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 Small Business Administration 13 CFR Parts 107 and 121
 AGENCY: Small Business Administration.
 ACTION: Direct final rule.
 SUMMARY: This final rule implements legislative changes to size eligibility requirements for assistance from Small Business Investment Companies (SBICs) and Certified Development Companies (CDCs), and for the Agriculture industry. The Small Business Investment Improvement Act of 1999, codified in sections 103(5) and 103(12) of the Small Business Investment Act of 1958, as amended, established a method for determining the eligibility of a business that is not required to pay Federal income tax at the corporate level, but that is required to pass income through to its shareholders or partners. The new method treats “pass-through” enterprises the same as firms that pay Federal taxes for the purpose of size standard determinations. The Small Business Reauthorization Act of 2000, codified in section 3(a)(1) of the Small Business Act, increases the size standards used for Agriculture from $500,000 to $750,000 in average annual receipts.
 DATES: The rule will become effective August 6, 2001, unless adverse comment is received prior to July 9, 2001. If an adverse comment is received, SBA will publish a timely withdrawal of the rule in the 
                        **Federal Register**
                        . The Agency may proceed to publish a proposed rule following notice and comment procedures.
 ADDRESSES: Send written comments to Gary M. Jackson, Assistant Administrator for Size Standards, U.S. Small Business Administration, 409 Third St., SW., Mail Code 6530, Washington, DC 20416; or via e-mail to 
                        *sizestandards@sba.gov.*
 FOR FURTHER INFORMATION CONTACT: Diane Heal, Office of Size Standards, (202) 205-6618.


SUPPLEMENTARY INFORMATION: SBIC/CDC A business seeking financial assistance from an SBIC or a CDC must qualify as a “small-business concern” as defined in section 103(5) of the Small Business Investment Act of 1958, as amended (the Act), and as implemented by 13 CFR 121.301(b) for CDCs and 13 CFR 121.301(c) for SBICs. For SBIC financial assistance, a business also may need to qualify as a “smaller enterprise” as defined in section 103(12) of the Act, and as implemented by 13 CFR 107.710(a). Each of these definitions requires a firm to meet either the size standard for its primary industry or certain net worth and net income tests. The net income tests measure the firm's average net income after Federal income taxes for the preceding 2 years. On April 5, 1999, Public Law 106-9, the “Small Business Investment Improvement Act of 1999” which expands opportunities for small businesses to receive investment capital from banks and traditional investment sources, became effective. This legislation established a new method for applying the net income test to a business that is not required to pay Federal income tax at the enterprise level, but that is required to pass income through to its shareholders, partners, or other owners. This new method permits such businesses to use a specified formula to impute a tax to the business and to compute “after-tax” net income. The intent is to permit “pass-through” enterprises to be treated the same as concerns that pay Federal income taxes for purposes of SBA size standard determinations. As authorized by Public Law 106-9, this final rule revises 121.301(b), 121.301(c) and 107.710(a) to permit a business concern that does not pay Federal income taxes at the enterprise level to deduct an imputed Federal income tax expense from its net income. The business concern computes this deduction by multiplying its net income 
                    ( print page 30647)
                    by the marginal Federal income tax rate that would have applied if the concern were a taxable corporation. If the business concern is also treated as a pass-through entity for State and local income tax purposes, it can compute an additional deduction equal to its net income multiplied by the State income tax rate (or combined State and local income tax rate, if applicable) that would have applied if it were a taxable corporation. In this case, the State/local tax deduction must be computed first and then subtracted from net income before computing the deduction for Federal income taxes. Agriculture Industry On December 21, 2000, Public Law 106-554, the “Small Business Reauthorization Act of 2000” became effective. Section 806(b) of this legislation increases the size standard for small businesses in the Agriculture industry from $500,000 in average annual receipts to $750,000 in average annual receipts. This change affects Agriculture industries under North American Industry Classification System (NAICS) codes, Sector 11, “Agriculture, Forestry, Fishing and Hunting,” Subsector 111 “Crop Production” (NAICS Codes 111110 through 111998) and Subsector 112, “Animal Production” (NAICS Codes 112111 through 112990). Not affected by this legislative change are NAICS codes 112112, “Cattle Feedlots” and 112310, “Chicken Egg Production” as their size standard is currently above $750,000. Those size standards remain at $1.5 million and $9.0 million, respectively. The SBA is publishing this regulation as a direct final rule because the SBA believes the rule is non-controversial. It is merely implementing provisions of Public Laws 106-9 and 106-554. As such, SBA believes that this rule will elicit no significant adverse comment. Compliance With Executive Orders 12866, 12988, and 13132, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork Reduction Act (44 U.S.C. Ch. 35) This final rule is not a “significant” regulatory action for purposes of Executive Order 12866 and therefore was not reviewed by the Office of Management and Budget. SBA has determined that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. This rule is merely implementing provisions of Pub. L. 106-9 and 106-554. This rule does not impose costs upon the businesses that might be affected by it. The rule will have no effect on the amount or dollar value of any contract requirement or on the number of requirements reserved for the small business set-aside program. Therefore, it will not have an annual economic effect of $100 million or more, result in a major increase in costs or prices, or have a significant adverse effect on competition or the United States economy. For purposes of Executive Order 12988, SBA has determined that this final rule is drafted, to the extent practicable, in accordance with the standards set forth in Section 3 of that Order. For purposes of Executive Order 13132, SBA has determined that this final rule will have no federalism implications. For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA has determined that this final rule contains no new reporting or recordkeeping requirements. List of Subjects in 13 CFR Parts 107 and 121 Investment companies
Loan programs—business
Reporting and recordkeeping requirements
Small businesses
 For the reasons stated forth above, SBA amends 13 CFR parts 107 and 121 as follows: PART 107—SMALL BUSINESS INVESTMENT COMPANIES
 1.The authority citation for 13 CFR Part 107 continues to read as follows: Authority:
                        15 U.S.C. 662, 681 
                            *et seq.*, 683, 687(c), 687b, 687d, 687g and 687m. 2.In § 107.710, revise paragraph (a) to read as follows: § 107.710
  
 (a) 
                            *Definition of Smaller Enterprise.*
                             A Smaller Enterprise means any small business concern that: (1) Both together with its Affiliates, and by itself, meets the size standard of § 121.201 of this chapter at the time of Financing for the industry in which it is then primarily engaged; or (2) Together with its affiliates has a net worth of not more than $6 million and average net income after Federal income taxes (excluding any carry-over losses) for the preceding two years no greater than $2 million. If the applicant is not required by law to pay Federal income taxes at the enterprise level, but is required to pass income through to its shareholders, partners, beneficiaries, or other equitable owners, the applicant's “net income after Federal income taxes” will be its net income reduced by an amount computed as follows: (i) If the applicant is not required by law to pay State (and local, if any) income taxes at the enterprise level, multiply its net income by the marginal State income tax rate (or by the combined State and local income tax rates, as applicable) that would have applied if it were a taxable corporation. (ii) Multiply the applicant's net income, less any deduction for State and local income taxes calculated under paragraph (a)(2)(i) of this section, by the marginal Federal income tax rate that would have applied if the applicant were a taxable corporation. (iii) Add the results obtained in paragraphs (a)(2)(i) and (a)(2)(ii) of this section.
 PART 121—SMALL BUSINESS SIZE REGULATIONS
 1.The authority citation for 13 CFR Part 121 continues to read as follows: Authority:
                        15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and 662(5). 2.In § 121.201, revise the referenced NAICS Codes and size standards in the table “SMALL BUSINESS SIZE STANDARDS BY NAICS INDUSTRY,” under the heading Sector 11—Agriculture, Forestry, and Fishing—Subsector 111—Crop Production, and Subsector 112—Animal Production, to read as follows: § 121.201
  
 
 
 Small Business Size Standard by NAICS Industry
NAICS code
Description 
                                     (N.E.C.=not elsewhere classified)
Size standard 
                                     in number of  
                                     employees or  
                                     millions of  
                                     dollars**Sector 11—Agriculture, Forestry, and Fishing****Subsector 111—Crop Production**111110
Soybean Farming
$0.75111120
Oilseed (except Soybean) Farming
0.75111130
Dry Pea and Bean Farming
0.75111140
Wheat Farming
0.75111150
Corn Farming
0.75111160
Rice Farming
0.75111191
Oilseed and Grain Combination Farming
0.75111199
All Other Grain Farming
0.75111211
Potato Farming
0.75111219
Other Vegetable (except Potato) and Melon Farming
0.75111310
Orange Groves
0.75111320
Citrus (except Orange) Groves
0.75111331
Apple Orchards
0.75111332
Grape Vineyards
0.75111333
Strawberry Farming
0.75111334
Berry (except Strawberry) Farming
0.75111335
Tree Nut Farming
0.75111336
Fruit and Tree Nut Combination Farming
0.75111339
Other Noncitrus Fruit Farming
0.75111411
Mushroom Production
0.75111419
Other Food Crops Grown Under Cover
0.75111421
Nursery and Tree Production
0.75111422
Floriculture Production
0.75111910
Tobacco Farming
0.75111920
Cotton Farming
0.75111930
Sugarcane Farming
0.75111940
Hay Farming
0.75111991
Sugar Beet Farming
0.75111992
Peanut Farming
0.75111998
All Other Miscellaneous Crop Farming
0.75**Subsector 112—Animal Production**112111
Beef Cattle Ranching and Farming
0.75112112
Cattle Feedlots
1.50112120
Dairy Cattle and Milk Production
0.75112210
Hog and Pig Farming
0.75112310
Chicken Egg Production
9.00112320
Broilers and Other Meat Type Chicken Production
0.75112330
Turkey Production
0.75112340
Poultry Hatcheries
0.75112390
Other Poultry Production
0.75112410
Sheep Farming
0.75112420
Goat Farming
0.75112511
Finfish Farming and Fish Hatcheries
0.75112512
Shellfish Farming
0.75112519
Other Animal Aquaculture
0.75112910
Apiculture
0.75112920
Horse and Other Equine Production
0.75112930
Fur-Bearing Animal and Rabbit Production
0.75112990
All Other Animal Production
0.75*         *         *         *         *         *         *
 3.In § 121.301, revise paragraphs (b) and (c) to read as follows: § 121.301
  
 (b) For Development Company programs, an applicant must meet one of the following standards: (1) The same standards applicable under paragraph (a) of this section; or (2) Including its affiliates, tangible net worth not in excess of $6 million, and average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of $2 million. If the applicant is not required by law to pay Federal income taxes at the enterprise level, but is required to pass income through to its shareholders, partners, beneficiaries, or other equitable owners, 
                        ( print page 30649)
                        the applicant's “net income after Federal income taxes” will be its net income reduced by an amount computed as follows: (i) If the applicant is not required by law to pay State (and local, if any) income taxes at the enterprise level, multiply its net income by the marginal State income tax rate (or by the combined State and local income tax rates, as applicable) that would have applied if it were a taxable corporation. (ii) Multiply the applicant's net income, less any deduction for State and local income taxes calculated under paragraph (b)(2)(i) of this section, by the marginal Federal income tax rate that would have applied if the applicant were a taxable corporation. (iii) Sum the results obtained in paragraphs (b)(2)(i) and (b)(2)(ii) of this section. (c) For the Small Business Investment Company (SBIC) program, an applicant must meet one of the following standards: (1) The same standards applicable under paragraph (a) of this section; or (2) Including its affiliates, tangible net worth not in excess of $18 million, and average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of $6 million. If the applicant is not required by law to pay Federal income taxes at the enterprise level, but is required to pass income through to its shareholders, partners, beneficiaries, or other equitable owners, the applicant's “net income after Federal income taxes” will be its net income reduced by an amount computed as follows: (i) If the applicant is not required by law to pay State (and local, if any) income taxes at the enterprise level, multiply its net income by the marginal State income tax rate (or by the combined State and local income tax rates, as applicable) that would have applied if it were a taxable corporation. (ii) Multiply the applicant's net income, less any deduction for State and local income taxes calculated under paragraph (c)(2)(i) of this section, by the marginal Federal income tax rate that would have applied if the applicant were a taxable corporation. (iii) Add the results obtained in paragraphs (c)(2)(i) and (c)(2)(ii) of this section.
 Dated: May 30, 2001. John Whitmore, Acting Administrator.


[FR Doc. 01-14222 Filed 6-6-01; 8:45 am] BILLING CODE 8025-01-P