SBA 8(a) Business Development Program – Planning for Continued Participation with Income, Net Worth, and Excessive Withdrawal Compliance
Key Details: The Small Business Administration (SBA) 8(a) Business Development Program is part of the federal government’s goal to award at least 5% of federal contracting amounts to small and disadvantaged businesses each year. A key objective of this program is to promote participation and economic growth for small businesses that are owned by socially and economically disadvantaged individuals. The government provides an advantageous limit to competition for small businesses who are part of the Business Development Program by setting aside specific contracts for which these businesses can compete.
Qualifications for the SBA 8(a) Business Development Program
There are five basic qualifications required to participate in the 8(a) program, which are:
- You must be a small business
- You must not have previously been a part of the 8(a) program
- Your business must be at least 51% owned and controlled by U.S. citizens that are socially and economically disadvantaged
- You have a personal net worth of less than $750,000, an adjusted gross income (AGI) of less than $350,000 annually, and assets of less than $6,000,000
- You must demonstrate good character and the potential to perform on contracts
Individuals who have had their business accepted to the 8(a) program and are successful in developing and capturing business will need to give attention to the fourth item above, specifically the AGI, net worth, and the related excessive withdrawal requirements for continued program participation. The SBA’s annual review process requires program participants to submit personal financial information to support continued eligibility.
Submitting Information for the SBA 8(a) Business Development Program
- The SBA will presume that an individual is not economically disadvantaged if his or her adjusted gross income averaged over the three preceding years exceeds $350,000. This can be calculated through adding up your AGI that is reported on the first page of your federal tax returns and averaging the total. Other sources of income other than the operation of the 8(a) business will be included in this calculation.
- Distributions from your business can also be included in your AGI calculation. Thus, withdrawals for personal or tax purposes, other than for satisfying tax obligations arising in the normal course of operating the 8(a) firm, will be included. For example, assume an 8(a) owner takes wages of $150,000 and distributions of $350,000. If the individual’s tax liability arising from the 8(a) business equates to only $100,000, that owner has received excess distributions which would be included in the AGI calculation. This results in an AGI of $400,000 which is above the limit.
- A three-year rolling average AGI is below $350,000 is a starting point for compliance. Disadvantaged owners averaging greater than $350,000 or receiving distributions exceeding tax on 8(a) participant profits must conduct a more detailed analysis of AGI. If you are filing taxes jointly with your spouse, then you must separate any portion of income reported between you and your spouse. Further analysis can be performed for owners of an S Corporation, Limited Liability Company (LLC), or Partnership by deducting any income reinvested (less distributions taken).
Net Worth Requirements:
- The net worth of an individual claiming disadvantage must remain less than $750,000 throughout program participation.
- The value of an owner’s personal assets such as a home, retirement accounts, and value of the business are not included in this net worth calculation except when portions of assets and equity are gained through excessive withdrawals from the 8(a) business.
- The income and assets of a spouse are also not included in the calculation. But an important item to note is that the SBA will be checking for transfers between an owner and their spouse.
Excessive Withdrawal Rules:
- Overlaps and interacts with AGI and Net Worth requirements.
- Withdrawals are excessive if in aggregate during any fiscal year they exceed $250,000 to $400,000 depending on annual sales.
- Withdrawals include cash dividends, distributions in excess of amounts needed to pay pass-through entity taxes, cash withdrawals, payments to family members not employed by the business, officer bonuses, investments on behalf of the owner, and other items with the SBA maintaining discretion in making determinations for specific items.
- Officers’ salaries may be deemed excessive withdrawals when salaries exceed a reasonable level or when the SBA determines that there is intent to pay salary to avoid the withdrawals limit.
- In the simple example from the AGI Requirements section above, the owner has already reached a possible excessive withdrawal threshold ($250,000) with their non-tax distributions meaning that any other actions considered withdrawals could place the Participant over the withdrawal limit for the fiscal year.
For continued participation and 8(a) program eligibility, it is important to estimate, model, and monitor economically disadvantaged individuals AGI and Net Worth along with the constraints to participating business withdrawals. A determination that an owner is no longer economically disadvantaged or excessive withdrawals may result in 8(a) program early graduation or termination. Early graduation and termination can not only prevent the award of new 8(a) contracts, but also interfere with existing 8(a) contract option year exercise and modifications.
The SBA 8(a) Business Development Program is a fantastic way for qualified owners and small businesses to get a head start building their contract portfolio. Through lowered competition, owners will have a higher chance of working on more contracts and growing their business. Small businesses that would like to learn more about the 8(a) Business Development Program can consult official resources provided by the Small Business Administration.
SBA 8(a) participants and business owners who have questions or concerns regarding their specific income or tax situation as it relates to 8(a) program participation can contact Ryan & Wetmore to discuss program and tax planning services.
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About Peter Ryan
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Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries, including government contracting. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.
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About Rosie Cheng
Rosie Cheng is a Finance Consultant at Ryan & Wetmore. She focuses on government contracting services and produces many of the firm’s government contracting newsletters. Rosie graduated from Georgetown University with a Master of Science in Management and from William and Mary with a Bachelor of Business Administration.