For businesses vying for federal contract work an 8(a) certification can be an advantageous distinction to achieve. However, a business must meet certain parameters to be eligible for 8(a) certification. One such stipulation is that individuals operating the business must have an adjusted gross income (AGI) of less than $400,000 over the past three tax-filing years. In this piece, we’ll briefly look at 8(a) certification and how to best calculate an individual’s AGI.
What is the 8(a) Certification?
For an extensive look at 8(a) certification be sure to check out our comprehensive guide. For a quick overview here are some 8(a) certification facts:
- The 8(a) certification was created to assist socially and economically disadvantaged businesses.
- To qualify for 8(a) certification a business must meet the following:
- Qualifies for Small Business Status and is not currently part of the 8(a) Program
- Over 51% owned and controlled by economically or socially disadvantaged U.S. citizens
- Minority and disadvantaged business owners manage day-to-day and long-term operations
- Demonstrate good character and the potential to succeed when awarded federal contracts
- Business Owner’s personal net worth and the average adjusted gross income is under $850,000
- Business Owners have under $6.5 million in total asset value
- The business’ AGI must be less than $400,000 over the past three years. What is the definition of Adjusted Gross Income?
Adjusted Gross Income (AGI)
Adjusted gross income (AGI) is a tax term for an amount used in the calculation of an individual’s income tax liability. AGI is calculated by subtracting the maximum allowable adjustments from the applicant’s gross income. Over the past few years, AGI has been located in the following places: Line 7 for 2018 personal taxes, Line 8B for 2019 Taxes, and Line 11 for 2020 personal taxes. What is my Adjusted Gross Income (AGI)?
Below are three progressive steps to help calculate your adjusted gross income (AGI). If a step doesn’t satisfy the less than $400,000 AGI requirement, proceed to the next step to try an alternate method to qualify for 8(a) certification.
Economic Disadvantage Qualification
Directly from the Small Business Association, here is how the SBA determines if an individual is economically disadvantaged: “SBA will presume that an individual is not economically disadvantaged if his or her adjusted gross income averaged over the three preceding years exceeds $400,000. The presumption may be rebutted by showing that this income level was unusual and not likely to occur in the future, that losses commensurate with and directly related to the earnings were suffered, or by evidence that the income is not indicative of lack of economic disadvantage.”
1. Average reported Adjusted Gross Margin (AGI) from previous 3 years of federal tax returns
The simplest way to initially determine if the $400,000 limit is exceeded, is to add up the AGI number reported on the first page of your last three years of federal tax returns and divide by three to calculate the average AGI. An important distinction to remember is that if a portion of the firm’s income is negative, this cannot be deducted from your AGI figure. Losses for S corporations, LLCs, or partnerships are losses at the company level and not a loss for the individual’s income. If this calculation is less than $400,000, congratulations! You are indeed eligible and no further AGI calculation is needed. If the average calculated is higher than $400,00 you must attempt the method detailed in step 2.
2. Separate income reported by spouse & applicant
If you file taxes jointly with your spouse, you may have another option to qualify for the 8(a) certification. If the AGI calculation exceeds $400,000 or your distributions exceed the profits reported for your business on its tax return–you must separate out reported income between the applicant and his or her spouse.
If the resulting calculation is still larger than $400,000 trudge on to step 3. If the number is less than $400,000 and your distributions are taken out from the company do not exceed the profits reported for your business on its tax return, your AGI is less than $400,000 without doing any further analysis.
3. If the Business is an LLC, S corporation, or partnership further deductions are possible
If an individual has made it this far, the last step to attempting to meet the threshold involves the individual’s IRS Income Tax rate. To find this rate look at the IRS’ 1040 form for taxable income. Once you have this figure visit this site to determine your tax bracket percentage.
As mentioned above in step 2, be sure to deduct any income used to pay the LLC or S-Corporation Federal taxes owed on behalf of the income from your LLC or S-Corporation income reported. Please note the SBA does not count or allow any State taxes you may have paid to reduce your AGI. State taxes are prohibited from being deducted from your AGI.
FAMR Provides AGI Calculation Assistance
As you can see throughout this piece, knowing how to calculate your adjusted gross income (AGI) can be somewhat complex and a misstep here could prevent an individual from missing out on the phenomenal 8(a) benefits. The professionals at FAMR can make this process much easier by determining your AGI for you and ensuring you get what you qualify for. We will perform an analysis for the last three tax years and provide you with a detailed report showing you exactly what your adjusted gross income (AGI) is for each year and averaged over the last three years.
