ERC Litigation is Exploding
Remember all of those offers you were getting from ERC promoters that sounded too good to be true. Funny thing.
Here are today’s highlights:
A deal being worked on in Congress would deliver child-care tax credits and business tax breaks.
Once again, retail sales came in stronger than economists expected, but most shopping malls are in an increasingly tough spot.
The new rules governing the classification of contract workers are somewhat subjective and all but certainly headed to court.
A California fast food operator is already making cuts in preparation for the $20-an-hour minimum wage.
Small businesses and ERC hot shops are going to war: “A small Florida wholesaler thought it was getting a $3 million tax windfall. Now, it wants to return the money, but faces a $431,000 bill. The Internal Revenue Service isn’t the problem. The issue is with the company that helped the wholesaler claim a popular pandemic-era tax break. The dispute represents the leading edge of what is likely to be a wave of lawsuits tied to the employee-retention credit, or ERC, which was created by Congress to reward employers for keeping workers on payrolls during the pandemic. In December, the IRS rolled out a program that would allow employers to return 80 percent of the credit and avoid most penalties if they provided details about the ERC firm they used, part of an agency effort to crack down on what it says are fraudulent and ineligible claims.”
“Colonial Wholesale Distributing, the Florida company, is one of at least four customers that have sued ERC Specialists, which promised to help taxpayers ‘file lightning fast’ for the tax break. The legal battles go both ways: In recent months, ERC Specialists filed lawsuits against more than 40 of its customers, seeking to collect unpaid fees.”
“The Orem, Utah, company says it has helped more than 65,000 employers claim the credit. Executives won’t put a dollar value on refunds requested, but in a 2022 podcast said they expected to process $10 billion in ERC refunds before the program expires in April 2025.”
“Yaya’s Kitchen, a commercial bakery in Henderson, Nev., filed a lawsuit in 2023 against ERC Specialists saying it ‘misrepresented itself as having special knowledge or skills.’ The bakery’s accountant would have charged less than $3,000 for the ERC paperwork, which ‘required a minimal dedication of time,’ the lawsuit said. ERC Specialists said it was owed $203,000 for helping Yaya’s secure more than $1.3 million in tax credits, according to a counterclaim. The case was settled in December, according to court filings.” READ MORE
The SBA is offering a 60-day reprieve to PPP and Covid EIDL borrowers: “The SBA has announced that for borrowers with loans under $100,000 through those two prime Covid-era programs, the agency has implemented a 60-day goodwill exception period lasting until March 3 under which the SBA will not send delinquent loans to the IRS or Treasury Department for collections. During that time, the agency will work to ensure that PPP borrowers know how to apply for loan forgiveness and that Covid EIDL program borrowers are aware of all the repayment options — including hardship repayment opportunities.”
“The agency stressed that interest will not be deferred during this period, and is only for PPP and Covid EIDL loans under $100,000 that have defaulted and have been charged off by the agency — about $30 billion worth. That equals about 2.5 percent of the $1.2 trillion loaned out under both programs, according to the SBA.”
“The most prominent option for small-business owners who can’t make a payment is applying for a Hardship Accommodation Plan from the agency. That will reduce the borrower’s payment to 10 percent of their monthly payment for six months, after which their regular monthly payment will resume unless they apply for, and receive, another six-month extension.” READ MORE
There’s a deal being negotiated in Congress that would extend business tax breaks and restore child tax credits: “Top Democrats and Republicans in Congress on Tuesday released a $78 billion compromise they have reached to expand the child tax credit and restore three popular expired business tax breaks, but the package faces a challenging road to enactment in an election year. The plan includes $33 billion to partly extend a major expansion of the child tax credit that was initially beefed up for one year as part of the sweeping 2021 pandemic aid law, and another $33 billion to reinstate a set of expired business tax benefits related to research, business and capital deductions. Both would last through 2025.”
“The package would be financed by reining in the employee retention tax credit, a pandemic-era program to encourage employers to keep workers on payroll that has become a hotbed of abuse.”
“Congress remains primarily focused on funding the government before a shutdown deadline on Friday, and fractious House Republicans continue to put Speaker Mike Johnson of Louisiana in a bind. The deal also faces resistance from many Senate Republicans, and House Democrats have argued that it should do more to expand the child tax credit.” READ MORE
A flood of Chinese products could put U.S. investments in clean energy and high-tech factories at risk: “The Biden administration has begun pumping more than $2 trillion into U.S. factories and infrastructure, investing huge sums to try to strengthen American industry and fight climate change. But the effort is facing a familiar threat: a surge of low-priced products from China. That is drawing the attention of President Biden and his aides, who are considering new protectionist measures to make sure American industry can compete against Beijing.”
“As U.S. factories spin up to produce electric vehicles, semiconductors and solar panels, China is flooding the market with similar goods, often at significantly lower prices than American competitors. A similar influx is also hitting the European market.”
“American executives and officials argue that China’s actions violate global trade rules. The concerns are spurring new calls in America and Europe for higher tariffs on Chinese imports, potentially escalating what is already a contentious economic relationship between China and the West.”
“Administration officials appear likely to raise tariffs on electric vehicles and other strategic goods from China, as part of a review of the levies that former President Donald J. Trump imposed on China four years ago, according to people familiar with the matter. That review, which has been underway since Mr. Biden took office, could finally conclude in the next few months.” READ MORE
Holiday sales came in better than expected: “U.S. retail sales rose at the strongest pace in three months in December, capping a solid holiday season that suggests consumer resilience heading into the new year. The value of retail purchases, unadjusted for inflation, increased 0.6 percent in a broad-based advance, Commerce Department data showed Wednesday.”
“Nine of 13 categories posted increases, with the biggest gains in clothing, general merchandise stores — which include department stores — and e-commerce. Motor-vehicle sales were up 1.1 percent, matching the biggest increase since May, while those at gas stations fell for a third month as pump prices declined.” READ MORE
Shoppers prefer to be outdoors, which is another problem for shopping malls: “National chains are accelerating their exit from malls for other types of retail locations, signaling more trouble for malls as consumers show a growing preference for shorter, more convenient shopping experiences. Jewelers, shoe stores, and other specialty retailers are among the operators making the shift, indicating they will continue opening at outdoor, non-mall locations such as grocery-anchored shopping centers and strip malls after finding that they perform better and typically save on costs.”
“Not all retailers are exiting from malls. Publicly traded mall owners Simon Property Group and Macerich, which primarily own higher-end centers, have reported record-high leasing volume over the past year as retailers such as Hermès, Warby Parker, and Alo Yoga have taken space.”
“Online-sales data have also helped retailers pinpoint locations for successful stores with better accuracy than in the past. ‘You know where your customer is buying and where they live,’ said Scott Lipesky, chief financial and operating officer for Abercrombie & Fitch. ‘We’re looking at this digital shipping data, and we just plop a store down in the middle of it.’”
“Increasing demand for open-air space has driven up shopping-center rents to nearly $24 a square foot, the highest level since real-estate firm Cushman & Wakefield began tracking the metric in 2007.” READ MORE
The Department of Labor’s new rules classifying workers as either employees or contractors are somewhat subjective: “Mary-Ellen Allen, an attorney in West Chester, [Pa.] says that whether the contractor generates revenue for the business may not always be the central question. ‘If the work is critical and necessary to the company’s principal business, then this factor would weigh in favor of classifying the worker as an employee,’ she said. ‘A contracted accountant performing services on behalf of an accounting firm is performing work that is an integral part of the business and the accountant would be an employee under this factor. A worker who performs marketing and business development for the accounting firm may help generate revenue for the firm but is not performing a function that is critical to the principal purpose of the business.’”
“Claude Schoenberg, a labor attorney based in Bala Cynwyd, says that there are already lawsuits contesting an existing worker classification rule. Those suits had been stayed until the new rule was announced. With the new rule published, those lawsuits will resume.”
“‘Litigation will continue and likely last through 2025,’ he said. ‘It will also depend on the election. If President Biden loses then it’s likely that a new administration could withdraw this rule and simplify the independent contractor test.’” READ MORE
A California restaurant operator says he’s preparing for the $20-an-hour fast-food wage by trimming hours, eliminating paid time off, and raising prices: “Marcus Walberg and his family operate four Fatburger franchises in Los Angeles. Over the years, the restaurants have survived economic downturns, state labor laws that increase operational costs, and the Covid-19 pandemic. But doing business in California ‘has been more strained now than any time I can remember,’ Walberg told Business Insider.”
“The main reason: California fast-food workers are getting a big bump in pay to $20 an hour under a new state law that goes into effect in April. That new wage is nearly 30 percent more than most employers pay fast-food workers. The law affects 557,000 fast-food workers at 30,000 restaurants in California.”
“Walberg said raising prices was the No. 1 thing every California fast-food food owner was talking about. ‘It's a scary thing because customers are already complaining that prices are too high,’ he said. Year over year, prices were up 8 percent at his four restaurants, he said. When fast-food wages increase to $20 an hour in April, ‘we'll have to take another 8-10 percent’ increase, he told BI.”
“Walberg said he used to offer paid time off to eligible workers. The average worker earned about 48 hours of paid time off, capped at 72 hours a year, he said. But he eliminated the PTO program, first launched in 2021, at the start of the year ‘to prepare for the increase in wages in 2024,’ he said.”
“Even though he's not hiring, Walberg said he expected to get an influx of applications come April from casual-dining workers looking for more money. The new California law doesn't apply to employees at full-service chains such as Chili's or Cheesecake Factory.” READ MORE
Uber is shutting down Drizly, the liquor-delivery service it paid $1.1 billion for in 2021: “The company started in a Boston College dorm room when cofounder Nick Rellas wanted to buy some beer. After researching the regulatory complications, he connected with fellow BC students Justin Robinson and Spencer Frazier to create the service. Local chain Gordon’s Fine Wines and Liquors signed on as the company’s first partner and the service opened for business in February 2013. Drizly was among many online companies that saw a surge in business at the beginning of the pandemic. Revenue quadrupled in 2020, and the company raised $50 million to fuel further growth.”
“Uber, which already operates the food delivery service Uber Eats, used its high stock price in 2020 and 2021 to make a series of acquisitions to bolster the drop-off and pick-up business. In addition to paying $1.1 billion for Drizly, 90 percent in stock, Uber also acquired Postmates in a $2.65 billion all-stock deal and tried to buy Grubhub.”
“The shutdown comes a year after Lantern, Drizly’s former marijuana delivery service, shut down. Uber spun off Lantern when it bought Drizly.” READ MORE
So far, Texas is keeping the power on: “After issuing a request for Texans to conserve electricity on Tuesday morning, a time that posed a crucial test for the power supply, the grid operator, the Electric Reliability Council of Texas, indicated that it had sufficient power available to handle expected demand for the rest of the day. The situation was expected to further improve with a forecast rise in temperatures. Wind chills fell below zero in the morning in cities like Austin, Dallas, and San Antonio. Many businesses were reopening after a long holiday weekend, but several major school districts, including those in Houston and Dallas, remained closed because of the weather.”
“Brutal winter weather in February 2021 caused the state’s electricity grid to fail, with millions of people losing power for days. The failure contributed to the deaths of more than 240 people.”
“State officials have taken steps since then to prevent such critical infrastructure from failing again when demand increases during cold weather. The state has expanded the amount of solar power on the grid, in addition to large amounts of wind energy.” READ MORE
THE 21 HATS PODCAST
The Worker Co-Op Solution: In this week’s bonus episode, Cameron Madill takes us on his succession journey, which began years ago when he started having conversations with older business owners, many of whom seemed to feel trapped. They’d had a lot of success, they were proud of the business they’d built, but they weren’t sure what to do with it or how to leave it. None of the usual options seemed terribly appealing. Hoping to write a different ending, Madill, now in his 40s, started looking for better options much earlier than most owners, and the one he landed on was an unusual choice: a worker cooperative. Now, there are aspects of this model that are likely to give some owners pause. For one, a co-op probably isn’t going to produce the biggest payday for a selling owner. And if the owner wants to stick around as CEO, he or she will have to report to a board, and that board can challenge any and all of the owner’s decisions.
But Madill, as he explains in a conversation we recorded late last year, before he stepped down from his role as CEO, decided to sell to his employees anyway. Not only is he glad he did, he thinks co-ops are an option far more owners, especially those struggling to find a buyer, should consider.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren