• July 31, 2022

Explanation of the “two year exemption” from the 8A certification

Many new businesses are interested in joining the 8a Certification program to take advantage of Federal Sole Source and Reserve Contracts. The average 8a business generates more than $4 million per year in federal revenue. So for a start-up business, getting 8a certified can create a potential bonanza for the business.

There are five main categories that a business and its owner must meet in order to obtain 8a certification. 1. Social disadvantage, 2. Economic disadvantage, 3. Potential to successfully complete federal contracts, 4. No present control issues, and 5. Good moral character. This article is about Qualifications #3, The Potential to Successfully Complete Federal Contracts.

Various 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 requirement of two years in business. A company must have been in business for two years before being admitted to the 8a program. The SBA will grant an exemption 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 to determine if a two-year waiver 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 main 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 any kind of guideline for the amount of revenue a business should have before attempting a two-year exemption, $50,000? $250,000? Does this assume that all other conditions are met?

Answer:

Yes, we look at revenue (there is no set amount because it depends on the industry), but we also look at where/who the contracts/revenue comes from (more than 1 or 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 starts working full-time in 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 past 2 years. Nevertheless; 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 (points application)

YES Waiver required

In this scenario, the two-year exemption will be required. Because the business did not generate revenue for the past 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 Dec 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 indicate that the owner has been the President (top official) for some time and that owner 1 has been signing contracts on behalf of the company for some time. The SBA will also take a close look at all potential control issues to make sure no one else has control over the homeowner.

When a two-year waiver is required, what is generally a winning 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 income tax return and a gain on that return.
3. The business owner must have a certain 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 strongly recommended that you conduct an analysis of your company’s sales potential.

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