The SBA modified the Historically Underutilized Business Zone (HUBZone) Program at the end of 2019 to address long-standing uncertainties for small business investors and government agencies utilizing HUBZone companies. The program was established in 1997 and launched in 1999 to provide contracting opportunities, such as set-asides, sole-source awards, and price evaluation preferences, to small businesses in designated areas and certified through the SBA.
“Thanks to the SBA’s action, HUBZone firms will see a reduction in regulatory burdens due to this change. The new rules also help agencies by eliminating ambiguities and, most importantly, make it easier for HUBZone firms to understand and comply with program requirements,” said SBA Atlantic Regional Administrator Steve Bulge.
The HUBZone Program changes include benefits for small businesses investors, which extend to their communities by creating jobs and increasing capital investments in distressed areas. The goal for federal agencies is to award 3% of contracts to certified HUBZone small businesses, and, by making investments easier for small businesses, that goal is expected to be easier to attain for 2020 and beyond. We want to take a look at certain improvements made to the program, updates to employee residence requirements, and certain program changes related to contracting.
Governor’s Designated Covered Areas Initiative
The 2020 HUBZone Program introduced the Governor’s Designated Covered Areas Initiative, where, beginning January 1, 2020, governors may petition the SBA annually to designate HUBZones in distressed rural communities. The areas must have a population of less than 50,000 and an unemployment level at least 120% of the lesser of the US or state average. This initiative is expected to greatly expand the program’s reach.
Certification/Recertification Accountability & Reporting Requirements
The SBA’s final rule states, “In order for a location to be considered the principal office, the concern must conduct business at this location.” The SBA now requires proof, through presentation of utility bills, etc., that your alleged principal office is in a location that conducts legitimate business. Full documentation reviews will be performed by the SBA every three years. While their initial verification process has become more complex, the SBA promises to process applications within 60 days of submission.
Small businesses investing in HUBZones via building purchase or long-term lease (10 years or longer) may maintain HUBZone certification for a period of 10 years, even if the office location no longer qualifies as a HUBZone, providing the business still meets residency and certain other program requirements.
Improvements to the certification and annual recertification processes have been made, ensuring firm compliance and adding investigation and enforcement procedures through the Office of Inspector General (OIG).
The program will also be held to a new standard of reporting, based on a pending online tool expected to be completed by the SBA by the end of 2021, that requires an updated map presentation based on comparison of data from the Census Bureau, the Department of Housing and Urban Development, and the Department of Labor every 5 years. Small businesses with HUBZone status prior to December 31, 2019, will retain their status until the SBA’s online tool is available.
“We are excited about our partnership with the White House’s U.S. Digital Service and the improvements made to the HUBZone maps to modernize SBA’s contracting programs – making them more user-friendly, agile and nimble for the busy entrepreneurs that we support,” said Linda McMahon, SBA Administrator (2017-2019).
Employee Residency Requirements
A firm that receives a HUBZone contract must “attempt to maintain” 35% employment of HUBZone residents and demonstrate at least 20% of employees are HUBZone residents. The final rule defines “attempt to maintain” as “making substantive and documented efforts such as written offers of employment, published advertisements seeking employees, and attendance at job fairs” and defines “failure to attempt to maintain compliance” as “falling below 20% HUBZone residency during the performance of a HUBZone contract.”
HUBZone employees must work at least 40 hours per month and generally reside within the HUBZone area. The final rule defines a “a resident qualifying for an entire HUBZone program year” as “an individual [who] lived in a HUBZone for at least 180 days prior to certification (or recertification, as applicable), […] even if the individual moves out of a HUBZone within 180 days of certification or recertification,” or if their residence itself loses its geographical eligibility to remain a HUBZone.
Additionally, the final rule includes a provision for employees temporarily living overseas in connection with the performance of a contract. These employees will be considered U.S. residents and qualify toward a firm’s 35% residency requirement.
To simplify contract verification, a firm certified at the time of initial offer will generally be considered a HUBZone small business throughout the life of that contract, meaning HUBZone status will no longer be determined as of the time of award.
The SBA’s 2019 press release, announcing the final rule, highlights additional contract provisions:
- If a firm is HUBZone-certified at the time of initial offer for a HUBZone Multiple Award Contract, it will be considered to be certified for each order issued against the contract; if a Multiple Award Contract is not a HUBZone contract, and a procuring agency sets aside an order as a HUBZone award, the awardee must be HUBZone-certified, and be designated as such in SBA’s Dynamic Small Business Search engine, at the time it submits its offer for the order; and
- Once certified as a HUBZone small business, a firm will be eligible for all HUBZone contracts for which the firm qualifies as small, for one year from the date of its initial certification (and subsequently, for one year after each annual recertification), unless the firm acquires, is acquired by, or merges with another firm during that period.
In addition to the qualifications above, a HUBZone firm must meet the SBA’s size standard for the business’s primary NAICS Code and be at least 51% owned/controlled by U.S. citizens. The principal office (the location where the greatest number of employees perform work) must be located within a designated HUBZone. To find out where HUBZones are located, take a look at the SBA’s current HUBZone Map.
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by David Jean, CPA, CCIFP, CExP