The Biden administration has proposed boosting spending through small business initiatives, including tripling the Federal goal under the Small Business Administration’s (SBA’s) 8(a) program from 5 percent to a minimum of 15 percent of all Federal procurement dollars by 2025. We expect these efforts will attract more candidates to apply to the 8(a) program, while making a lengthy application process take even longer. To avoid potential delays with the application process, we recommend reviewing the following before you apply.
Is your NAICS Code in Harmony with the Business Activity Code on your Entity’s Tax Return?
The SBA may question or reject an 8(a) program application when the North American Industry Classification System (NAICS) code on the application or listed in the System for Award Management (SAM) does not match the business activity code reported on the entity’s tax return.
The NAICS codes are published by the U.S. Census Bureau, but the business activity codes that must be reported on an entity’s tax return are published by the IRS. The problem is that the business activity codes, while based on the NAICS codes, are more limited in number than NAICS codes and will not always offer an exact match.
The good news is that most inconsistencies can be addressed by requesting a letter from your tax professional explaining the difference. Obviously, getting the codes to match, or at least closely resemble each other, can cut down on questions and save time. We recommend working with your tax professional to address any inconsistencies. You should make your tax professional aware of any changes to your entity’s primary NAICS code.
Choosing your Preferred Business Structure
Your business structure affects how much you pay in taxes, your ability to raise money, your recordkeeping, the paperwork you need to file, and your personal liability. While it may be possible to convert to a different business structure once admitted into the 8(a) program, it will be easier to have your preferred structure in place before you apply. Your tax professional can help you understand the pros and cons of the different tax structures.
In addition, a tax professional may be able to assist with making sure the structure is designed to comply with the SBA’s rules. For example, at least 51 percent of the applicant concern must be directly and unconditionally owned by one or more socially and economically disadvantaged individuals. An LLC would not be eligible for the 8(a) program if it was 100% owned by a C Corporation, even if the C Corporation is 51% owned by a socially and economically disadvantaged individual. The structure should also avoid granting veto and/or supermajority voting rights that may give the non-controlling owners negative control.
If you have questions or would like to speak with any of our specialists, please contact us.
Written by: Jeff McCurry, CPA
Jeff McCurry is a manager in the tax department of Thompson Greenspon. He is responsible for the review of Federal and multi-state tax returns, as well as tax compliance and planning strategies for a variety of clients, including government contractors, professional service firms, closely-held businesses and individuals. Prior to joining the firm, Jeff gained 12 years of experience working for a mid-sized regional CPA firm.
Jeff holds a Bachelor’s degree in Accounting from Virginia Tech. He is a member of the American Institute of Certified Public Accountants, the Virginia Society of Certified Public Accountants, and serves as Treasurer of the Greenbriar Pool.