By Cindy Lennard, CPA, Tax Supervisor, Hoyman Dobson, CPA’s
The SBA’s 8(a) Business Development (BD) program was created to help small disadvantaged businesses compete and have access to the federal procurement program. According to SBA, in order to qualify for the 8(a) BD Program certification your company:
- Must be a small business
- Must be unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of the US and
- Must demonstrate potential for success
As an 8(a) BD certified business, your company must continuously meet eligibility criteria established by the SBA in order to maintain the economically disadvantaged small business status. These criteria are now being heavily enforced.
According to SBA, among the top ten 8(a) BD eligibility problems is the “Excessive Compensation or Withdrawals,” which happens to be one of the most commonly misunderstood eligibility requirements.
For clarification purposes, a withdrawal includes, but is not limited to:
- Officer’s salary
- Cash dividends
- Distributions in excess of amounts needed to pay the S-Corporation taxes
- Cash and property withdrawals
- Bonuses
- Loans
- Advances
- Payments to immediate family members
- Investments on behalf of an owner, officer or key employee
- Charitable contributions
Withdrawals are considered excessive if during Participant’s fiscal year they exceed the following levels:
- $150,000 for firms with sales up to $1,000,000
- $200,000 for firms with sales between $1,000,000 and $2,000,000
- $300,000 for firms with sales over $2,000,000
Please keep in mind the withdrawals limits are totals for the entity, not for each individual. In addition, the withdrawals apply to officers even if they are not an owner. Therefore, for example, if an entity has sales over $2,000,000 and has a disadvantaged owner and two officers (perhaps a Vice President and a Chief Financial Officer), their combined withdrawals as defined above cannot exceed $300,000.
If the SBA determines that excessive withdrawals have been made, SBA will immediately initiate termination or early graduation proceedings. In some instances SBA will accept some corrective actions or remedies. However, the SBA will continue the termination or early graduation proceedings until the 8(a) BD certified entity’s proposed corrective actions are accepted by the SBA.
Please keep in mind the area of excessive withdrawals is being monitored closely by the SBA. Once SBA determines a business is out of compliance, there are serious ramifications. As such, an entity participating in the 8(a) Business Development program needs to:
- Understand that the withdrawal limits are cumulative amounts for all owners and officers rather than ceilings per individuals.
- Monitor withdrawals throughout the year in order not to exceed the limits.
- Take immediate corrective action before year-end if it is determined that the annual withdrawals have exceeded the limit.
We have discussed the details of this issue with our government contracting clients and would love to be a resource for you if you are dealing with this or similar government contracting issues. Please call me at 321-426-3032 or email me at clennard@hoyman.com if you need assistance.
Source: U.S. Small Business Administration – www.sba.gov