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Five 8(a) Annual Review Tips

TIP 1: Keep an eye on your Adjusted Net Worth. To remain economically disadvantaged while you are a participant in the SBA 8(a) Program the 8(a) applicant(s) Adjusted Net Worth must be less than $850,000 when you submit your 8(a) Annual review.

The algorithm used to determine Adjusted Net Worth for 8(a) Certification purposes is:

Adjusted Net Worth = Personal Assets – Personal Liabilities – [Equity in primary residence + value of ownership interest in applicant business + value of any IRA/401(k) or other retirement account that are subject to a penalty for early withdrawal]

If the applicant is married and the asset or liability is jointly held, you split the value 50/50. If the applicant is married and lives in a community property state, you only split assets and liabilities 50/50 if you have a transmutation or pre/post nuptial agreement that states otherwise.

Each applicant, and their spouse, must submit a separate Personal Financial Statement. You may also have to submit statements for each asset or liability supporting the amounts reported. These statements should not be any older than 30 days when the Annual Review is completed.

*Important* If you transfer an asset out of the applicant’s name for less than fair market value the full amount of the asset at the time of the transfer will be re attributed back to the applicant.

TIP 2: Watch out for Excessive Withdrawals. Withdrawals are excessive if in the aggregate during any fiscal year of the Participant they exceed (i) $250,000 for firms with sales up to $1,000,000; (ii) $300,000 for firms with sales between $1,000,000 and $2,000,000; and (iii) $400,000 for firms with sales exceeding $2,000,000.

The term withdrawal includes, but is not limited to, the following: Cash dividends; distributions in excess of amounts needed to pay S Corporation, LLC or partnership taxes; cash and property withdrawals; payments to immediate family members not employed by the Participant; bonuses to officers; and investments on behalf of an owner. Although officers’ salaries are generally not considered withdrawals for purposes of this paragraph, SBA will count those salaries as withdrawals where SBA believes that a firm is attempting to circumvent the excessive withdrawal limitations through the payment of officers’ salaries. SBA will look at the totality of the circumstances in determining whether to include any specific amount as a withdrawal under this paragraph.

TIP 3: Watch your percentage of 8(a) vs Non 8(a) revenue earned as you enter the transitional stage of the 8(a) Program.

To ensure that Participants do not develop an unreasonable reliance on 8(a) awards, and to ease their transition into the competitive marketplace after graduating from the 8(a) program, Participants must make maximum efforts to obtain business outside the 8(a) program. Work performed by an 8(a) Participant for any Federal department or agency other than through an 8(a) contract, including work performed on orders under the General Services Administration Multiple Award Schedule program, and work performed as a subcontractor, including work performed as a subcontractor to another 8(a) Participant on an 8(a) contract, qualifies as work performed outside the 8(a) program.

During both the developmental and transitional stages of the 8(a) program, a Participant must make substantial and sustained efforts, including following a reasonable marketing strategy, to attain the targeted dollar levels of non-8(a) revenue established in its business plan. It must attempt to use the 8(a) program as a resource to strengthen the firm for economic viability when program benefits are no longer available.

Required non-8(a) business activity targets during transitional stage—(1) General. During the transitional stage of the 8(a) program, a Participant must achieve certain targets of non-8(a) contract revenue (i.e., revenue from other than sole source or competitive 8(a) contracts). These targets are called non-8(a) business activity targets and are expressed as a percentage of total revenue. The targets call for an increase in non-8(a) revenue over time.

Non-8(a) business activity targets. During their transitional stage of program participation, Participants must meet the following non-8(a) business activity targets each year:

  • Year 1 – 15%
  • Year 2 – 25%
  • Year 3 – 35%
  • Year 4 – 45%
  • Year 5 – 55%

TIP 4: Make sure your financial statements breakout 8(a) and Non 8(a) Revenue.

Your annual financial statements, specifically your Profit & Loss Statement, must show a breakout of your revenue earned by any 8(a) contract revenue and any non 8(a) revenue. This is a common issue we see when we perform 8(a) Annual Reviews for our clients.

TIP 5: Ensure that you provide the correct type of prepared financials depending on your gross annual receipts.

Participants with gross annual receipts of more than $10,000,000 must submit to SBA audited annual financial statements prepared by a licensed independent public accountant, within 120 days after the close of the concern’s fiscal year.

Participants with gross annual receipts between $2,000,000 and $10,000,000 must submit to SBA reviewed annual financial statements prepared by a licensed independent public accountant, within 90 days after the close of the concern’s fiscal year.

Participants with gross annual receipts of less than $2,000,000 must submit to SBA an annual statement prepared in-house or a compilation statement prepared by a licensed independent public accountant, verified as to accuracy by an authorized officer, partner, limited liability member, or sole proprietor of the Participant, including signature and date, within 90 days after the close of the concern’s fiscal year. .

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