The IRS Shuts Down the ERC

Employee retention credit claims are often filled with errors and filed by employers that aren’t eligible, which is why the IRS is pressing pause.

Good Morning!

Here are today’s highlights:            

• Did you know there are ways to build a business without taking venture capital?

• Employees say being micromanaged is the biggest reason they change jobs.

• Even small manufacturers can be smart manufacturers.

• Can a startup sneaker brand aimed at Asian consumers break through?

TAXES

Reacting to a wave of fraud, the IRS has stopped processing ERC claims: “New claims for the employee retention credit, or ERC, won’t be processed until at least 2024, the IRS announced Thursday. The tax agency also plans to give tougher scrutiny to an existing queue of more than 600,000 requests. The IRS will allow employers with pending claims to withdraw them and will let many repay their refunds if they no longer think they qualify. Congress created the credit in 2020 as an incentive for businesses to keep employees attached to their jobs during the pandemic, but the refunds accelerated after business closures ended. The ERC’s cost has far exceeded the expectations of lawmakers and administration officials.”

• “The IRS is trying to disrupt a pop-up industry that encourages small businesses and nonprofits to claim the once-obscure credit and receive up to $26,000 per employee. The Wall Street Journal has reported that aggressive marketing by such firms is driving a flow of ERC refund claims that has overwhelmed the tax agency.”

• “Firms that promote the tax credit say they help small businesses and nonprofits get money they deserve under the law, and some pitch it as a lifeline for struggling employers. Lawmakers have at times pressured the IRS to move quickly through the backlog of requests for the credit.”

• “The IRS and many accountants, however, say ERC claims are often filled with errors and filed by employers that aren’t eligible. To receive the tax credit, an employer must show a significant decline in revenue or that a government order fully or partially suspended their operations.” READ MORE

FINANCE

The Insider has discovered that there are actually ways to build a business without taking venture capital: “Contrary to popular belief, there's more than one way to successfully scale a small business. ‘I think the media often portrays one narrative — those unicorn startups that get the big VC funding and that are growing at a crazy pace,’ Marnie Rabinovitch Consky, the founder of the anti-chafe-shorts brand Thigh Society, told Insider. ‘That's great, but that's not a requirement for growth.’ But how can you ensure you're growing at a healthy pace — without growing past what your business can support? How can you build your own ‘just right’ playbook for growth? Insider spoke with three small-business owners about how to strategize growth within your organization.”

• “As a fairly risk-averse founder, Rabinovitch Consky always knew she wanted to find a gradual way to grow rather than raise money to scale as fast as possible. With her chief financial officer, she works backward to figure out her growth targets each year based on a combination of sales forecasting and how much cash she feels comfortable spending on inventory.”

• “She appreciates thinking through the pros and cons of different scenarios and having someone who understands her appetite for risk but can stretch her a bit out of her comfort zone, she told Insider. Sometimes, this means taking out loans to place larger purchase orders for the upcoming season. Sometimes, it means limiting their inventory, which caps their growth but requires fewer up-front resources.”

• “‘It's my goal to grow self-funded until we can't. We're conservative, but we know why we're being conservative,’ Rabinovitch Consky, whose 14-year-old company has already achieved over $16 million in gross revenue this year, said.” READ MORE

HUMAN RESOURCES

Are you a micromanager? “As employers shift their focus from recruitment to retention, they may want to take a closer look at their management styles. That's one takeaway from Monster.com’s Workplace Red Flags survey, which explored pain points in the workplace that could result in turnover. In the report, 73 percent of workers said micromanagement is the biggest workplace red flag.”

• “Workers also cited ‘meetings that could have been an email’ (59 percent), a lack of flexible work hours (51 percent), and weekly status meetings (31 percent) as pain points.”

• “Even some activities designed to boost morale, such as team-bonding exercises (31 percent) and happy hours (27 percent) are a pain point for some workers.”

• “More than half (51 percent) of workers say flexible remote work policies are their biggest green flag in the workplace.” READ MORE

MANUFACTURING

Even small manufacturers can be smart manufacturers: “Many smart factory proponents, bedazzled by technology, overlook the biggest potential sources of value creation. We’ve seen this in visits to hundreds of manufacturing sites over the last five years: that most manufacturers make far too little use of readily available data. Labor hours, for instance; those numbers are collected for payroll, but rarely extracted from clock-in/out systems and analyzed to discover ways to operate more efficiently. Similarly, off-the-shelf RFID technology can trace scrap origins, and simple Internet of Things sensors can deliver real-time insights into utility usage. The ability to see, analyze, and act on information immediately can have as much impact on factory profitability as advanced robotics, at much lower cost.”

• “Take, for example, a commercial bakery in the northeast United States with annual revenues of about $200 million. The company realized $1.5 million in annual savings, which increased Ebitda by 4.8 percent, through targeted smart factory solutions centered on three business issues: reducing scrap and other waste, improving labor costs, and cutting energy use.”

• “A major cause of waste, for example, was baked goods that came off the line underweight (which had to be discarded) or overweight (which used more dough than necessary). By installing digital scales and sensors on the existing manufacturing line, the company caught that waste before it was (literally) baked in — reducing scrap by 25 percent.”

• “Finally, by installing IoT sensors and connecting data feed with existing systems to monitor utilities consumption, annual utilities spend was cut by 5 percent because, among other things, it revealed when equipment was being run unnecessarily.” READ MORE

THE ECONOMY

For the first time, the UAW has launched a strike against Detroit’s Big Three automakers: “After three years of surging prices, limited choices and long waits, the new and used markets were starting to stabilize. Now, a United Auto Workers strike of General Motors, Ford Motor, and Jeep-maker Stellantis is poised to worsen the already tight supply of popular models, dealers and industry analysts say. How a strike affects buyers and owners will largely depend on how long it plays out. For consumers, a prolonged work stoppage could mean fewer options for new and used cars, higher prices and long waits for repairs that depend on specialty parts.”

• “Some dealerships will be less likely to work with out-of-state counterparts to get customers exactly what they’re looking for. Popular used car models could shoot up in price. And repairs may take longer, if shops can get necessary manufacturer-supplied parts at all.”

• “A protracted strike is different. It would likely put pressure on new car prices that surged 34 percent during the pandemic and reached a record high of about $51,800 in August, according to AI-assisted automotive shopping app CoPilot. The average used car was $31,000.”

• “Parts factories temporarily laid off workers during the GM strike in 2019, making certain repairs tricky. Mechanics are bracing for the same this time around. Colonial Cadillac in Woburn, Mass., ordered a three-month supply of all of their fastest-selling parts. ‘We don’t want to order too much where we’ll get stuck with inventory and not be able to sell it in a timely manner even if the strike doesn’t happen,’ says service manager Peter Vincent. ‘But we’re all nervous it’s going to happen and what it could mean for the immediate future of the industry.’” READ MORE

COMPETITION

What might happen if Google loses its antitrust case: “The options range from financial penalties to fundamental changes in Google’s apps and services, which could directly impact consumers. Google has already been fined billions of dollars in antitrust actions in Europe, including a $4 billion penalty upheld last year over misusing the Android operating system to bolster its search business. Justice Department lawyers have signaled that they would seek to go beyond fines, which haven’t made much of an impact on Google’s market position — or its balance sheet. The California search giant, now valued at $1.7 trillion, brought in $33 billion of profit in the first half of the year on $144 billion of revenue. That could mean behavioral restrictions or the even more substantial option of so-called structural remedies, such as forcing Google to sell parts of its business.”

• “Google is accused of making improper deals with computer and mobile phone makers like Apple and Samsung to cement its search engine as the default option. A court could impose a restriction prohibiting Google from making such deals or require terms to create a more even playing field for competitors.”

• “After the E.U. made Google offer search choices on Android phones, the company’s share of the market remained over 97 percent. The incident now forms part of Google’s defense that its high search market share reflects the popularity of its service, not any improper deal-making.”

• “Some antitrust experts said the government could seek to force the company to spin off its Chrome browser business. Chrome has a dominant share of web browsing on computers and Android mobile phones (though not on iPhones). As an independent company, Chrome might add a different search service as its default or make changing the default option simpler.” READ MORE

STARTUPS

A Massachusetts company, 1587 Sneakers, makes shoes it hopes will appeal to all consumers, especially Asians: “Adam King believes society has long ignored Asian Americans. But it was during his time in the sneaker industry that he felt the full sting of what that actually meant. During marketing meetings, whenever the subject of Asian Americans came up, the verdict was always the same. ‘The Asian American consumer is a follower consumer,’ King recalled executives saying. ‘You never need to market to them. You market to hip-hop culture, you market to skateboard culture, and the Asian Americans will just follow. They were basically saying we have no identity.”

• “So earlier this year, King launched footwear startup 1587 Sneakers, which takes its name from the year the first Asians — sailors from the Philippines — set foot in North America. The company, based in West Roxbury, makes high-end sneakers under the banner of being ‘unapologetically Asian.’”

• “1587 is targeting the luxury market where sneakers have increasingly replaced dress shoes as the footwear of choice for work and other formal occasions. And in an inflationary economy, if consumers want to buy sneakers that cost hundreds of dollars, they will likely purchase just one pair that can serve many needs.”

• “‘Starting a product is difficult at the best of times, but starting a product that competes against some of the top brands in the world (Nike, Cariuma, Hoka) is nearly insurmountable,’ said DeAnn Campbell, head of retail strategy and insights for AAG Consulting in Atlanta. ‘By targeting one specific cultural demographic, [1587] can certainly carve out a pool of customers that will resonate with a product that celebrates their identity. It would also be helpful if 1587 could find an additional value proposition to complement their core Proud Asian message.’” READ MORE

THE 21 HATS PODCAST

The temptation of private equity: This week, Shawn Busse, Jennifer Kerhin, and William Vanderbloemen discuss private equity. Both William and Jennifer have been getting emails and calls from representatives of PE firms who come promising all kinds of gifts—connections, expertise, money to invest in the business, and money to take off the table—which is why the temptation can be great. “If anybody even just offered me a three-day vacation, I think I would jump at it,” Jennifer jokes. But of course PE firms do exact a price, possibly including control of what used to be your business, which is why Jennifer says she wonders whether she should even take the phone calls. Entering the conversation, she says, feels a little like entering the Garden of Eden. Do you take a bite of that apple?”

• Plus, Shawn thinks he’s found a better way to manage his company’s credit cards, and Jennifer gives us an update on her new website.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren