Economically Disadvantaged - And All That Entails - In the 8(a) Program
One of the most commonly known aspects about the 8(a) program is that everyone who applies for 8(a) certification must prove they have experienced "economic disadvantage".
For most people, what this entails is not as well known.
There are many people who fit into the SBA's category of economic disadvantage who do not expect to do so.
There are three quantitative, and one qualitative metric by which the SBA makes their determination.
The first value that the SBA looks at when determining economic disadvantage is the Total Assets.
Simply put, you cannot personally own more than four million dollars in assets.
This does not include any assets held by your spouse.
If you live in a community property state then any of the assets held by one spouse are the joint property of both.
In other words, if the spouse of the applicant owns a million dollar house in a non-community property state it would not be counted as an asset of the applicant, and in a community property state the applicant would have $500 thousand of that home as a personal asset.
While there are no other adjustments to this value, the bar is set high enough that it is not a concern for most small business owners.
The most common problems occur with the Adjusted Net Worth.
This value is your net worth -using the same criteria with regards to community property- once you have removed the equity value in your home and the applicant firm.
This value must be below $250,000.
Once you are certified, you can have an Adjusted Net Worth of up to $750,000 to stay in the program.
During the application process, though, this value must be under $250,000.
In determining your Adjusted Net Worth, any secondary properties, retirement accounts, personal property and several other categories must be taken into account.
The Adjusted Net Worth can be a tricky amount to calculate, and the SBA will question you if the numbers are not what SBA expects.
For example, if you have paid off his or her mortgage, they will have to provide proof of that fact.
If you do not, the SBA evaluator will likely ask for it after the application has been submitted, drastically increasing the time it take to become certified.
The last quantitative metric by which the SBA determines economic disadvantage is Total Compensation.
8(a) regulations state that an applicant must have a Total Compensation of less than $200,000 averaged over the past two years.
The first place that the SBA evaluators look for this is on your personal tax returns.
The last line on the first page of the IRS Form 1040 is your adjusted net income value.
If this number is over 200,000 for either of the past two years your evaluator will question whether or not you meet this criteria.
According to case law from the Office of Hearings and Appeals, there is some analysis that can be done breaking out the income from each spouse and taking into account taxes and distributions.
It is very possible that even if you have an adjusted net income of over $200,000 for both the past two years that you may still qualify once an analysis is done.
Call us for a free, no obligation consultation for this analysis.
There is only one qualitative metric for determining economic disadvantage: the Economic Disadvantage Narrative.
What you must show in this document are clear examples of personal discrimination.
The incidents described in the narrative must include enough specifics, names, dates, places, so that his or her story meets the "Preponderance of the Evidence" standard.
Basically, what this means is you must be able to tell your story with enough detail to make the narrative credible to the SBA.
Do not hesitate to provide these details to the SBA, the details cannot be shared with anyone outside of the agency without your consent.
The phrase "economically disadvantaged individual" may not seem to describe most small business owners, however under the SBA guidelines, more people fit into this category than it would first appear.
For most people, what this entails is not as well known.
There are many people who fit into the SBA's category of economic disadvantage who do not expect to do so.
There are three quantitative, and one qualitative metric by which the SBA makes their determination.
The first value that the SBA looks at when determining economic disadvantage is the Total Assets.
Simply put, you cannot personally own more than four million dollars in assets.
This does not include any assets held by your spouse.
If you live in a community property state then any of the assets held by one spouse are the joint property of both.
In other words, if the spouse of the applicant owns a million dollar house in a non-community property state it would not be counted as an asset of the applicant, and in a community property state the applicant would have $500 thousand of that home as a personal asset.
While there are no other adjustments to this value, the bar is set high enough that it is not a concern for most small business owners.
The most common problems occur with the Adjusted Net Worth.
This value is your net worth -using the same criteria with regards to community property- once you have removed the equity value in your home and the applicant firm.
This value must be below $250,000.
Once you are certified, you can have an Adjusted Net Worth of up to $750,000 to stay in the program.
During the application process, though, this value must be under $250,000.
In determining your Adjusted Net Worth, any secondary properties, retirement accounts, personal property and several other categories must be taken into account.
The Adjusted Net Worth can be a tricky amount to calculate, and the SBA will question you if the numbers are not what SBA expects.
For example, if you have paid off his or her mortgage, they will have to provide proof of that fact.
If you do not, the SBA evaluator will likely ask for it after the application has been submitted, drastically increasing the time it take to become certified.
The last quantitative metric by which the SBA determines economic disadvantage is Total Compensation.
8(a) regulations state that an applicant must have a Total Compensation of less than $200,000 averaged over the past two years.
The first place that the SBA evaluators look for this is on your personal tax returns.
The last line on the first page of the IRS Form 1040 is your adjusted net income value.
If this number is over 200,000 for either of the past two years your evaluator will question whether or not you meet this criteria.
According to case law from the Office of Hearings and Appeals, there is some analysis that can be done breaking out the income from each spouse and taking into account taxes and distributions.
It is very possible that even if you have an adjusted net income of over $200,000 for both the past two years that you may still qualify once an analysis is done.
Call us for a free, no obligation consultation for this analysis.
There is only one qualitative metric for determining economic disadvantage: the Economic Disadvantage Narrative.
What you must show in this document are clear examples of personal discrimination.
The incidents described in the narrative must include enough specifics, names, dates, places, so that his or her story meets the "Preponderance of the Evidence" standard.
Basically, what this means is you must be able to tell your story with enough detail to make the narrative credible to the SBA.
Do not hesitate to provide these details to the SBA, the details cannot be shared with anyone outside of the agency without your consent.
The phrase "economically disadvantaged individual" may not seem to describe most small business owners, however under the SBA guidelines, more people fit into this category than it would first appear.
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