New Threat to 8(a) Owners: Making Too Much Money By Antonio R. Franco and Ryan C. Bradel Under SBA’s 8(a) Business Development program, 8(a) firms must meet certain economic disadvantage criteria to remain eligible. To comply with this requirement, the owner of an 8(a) concern must, among other things, have a net worth threshold of less than $750,000. Unbeknownst to some 8(a) firms, SBA may also consider their annual income. Recently some SBA district offices have begun scrutinizing the prior-year income of current 8(a) owners and initiating termination proceedings if the owner’s income exceeds an average of $200,000 per year over two years. If this apparent new practice continues, many 8(a) firms will find it very difficult to succeed in the program. The 8(a) program was created for companies owned by individuals who are socially and economically disadvantaged. In order to enter the program, the owner of the concern must have an average annual income for the two years prior to applying for the program that is below the top 2% income tax bracket—in recent years $200,000 per year. While this income threshold has always been applied during the initial application process, using it to evaluate a company’s continued eligibility for the 8(a) program is entirely novel. Whether applied initially or for continued eligibility, the income threshold is problematic on both policy and legal grounds. The 8(a) program was designed to further the business development of participants. Unfortunately, the income cap may have the unintended consequence of actually stunting the growth of 8(a) firms. An individual upon whom 8(a) eligibility is based must, within certain exceptions, be the highest-paid employee at the firm. In many industries, especially high-tech industries, an 8(a) company will simply be unable to compete with other businesses unless it is able to attract professionals with market-rate compensation packages that are above the $200,000 threshold. If SBA terminates firms from the program because the owner’s income exceeds the $200,000 threshold, 8(a) firms in many industries will not able to compete with other companies for top talent. Also, many 8(a) owners’ salaries are often above the national norm because they live in cities and states where the cost of living is high. Keeping their income below the $200,000 threshold will make it extremely difficult for these owners to remain in the program. Left with no alternative but to move their business, employees and families to more affordable places, many will not continue participating in the program just when they are achieving some success. It is doubtful that Congress ever intended that result when it authorized the program. The threshold also appears to be on tenuous legal ground. SBA regulations instruct that, in assessing a socially disadvantaged individual’s ability to compete in the free enterprise system, SBA must compare that individual to “others in the same or similar line of businesses who are not socially disadvantaged.” The top 2% of taxpayers are not necessarily in the same or similar line of business as the owner of an 8(a) concern. Application of the top 2% rule fails to take into account that, even if an 8(a) owner’s personal income exceeds the threshold, he or she may still be economically disadvantaged as compared to non-disadvantaged individuals running companies with which they compete. The 8(a) program is intended to level the playing field for socially and economically disadvantaged individuals; the salary cap will only make it more difficult to overcome these disadvantages. If 8(a) owners are unable to reap the rewards of their hard work, one of the most significant motivators to succeed will be taken away. It will not only undermine the business development goals of the program but also stifle, if not penalize, entrepreneurship. Antonio Franco is a partner with PilieroMazza PLLC in Washington, DC. Mr. Franco oversees the firm’s Government Contracts/Small Business Group. His practice includes all aspects of federal government contracting and administration. Ryan C. Bradel is an associate with PilieroMazza PLLC, where he practices in the areas of government contracts, litigation and regulatory affairs.