The SBA calculates annual receipts by taking your total income plus cost of goods sold from your federal tax returns, averaging that figure across your most recently completed fiscal years, and comparing the result to the dollar threshold set for your industry. For government contracting the average runs over five fiscal years; for 7(a), 504, Microloan, and disaster loan programs it runs over three.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts Industry thresholds range from $2.25 million for most farming operations up to $47 million for certain professional services.2Federal Register. Small Business Size Standards: Revised Size Standards Methodology The SBA annual receipts calculation determines whether you qualify as a small business in revenue-based industries, and the details of what gets counted, what gets excluded, and whose numbers get added to yours decide the answer.
What the SBA Counts as Receipts
Receipts are defined broadly: all revenue in whatever form, from whatever source. Product sales and service fees are obvious. Less obvious are interest, dividends, rents, royalties, and commissions, all of which the regulation pulls in.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts Investment income counts. If it shows up on your tax return as revenue, the SBA almost certainly includes it.
Receipts are reduced by returns and allowances. They are not reduced by operating expenses. Payroll, rent, materials, utilities: none of that comes off the top. The measure is how much money flowed into the business before any deductions, not what you kept after paying bills.
The Allowed Exclusions
The regulation permits a short and specific list of subtractions. Nothing outside this list qualifies.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts
- Net capital gains or losses from the sale of equipment, property, or investments.
- Taxes collected from customers and remitted to a taxing authority, such as sales or excise taxes, provided those amounts were included in gross or total income on your return.
- Revenue from transactions between your company and its domestic or foreign affiliates, so the same dollar isn’t counted twice.
- Amounts collected on behalf of another party by travel agents, real estate agents, advertising agents, freight forwarders, customs brokers, and conference management providers.
- Revenue your business can legally exclude for federal tax purposes.
Costs You Cannot Subtract
Most calculation errors come from trying to net out pass-through costs the regulation doesn’t allow. The rule specifically names subcontractor costs, reimbursements for purchases made at a customer’s request, investment income, and employee-based costs like payroll taxes as items that must stay in the total.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts
The subcontractor point trips up general contractors constantly. Win a $5 million government contract, pay $3.5 million of it to subcontractors, and your receipts from that contract are still $5 million. There is no pass-through exception. The same logic applies to reimbursed expenses: if a client reimburses you for travel or materials you bought on their behalf, the reimbursement counts as receipts.
Which Averaging Period Applies
The SBA averages receipts over multiple fiscal years to smooth out normal business fluctuations, but the length of the window depends on the program.
Five Years for Government Contracting
Government contracting and most other SBA programs use the five most recently completed fiscal years. Add up receipts across all five years and divide by five.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts If you’ve been operating for fewer than five complete fiscal years, use whatever completed years you have.
Three Years for Business and Disaster Loans
The 7(a) loan program, the 504 loan program, Microloans, and all disaster loan programs use three completed fiscal years instead.3GovInfo. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts Applying a five-year average to a 7(a) loan application produces a number the SBA won’t accept.
Annualizing a Newer Business
If your business hasn’t completed enough fiscal years for the standard average, divide total receipts by the number of weeks in business and multiply by 52.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts A firm that earned $300,000 across its first 30 weeks would annualize to $300,000 ÷ 30 × 52 = $520,000. The same method applies to any short fiscal year within the measurement period.
Where to Find the Numbers on Your Tax Return
The regulation defines receipts as “total income” plus “cost of goods sold” as those terms appear on your federal tax return. Sole proprietors use “gross income” in place of “total income.”1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts You add COGS back because total income on most forms has already subtracted it to arrive at gross profit. The SBA wants the full revenue picture before that deduction.
- C-corporations on Form 1120: Line 11 (total income) plus Line 2 (cost of goods sold).4Internal Revenue Service. Form 1120 – U.S. Corporation Income Tax Return
- S-corporations on Form 1120-S: Line 6 plus Line 2.5Internal Revenue Service. Form 1120-S – U.S. Income Tax Return for an S Corporation
- Sole proprietors on Schedule C: Line 7 (gross income) plus Line 4 (cost of goods sold).6Internal Revenue Service. Schedule C (Form 1040) – Profit or Loss from Business
- Partnerships on Form 1065: total income plus cost of goods sold from page 1.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts
- LLCs: use whichever form matches your tax classification (1120, 1120-S, 1065, or Schedule C).
The SBA uses your filed federal returns, including any amendments filed before the date you self-certify as small. When your certification doesn’t match the tax return, the tax return numbers control.
Adding Affiliate Receipts
If your business has affiliates, the calculation isn’t limited to your own numbers. The SBA adds the average annual receipts of your business to the average annual receipts of every affiliate, and the combined total is what gets measured against the size standard.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts
Affiliation is broader than most owners expect. Two entities are affiliates when one controls or has the power to control the other, whether or not that power is exercised. The SBA weighs stock ownership, shared management, family relationships, and economic dependence. A minority shareholder with veto power over the board can trigger it. Businesses owned by married couples or by parents and children are presumed affiliated when they share resources, do business together, or lend to each other.7eCFR. 13 CFR 121.103 – How Does SBA Determine Affiliation
Acquisitions matter for the measurement period. When you buy another business, the acquired company’s receipts count for the entire period, not just the months after the deal closed. The exception is the acquisition of a segregable division, where only post-acquisition receipts from that division count.1eCFR. 13 CFR 121.104 – How Does SBA Calculate Annual Receipts If an affiliation ends before you self-certify as small, that former affiliate’s receipts drop out entirely.
What Your Average Gets Compared To
The average only matters against the size standard for your industry. The SBA sets those standards by North American Industry Classification System (NAICS) code, and thresholds vary widely. Most non-agricultural industries fall between $8 million and $47 million in receipts. Agricultural industries in crop and animal production generally sit between $2.25 million and $5.5 million.2Federal Register. Small Business Size Standards: Revised Size Standards Methodology
For a government contract, the contracting officer assigns the NAICS code based on the principal purpose of the work.8Acquisition.GOV. FAR 19.102 – Small Business Size Standards and North American Industry Classification System Codes That designation is final unless appealed through the SBA’s Office of Hearings and Appeals. A procurement with multiple components is typically classified by whichever component carries the greatest share of contract value.
Why the Calculation Is Worth Getting Right
Misrepresenting business size to obtain a contract carries fines up to $500,000, imprisonment up to 10 years, or both, along with debarment from federal contracting, civil penalties under the Program Fraud Civil Remedies Act, and up to three years of ineligibility for any SBA program.9Office of the Law Revision Counsel. 15 U.S. Code 645 – Offenses and Penalties Competitors can file size protests, and when the SBA’s Area Office determines a protested business is too large, the contracting officer cannot award the contract; awards already issued get terminated.10eCFR. Procedures for Size Protests and Requests for Formal Size Determinations Running the calculation carefully, with the right averaging window and every affiliate included, is the difference between a clean certification and an enforceable one.