Explanation of the “two-year exemption” from 8A certification
Many new businesses are interested in joining the 8a Certification program to take advantage of Federal Reserve and Sole Source Contracts. The average 8a business generates more than $4 million a year in federal revenue. So for a start-up company, getting 8a certified can lead to a potential bonanza for the company.
There are five main categories that a business and its owner must meet to be certified 8a. 1. Social disadvantage, 2. Economic disadvantage, 3. Potential to successfully complete federal contracts, 4 No control issues present, and 5. Good moral character. This article is about Qualification #3, The Potential for Successful Completion of Federal Contracts.
Several tests are applied to an 8a company to demonstrate that it has the ability to successfully complete federal contracts. The biggest challenge for a new company is the two-year in-business requirement. A company must have been in business for two years before being admitted to the 8a program. The SBA will grant a waiver to businesses and in this article I am going to go over three scenarios for how the SBA will view an applicant under the given set of conditions.
When does a business need a two-year waiver for 8(a) certification?
The two basic factors in determining if a two-year exemption is required:
1. Has the applicant in question been in business for 2 years as evidenced by two tax returns completing a full twelve month tax cycle?
2. Has the applicant’s concern generated business in the primary NAICS code during the past two years?
Both conditions must be met.
Sometimes it may not be clear whether or not you need to complete a two-year waiver. The following are case study examples of when a business must file a two-year exemption and when it is not required.
Questions to the SBA:
Do you use some sort of guideline for how much income a business should have before attempting a two year, $50,000 exemption? $250,000? Does this assume that all other conditions are met?
Answer:
Yes, we look at the revenue (there is no fixed amount because it depends on the industry), but we also look at where/who the contracts/revenue is coming from (more than 1-2 sources).
Scenario I
Year 1 – $0 sales
Year 2 – $189,000
Year 3 – $369,000
Year May 4: The owner finally quits his other job and begins to devote himself full time to the business. Total business sales are $457,000 in year 4.
Year January 5 – application time
NO waiver required
The two-year exemption is not required because the business has generated income for the last 2 years. However; the SBA will review the owner’s management experience to confirm the potential for success.
Scenario II
Year 1 – $100,000 in sales
Year 2 – $500,000 in sales
Year 3 – $0 sales
Year 4 – January, new owner buys business $200,000 in sales
Year 5 – January (application of points)
YES Waiver required
In this scenario, the two-year exemption will be required. Because the business did not generate revenue for the last two years in its primary NAICS code.
Scenario III
Year 1 – $250,000 in sales Owner 1 (40%), Owner 2 (30%), Owner 3 (30%) – Owner 1 is president and signs all contracts, is the highest paid, and is in control of business decisions .
Year 2 – $500,000 in sales
Year 3 – $500,000 in sales
Year 4 – $500,000 in sales
Year December 5: Owner 1 buys Owner 2 and becomes a 70% owner. $500,000 in sales.
Year January 6 – (application time)
NO waiver required
A two-year exemption is not required because the business has been in existence for more than two years. In this scenario, the SBA will review the legal documents closely. The documents should state that the owner has been the president (highest ranking official) for some time and that the owner 1 has been signing contracts on behalf of the company for some time. The SBA will also look closely at any potential control issues to make sure no one else has control over the owner.
When a two-year waiver is required, what is generally a win-win scenario?
1. In general, the SBA likes to see at least $150,000 in sales since the start of the business.
2. At least 1 tax return with income and a gain on that return.
3. The business owner must have some degree of experience and business acumen.
4. 51% or more of the owner must be working full time for the business.
8a certification is one of the best ways for a small business to grow with federal contracts. If your company has the ability to earn this certification, it is highly recommended that you conduct an analysis of your company’s sales potential.