesses now qualifying as 
small and advanced small businesses remaining small for a longer 
period. This impact may be offset by a greater number of procurements 
being set aside for all small businesses. With large businesses 
qualifying as small and advanced larger small businesses remaining 
small for a longer period under the proposed rule, smaller small 
businesses could face some disadvantages in competing for set-aside 
contracts against their larger counterparts. However, SBA cannot 
quantify these impacts.

B. Executive Order 12988

    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. This action does 
not have retroactive or preemptive effect.

C. Executive Order 13132

    For purposes of Executive Order 13132, SBA has determined that this 
final rule will not have substantial, direct effects on the States, on 
the relationship between the national government and the States, or on 
the distribution of power and responsibilities among the various levels 
of government. Therefore, SBA has determined that this final rule has 
no federalism implications warranting preparation of a federalism 
assessment.

D. Executive Order 13563

    Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, reducing costs, harmonizing rules, and promoting 
flexibility. A description of the need for this regulatory action and 
benefits and costs associated with this action, including possible 
distributional impacts that relate to Executive Order 13563, is 
included above in the Benefit-Cost Analysis under Executive Order 
12866. Additionally, Executive Order 13563, Section 6, calls for 
retrospective analyses of existing rules.
    Following the enactment of Public Law 115-324, SBA issued a public 
notice advising business and contracting communities that SBA must go 
through a rulemaking process to implement the new law and that 
businesses still must report their receipts based on a 3-year average 
until SBA changes its regulations. SBA updated the Small Business 
Procurement Advisory Council (SBPAC) at its March 26, 2019, April 23, 
2019, and August 26, 2019, meetings about SBA's rulemaking process to 
implement Public Law 115-324. On April 18, 2019, SBA also presented an 
update on the implementation of Public Law 115-324 at the 2019 Annual 
Government Procurement Conference. Through phone calls and emails, SBA 
also advised business and contracting communities and other interested 
parties about the SBA's process to implement the new law.
    Additionally, SBA issued a revised white paper titled ``Small 
Business Size Standards: Revised Size Standards Methodology'' and 
published a notice in the April 27, 2018, issue of the Federal Register 
(83 FR 18468) to advise the public that the document is available for 
public review and comments. The Revised Size Standards Methodology 
explains how SBA establishes, reviews, and modifies its receipts-based 
and employee-based small business size standards. On April 11, 2019, 
SBA published a Federal Register Notice (84 FR 14587) advising the 
public that the Agency has issued the revised final white paper.

E. Executive Order 13771

    This rule is not expected to be an Executive Order 13771 regulatory 
action because this rule is not significant under Executive Order 
12866.

F. Final Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this final rule may 
have a significant economic impact on a substantial number of small 
businesses in industries subject to receipts-based size standards. As 
described above, this rule may affect small businesses in those 
industries seeking Federal contracts and assistance under other Federal 
small business programs.

[[Page 66577]]

    Immediately below, SBA sets forth a final regulatory flexibility 
analysis (FRFA) of this final rule to address the following questions: 
(1) What is the need for and objective of the rule?; (2) What is SBA's 
description and estimate of the number of small businesses to which the 
rule will apply?; (3) What are the projected reporting, record-keeping, 
and other compliance requirements of the rule?; (4) What are the 
relevant Federal rules that may duplicate, overlap, or conflict with 
the rule?; and (5) What alternatives will allow the Agency to 
accomplish its regulatory objectives while minimizing the impact on 
small businesses?
1. What is the need for and objective of the rule?
    Recently, Public Law 115-324 amended section 3(a)(2)(C)(ii)(II) of 
the Small Business Act by modifying the period for calculating average 
annual receipts for prescribing size standards for business concerns in 
services industries by an agency without separate statutory authority 
to issue size standards from 3 years to 5 years. This final rule 
implements the intent of Public Law 115-324 and makes consistent 
changes to SBA's definition of annual receipts by amending the SBA's 
regulations on the calculation of average annual receipts for all 
receipts-based standards from over 3 years to over 5 years, except for 
the Business Loan Programs and Disaster Loan Programs.
2. What are SBA's description and estimate of the number of small 
businesses to which the rule will apply?
    This final rule applies to all small businesses that are subject to 
a receipts-based size standard. Based on the 2012 Economic Census 
special tabulations, 2012 County Business Patterns Reports, and 2012 
Agricultural Census tabulations, of a total of about 7.2 million firms 
in all industries with receipts-based size standards to which this 
final rule will apply, 6.9 million or about 96.0 percent are considered 
small under the 3-year annual receipts average. Of 346,958 total 
concerns in SAM 2018 to which the rule will apply, about 303,500 or 
87.5 percent were small in at least one NAICS industry with a receipts-
based size standard. Similarly, based on the data from FPDS-NG for 
fiscal years 2015-2017, on average, about 88,770 unique firms in 
industries subject to receipts-based size standards received at least 
one Federal contract during that period, of which 83 percent, or 73,825 
were small.
3. What are the projected reporting, record-keeping and other 
compliance requirements of the rule?
    The final rule changes existing reporting or record-keeping 
requirements for small businesses. In reporting receipts to SBA for an 
SBA size determination after the final rule's effective date, 
businesses will report a 5-year average rather than a 3-year average 
which requires minimal effort. To qualify for Federal procurement and a 
few other programs, businesses are required to register in SAM and to 
self-certify that they are small at least once annually. Therefore, 
businesses opting to participate in those programs must comply with SAM 
requirements. There are no costs associated with SAM registration or 
certification. The change from a 3-year averaging period to a 5-year 
averaging period may result in some redistribution of Federal contracts 
between businesses gaining or extending small status and large 
businesses, and between businesses gaining or extending small status 
and other existing small businesses. However, it would have no impact 
on the overall economic activity since the total Federal contract 
dollars available for businesses to compete for will not change.
4. What are the relevant Federal rules which may duplicate, overlap or 
conflict with the rule?
    Under section 3(a)(2)(C) of the Small Business Act, 15 U.S.C. 
632(a)(2)(C), Federal agencies must use SBA's size standards to define 
a small business, unless specifically authorized by statute to do 
otherwise. In 1995, SBA published in the Federal Register a list of 
statutory and regulatory size standards that identified the application 
of SBA's size standards as well as other size standards used by Federal 
agencies (60 FR 57988 (November 24, 1995)). SBA is not aware of any 
Federal rule that would duplicate or conflict with establishing size 
standards.
    However, the Small Business Act and SBA's regulations allow Federal 
agencies to develop different size standards if they believe that SBA's 
size standards are not appropriate for their programs, with the 
approval of SBA's Administrator (13 CFR 121.903). The Regulatory 
Flexibility Act, 5 U.S.C. 601(3), authorizes an Agency to establish an 
alternative small business definition, after consultation with the 
Office of Advocacy of the U.S. Small Business Administration.
5. What alternatives will allow the Agency to accomplish its regulatory 
objectives while minimizing the impact on small entities?
    By law, SBA is required to develop numerical size standards for 
establishing eligibility for Federal small business assistance 
programs. Other than varying size standards by industry and changing 
the size measures or changing a measurement period, no practical 
alternative exists to the systems of numerical size standards. As 
stated elsewhere, the objective of this final rule is to change SBA's 
regulations on the calculation of business size in terms of average 
annual receipts to implement Public Law 115-324.
    This rule is expected to affect a substantial number of small 
entities, but the effects are not expected to be significant. However, 
to mitigate unintended negative impacts of a 5-year averaging period on 
small businesses and to allow small businesses more time to prepare for 
a switch to the 5-year receipts average, in this final rule, SBA is 
allowing, through January 6, 2022, businesses to elect to calculate 
average annual receipts using either a 3-year averaging period or a 5-
year averaging period. SBA also decided that the Business Loan Programs 
and Disaster Loan Programs are not included in this final rule and will 
instead be considered in a future proposed rule.

G. Paperwork Reduction Act

    SBA has determined that as a result of this final rule, an 
information collection will need to be revised.
    1 . SBA Form 355, Information for Small Business Size 
Determination. SBA submitted this information collection to OMB for 
approval of the changes described below and received conditional 
approval pending any change as a result of public comments. The final 
information collection package will be resubmitted to OMB concurrent 
with publication of this final rule. Changes have been made to Parts 
III and IV of the form to address the change from 3 years to 5 years 
for calculating average annual receipts. Other revisions to the form 
have been made to delete unnecessary questions, clarify certain 
previously approved requests for information, and in some instances, to 
request additional information where SBA has determined there is a 
programmatic need. As noted in the proposed rule and the OMB 
submission, these deletions and clarifications, though not required by 
the statute, will alleviate the additional burden posed by changing 
from 3 years to 5 years for calculating average annual receipts.

[[Page 66578]]

    (a) SBA amended the General Instructions section to define 
``concern'' and ``principal stockholders''; state that separate 
affiliation rules apply in some of SBA's loan and research programs; 
remove obsolete information about industries with special size 
standards; state that dormant or inactive firms must be disclosed; and 
to include in the certification a statement that accompanying 
documentation is true and correct.
    (b) In Part 1, SBA clarified that the information relates to the 
applicant business; added a checkbox for the firm to identify its 
corporate organization structure; required a firm to disclose whether 
it is organized for profit; and removed various obsolete or unnecessary 
information regarding county/city, purpose of the size determination, 
the contracting agency, the business's major products or services and 
shares of sales, addresses of owners or officers, and recently 
completed mergers. Part 1 was also amended to request ownership 
information for owners that are entities until the respondent 
identifies the ultimate owners that are natural persons.
    (c) In Part II, SBA limited the information requested about 
employees to businesses that are being evaluated under an employee-
based size standard.
    (d) In Part III, SBA limited the information request about receipts 
to businesses that are being evaluated under a receipts-based size 
standard. SBA also added two additional lines to the entries for annual 
receipts so that a business that has been in business for 5 years can 
provide information about its most recently completed 5 fiscal years. 
SBA added a question to allow the concern to elect a 3-year average or 
a 5-year average during the transition period that ends January 6, 
2022.
    (e) In Part IV, SBA added that the business must provide 
information for any business that the applicant's owner reports on a 
Schedule C or Schedule E of the owner's personal tax returns if the 
owner or an immediate family member has a controlling interest in the 
business; removed the request for addresses of individual owners and 
managers; requested ownership information for owners that are entities 
until the respondent identifies the ultimate owners that are natural 
persons; limited the request for employee information to applicants 
being evaluated under an employee-based size standard; limited the 
information request for receipts information to applicants being 
evaluated under a receipts-based size standard; and added two rows to 
the receipts table so that the receipts of acknowledged affiliates are 
reported based on a 5-year average.
    (f) In Part V, SBA removed requests about acknowledged affiliates 
that are covered in Part IV; deleted questions about performance of 
work on the contract, financial impact of termination for default, and 
specific terms and conditions of the contract; and added a question 
about actual or proposed subcontracts between the applicant and any of 
its alleged affiliates.
    SBA determined that these changes to the Form 355 will not impact 
the paperwork burden following the transition period, and it will 
remain at 4 hours. The changes require a business in an industry with a 
receipts-based size standard, if selecting to use the 5-year average 
during the transition period or if certifying after the transition 
period, to gather information about the business's 5 prior fiscal years 
and complete information about its 5 prior fiscal years and the 5 prior 
fiscal years for acknowledged affiliates. However, a business with a 
receipts-based size standard will not complete information about its 
number of employees. Similarly, a business with an employee-based size 
standard will not complete information about its receipts. 
Additionally, SBA has removed all requests for the addresses of 
individual owners and managers, and deleted 3 questions from Part V.
    The title, summary of the amended information collection, 
description of respondents, and an estimate of the reporting burden are 
discussed below. Included in the estimate is the time for reviewing 
instructions, searching existing data, and completing and reviewing 
each collection of information.
    Title and Description: SBA Form 355, Information for Small Business 
Size Determination. The information provided in this form will be used 
by SBA for a size determination of a business applying for assistance 
available to small businesses under any program administered by this 
Agency, except for its SBIC Program which uses SBA Form 480, or at the 
request of another Federal agency for purposes of its small business 
program.
    Need and Purpose: This information collection is necessary for SBA 
to, among other things, evaluate the eligibility of an applicant for 
SBA's small business programs.
    OMB Control Number: 3245-0101.
    Description of and Estimated Number of Respondents: This 
information will be collected from small businesses seeking an SBA 
determination of size. Based on historical information, SBA estimates 
this number to be between 500 and 600 each year.
    Estimated Response Time: 4 hours.
    Total Estimated Annual Hour Burden: 2,000-2,400.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Individuals with 
disabilities, Loan programs--business, Reporting and recordkeeping 
requirements, Small businesses.

    For the reasons set forth in the preamble, SBA amends 13 CFR part 
121 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for part 121 continues to read as follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 662, and 694a(9).


0
2. Amend Sec.  121.104 by revising the second sentence of paragraph (a) 
introductory text and by revising paragraphs (c) and (d)(2) through (4) 
to read as follows:


Sec.  121.104  How does SBA calculate annual receipts?

    (a) * * * Generally, receipts are considered ``total income'' (or 
in the case of a sole proprietorship ``gross income'') plus ``cost of 
goods sold'' as these terms are defined and reported on Internal 
Revenue Service (IRS) tax return forms (such as Form 1120 for 
corporations; Form 1120S for S corporations; Form 1120, Form 1065 or 
Form 1040 for LLCs; Form 1065 for partnerships; Form 1040, Schedule F 
for farms; Form 1040, Schedule C for other sole proprietorships) * * *
* * * * *
    (c) Period of measurement. (1) Except for the Business Loan and 
Disaster Loan Programs, annual receipts of a concern that has been in 
business for 5 or more completed fiscal years means the total receipts 
of the concern over its most recently completed 5 fiscal years divided 
by 5. For certifications submitted on or before January 6, 2022, rather 
than using the definitions in this paragraph (c), a concern submitting 
a certification may elect to calculate annual receipts and the receipts 
of affiliates using either the total receipts of the concern or 
affiliate over its most recently completed 5 fiscal years divided by 5, 
or the total receipts of the concern or affiliate over its most 
recently completed 3 fiscal years divided by 3.
    (2) Except for the Business Loan and Disaster Loan Programs, annual 
receipts

[[Page 66579]]

of a concern which has been in business for less than 5 complete fiscal 
years means the total receipts for the period the concern has been in 
business divided by the number of weeks in business, multiplied by 52.
    (3) Except for the Business Loan and Disaster Loan Programs, where 
a concern has been in business 5 or more complete fiscal years but has 
a short year as one of the years within its period of measurement, 
annual receipts means the total receipts for the short year and the 4 
full fiscal years divided by the total number of weeks in the short 
year and the 4 full fiscal years, multiplied by 52.
    (4) For the Business Loan and Disaster Loan Programs, annual 
receipts of a concern that has been in business for three or more 
completed fiscal years means the total receipts of the concern over its 
most recently completed three fiscal years divided by three. Annual 
receipts of a concern which has been in business for less than three 
complete fiscal years means the total receipts for the period the 
concern has been in business divided by the number of weeks in 
business, multiplied by 52. Where a concern has been in business three 
or more complete fiscal years but has a short year as one of the years 
within its period of measurement, annual receipts means the total 
receipts for the short year and the two full fiscal years divided by 
the total number of weeks in the short year and the two full fiscal 
years, multiplied by 52. For the purposes of this section, the Business 
Loan Programs consist of the 7(a) Loan Program, the Microloan Program, 
the Intermediary Lending Pilot Program, and the Development Company 
Loan Program (``504 Loan Program''). The Disaster Loan Programs consist 
of Physical Disaster Business Loans, Economic Injury Disaster Loans, 
Military Reservist Economic Injury Disaster Loans, and Immediate 
Disaster Assistance Program loans.
    (d) * * *
    (2) If a concern has acquired an affiliate or been acquired as an 
affiliate during the applicable period of measurement or before the 
date on which it self-certified as small, the annual receipts used in 
determining size status includes the receipts of the acquired or 
acquiring concern. This aggregation applies for the entire period of 
measurement, not just the period after the affiliation arose. However, 
if a concern has acquired a segregable division of another business 
concern during the applicable period of measurement or before the date 
on which it self-certified as small, the annual receipts used in 
determining size status do not include the receipts of the acquired 
division prior to the acquisition.
    (3) Except for the Business Loan and Disaster Loan Programs, if the 
business concern or an affiliate has been in business for a period of 
less than 5 years, the receipts for the fiscal year with less than a 
12-month period are annualized in accordance with paragraph (c)(2) of 
this section. Receipts are determined for the concern and its 
affiliates in accordance with paragraph (c) of this section even though 
this may result in using a different period of measurement to calculate 
an affiliate's annual receipts.
    (4) The annual receipts of a former affiliate are not included if 
affiliation ceased before the date used for determining size. This 
exclusion of annual receipts of such former affiliate applies during 
the entire period of measurement, rather than only for the period after 
which affiliation ceased. However, if a concern has sold a segregable 
division to another business concern during the applicable period of 
measurement or before the date on which it self-certified as small, the 
annual receipts used in determining size status will continue to 
include the receipts of the division that was sold.
* * * * *

0
3. Amend Sec.  121.106 by revising paragraph (b)(4)(ii) to read as 
follows:


Sec.  121.106  How does SBA calculate number of employees?

* * * * *
    (b) * * *
    (4) * * *
    (ii) The employees of a former affiliate are not counted if 
affiliation ceased before the date used for determining size. This 
exclusion of employees of a former affiliate applies during the entire 
period of measurement, rather than only for the period after which 
affiliation ceased. However, if a concern has sold a segregable 
division to another business concern during the applicable period of 
measurement or before the date on which it self-certified as small, the 
employees used in determining size status will continue to include the 
employees of the division that was sold.

0
4. Amend Sec.  121.903 by revising paragraphs (a)(1)(ii) and (iii) to 
read as follows:


Sec.  121.903  How may an agency use size standards for its programs 
that are different than those established by SBA?

    (a) * * *
    (1) * * *
    (ii) The size of a services concern by its average annual receipts 
over a period of at least 5 years, determined according to Sec.  
121.104;
    (iii) The size of other concerns on data over a period of at least 
5 years, determined according to Sec.  121.104; or,
* * * * *

    Dated: November 25, 2019.
Christopher M. Pilkerton,
Acting Administrator.
[FR Doc. 2019-26041 Filed 12-4-19; 8:45 am]
 BILLING CODE P