The Small Business Administration’s (SBA) 8(a) program was designed as an assistance program for small disadvantaged businesses. Having the designation allows a company to propose on numerous contracts the government has designated for those businesses. Without this program, it would be difficult for a startup company to win contracts competing against larger, more established companies. If a company is granted 8(a) status, there are numerous rules and regulations the company must follow. One of those rules limits the amount of withdrawals the owner(s) can take out of the company. Because a company can only participate in the program for nine years, the SBA has limited withdrawals in hopes that the company will have reinvested those earnings to help make the company viable after graduation from the program.
In 2011, the SBA made several revisions to regulations affecting 8(a) companies, one of the revisions affected excessive withdrawals. According to the new rule, a withdrawal was defined to exclude officers’ salaries and withdrawals for tax payments for those companies that are passthroughs for tax purposes. However, officer salaries could potentially be considered withdrawals from the company if it is found that the company is paying higher–than- normal wages in an attempt to circumvent the withdrawal regulations. The withdrawal limits are as follows:
$250,000 – For companies with sales of $1,000,000 or less
$300,000 – For companies with sales of $1,000,000 to $2,000,000
$400,000 – For companies with sales of $2,000,000 or more
Violating these limits is a basis for possible termination or early graduation from the program. Be sure to consult with your outside CPA if you feel you may be in violation of these limits prior to filing your 8(a) annual review.