The Rise and Fall of an ERC Mill

After amassing some $1.5 billion in fees, Howard Makler says his firm, Innovation Refunds, is ready to pivot.

Good Morning!

Here are today’s highlights:            

• Let’s take another look at last week’s stunning jobs report.

• Has Kentucky found an answer to the child-care-worker shortage?

• For some ecommerce businesses, the pickle-jar sweatshirt craze has been life-changing.

• The cities with the highest office-vacancy rates are in Texas.

PROGRAMING NOTE

There will be no Dashboard podcast published today. It will return next week.

TAXES

Inside the boom and bust of an Employee Retention Credit mill: “Howard Makler kicked off 2023 with a celebration for his employees, toasting a banner year. The festivities began with yoga led by the small company’s ‘well-being mentor.’ A Saturday night banquet featured a red carpet, ice sculptures, and a performance by a drill and drum band. By late September, Makler had kicked much of the staff to the curb. His company, Innovation Refunds, is down to 270 full-time workers from a peak of 1,000. It has halted all its marketing and stopped much of its activity.”

• “Makler, 56 years old, is an entrepreneur who relishes the spotlight, posts selfies with staff and appears in some of his company’s ads. He lives in a modern waterfront home in Miami and recently threw out the honorary first pitch for a Miami Marlins game.”

• “The IRS has advised employers to beware of ERC promoters who charge large upfront fees or are paid by collecting a percentage of refunds, saying taxpayers should always avoid providers who base their fee on the size of the refund.”

• “Innovation Refunds has processed more than $6 billion in ERC claims, for which it could earn roughly $1.5 billion in fees. Some accountants who have seen its work question the quality of its analysis.“

• “Innovation Refunds has stopped submitting new ERC claims. Makler said he would decide whether to resume after the IRS releases new guidance. ‘Our company is pivoting,’ Makler said in an interview. ‘We are not hanging our future on returning to the ERC.’” READ MORE

SELLING THE BUSINESS

Carol Tice learned the hard way that you need to have your books in order before trying to sell: “Negotiations on my business sale were several weeks along when my buyer started to ask disturbing questions. They’d compared my business account’s net income figures with the monthly profit-and-loss statements for the monthly-membership platform I’d spent a decade building. Weirdly, net revenue in the business account was lower than the P&Ls showed. A lot lower. As we dug into the numbers, it became clear that the accountants I hired to help me prep the business for sale were incompetent. They misclassified some expenses and double-counted some revenue. The result was that my business was revalued to a lower sale price.”

• “I thought I’d done everything right, hiring accounting pros to do P&Ls. Instead, I was going to have to accept $100,000 less than expected for my business, if I could even get the deal done. I spent a solid week feeling like I was about to throw up. Clearly, there was more I should have done to clean up my books before marketing my business for sale.”

• “If you’ve made accounting a low priority in your business up until now, their first task is to clean up the past three years’ records, says Holly Magister, CPA, certified financial planner, and founder of the seller’s resource and advisory platform Exit Promise. Buyers will often want to research back that far.”

• “Many small businesses operate on a cash basis because it’s simple to administer. But if you sell annual memberships or create service contracts the business fulfills long-term, the cash method doesn’t create the most accurate income picture, said Daniel Chamberlain, who’s a senior M&A associate at the tech-business advisory firm FE International.” READ MORE

THE ECONOMY

Here are some highlights from last week’s stunning jobs report: “Jobs in bars and restaurants have returned to pre-pandemic levels. When covid hit, the shuttering of businesses around the country and reluctance of consumers to dine out eliminated about half the jobs across the industry. That is, between February and April 2020, about 6 million restaurant and bar jobs vanished. Even as the economy reopened, these employers struggled to hire back workers. Some longtime food services workers had decided to leave the business altogether, trading up to better-paying or more humane positions. Some jumped from employer to employer amid the bidding war for staff.”

• “State and local governments are still deeply in the hole. Hence all those headlines about shortages of teachers, bus drivers, cops, corrections officers, etc. To be clear, state and local governments have lots of vacancies but are struggling to fill them. This is the result of a collection of factors.”

• “The share of prime-working-age women who are employed is at a record high.Despite all those warnings about a ‘she-cession’ setting working women back a generation, working women seem to be doing better than ever. After some stagnation in women’s employment early in the 21st century, women ages 25 to 54 are more likely to be working today than at any previous time in history.” READ MORE

HUMAN RESOURCES

Kentucky may have found an answer to the child-care-worker shortage: “With most of the federal government's pandemic relief money for child care now spent, it's up to states to step in with new ideas to solve the many problems plaguing the sector. A year ago, Kentucky came up with a creative solution that is already paying dividends. The state made all child care employees eligible for free child care, regardless of household income. ‘That is a beautiful incentive,’ says Jennifer Washburn, who owns and runs iKids Childhood Enrichment Center in Benton, Ky. ‘Any of my teachers who have children — they can work for me, and their children are paid for by the state.’”

• “In the pandemic, competition for workers intensified. The local Target started paying $17 an hour. The starting wage at Domino's was $15 an hour. In Kentucky, child care paid around $12 an hour.”

• “It does come at a cost to the state, which pays more than $200 a week in many counties for an infant spot, and less for older children. But already, it seems like money well spent. [Sarah Vanover, who was then director of Kentucky's Division of Child Care] is hearing from child-care centers who are overjoyed that they finally are able to fully staff up their operations, allowing them to open up spots for working families.”

• “She's also hearing from other states — 30 to date — interested in what Kentucky has done.” READ MORE

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ECOMMERCE

Pickle-jar sweatshirts are the latest viral craze on TikTok Shop: “The pickle-wardrobe mania is emblematic of what sets TikTok Shop apart from e-commerce competitors like Shopify and Amazon. Just like TikTok's non-shopping content, TikTok Shop is built around viral videos, be it a surge in viewer interest in pickle-jar sweatshirts or a mad rush to buy freeze-dried Skittles. It can be both a blessing and a curse for sellers. A viral video tagged with a product can give Shop sellers 15 minutes of fame and a bump in revenue, but not necessarily sustainable income. And a sudden rush of orders can send merchants scrambling to meet TikTok's strict three-day shipping window in the U.S.”

• “While a three-business-day processing time may be standard for enterprise sellers, many of the early adopters of TikTok Shop are small-business owners or side-hustlers who process goods out of their homes. The burden of meeting strict shipping requirements, particularly when sales volume spikes, is heavy.”

• “For Jessica Slone, founder of Bad Addiction Boutique, keeping up with order volume and meeting TikTok's requirements became unmanageable after thousands of users — more than 42,000 to-date — shelled out to purchase her company's $44 ‘Pickle Jar Sweatshirt.’”

• “Slone and her husband first enlisted their kids and her in-laws to help with order packing. But eventually, after repeated nights working until three in the morning, she decided to outsource the task to a local print and fulfillment team.”

• “‘It's been absolutely life-changing for us and for our business,’ Slone said. ‘TikTok Shop is kind of this roller coaster, and right now it's on this amazing uphill journey. And we're going to ride that roller coaster until pretty much the wheels fall off.’” READ MORE

RETAIL

Self-checkout may be facing a reckoning: “More than 30 years after the introduction of self-checkout and its promises of labor-cost savings, the tech has become ubiquitous in stores across the U.S. Now, retailers including Costco, Walmart, and Kroger are rethinking some of their self-checkout strategies. Some are finding they still need employees to combat theft, assist with purchases, review IDs, and check receipts. Costco, for example, has started asking staff to check membership cards in the self-checkout lanes, as well as assist with scanning items.”

• “Walmart started rolling out a hybrid approach to self-checkout in 2020. The redesigned checkout zones replaced traditional lanes with a staffed corral of kiosks where shoppers could opt to scan and pay on their own or have a worker do it for them.”

• “Kroger, meanwhile, is going all in on self-checkout in at least one store where it's no longer offering traditional registers. But Kroger told Retail Dive the change didn't result in labor cuts, and it still had front-end staff to assist with scanning and bagging groceries. This isn't exactly the labor-minimizing tech retailers were promised.”

• “Christopher Andrews, a Drew University sociologist who wrote ‘The Overworked Consumer,’ told CNN last year that, far from being the autonomous money collectors retailers were hoping for, self-checkout stations required supervision, maintenance, and IT support. Self-checkout ‘delivers none of what it promises,’ he told the outlet. READ MORE

POLICY

The Biden administration is having a big impact on employee-employer relations: “In isolation, it's not unusual for each administration to shape regulations to its desired outcomes, but experts agree that a long series of announcements, rulings, rules, and partnerships from the Biden administration, taken together, amount to an expansive and wide-ranging transformation of the employee-employer relationship. It’s an aggressive approach by the administration that has drawn criticism from business groups and has few parallels in recent memory, experts say.”

• “The Federal Trade Commission and the Department of Labor signed an agreement last month to crack down on issues such as labor market concentration, one-sided contract terms and labor issues within the broader ‘gig’ economy.”

• “That includes the FTC's high-profile proposed rule early in 2023 that seeks to broadly ban non-compete agreements as well as overly restrictive non-solicitation agreements and costly training-cost repayment plans.”

• “As a result of another effort by the NLRB, companies should be reviewing which employees count as independent contractors. A decision issued by the agency this summer overrules a litmus test established during the Trump administration in 2019 for how businesses classify independent contractors in favor of an earlier test, one established in 2014.” READ MORE

OFFICE SPACE

You might be surprised to learn which cities have the highest office-vacancy rates: “America’s highest office vacancies aren’t in the East and West Coast cities that have been shedding population and workers. They are in Texas, a thriving Sunbelt state that has been luring companies away from the big coastal cities. Houston, Dallas, and Austin top the list of major U.S. cities with the highest office-vacancy rates, according to Moody’s Analytics. About 25 percent of their office space wasn’t leased as of the third quarter. That was more than double New York’s vacancy rate of 12 percent and well above San Francisco’s vacancy rate of 17 percent.”

• “Vacancies are high largely because Texas developers build too much. All three cities experienced a surge in construction in the 1980s, when tax rules favored developers and loose lending created a commercial real-estate bubble. Another construction spurt in the late 1990s aggravated the problem.”

• “Texas’ high vacancy rate offers more evidence that the U.S. office market’s biggest problem hasn’t been primarily remote work. It is a glut of buildings across the U.S., which has been decades in the making and helps explain why the country has long had much higher vacancy rates than Europe or Asia.”

• “Most of the aging office buildings are in the suburbs around the three big cities. They are increasingly out of favor with a new generation of desk workers who tend to prefer modern buildings in walkable urban neighborhoods.” READ MORE

OPPORTUNITIES

In New York City, the business of caring for plants is thriving: “Felipe Gallegos used to work in fashion, designing store displays for Abercrombie & Fitch and Uniqlo. Now he spends his days with plants, helping them thrive in office buildings across New York City. On a recent morning, Mr. Gallegos and eight of his fellow plant keepers from Greenery NYC, which designs plant installations and maintains them for a range of companies, were gathered outside the Etsy headquarters in Brooklyn. As they prepared to advance on the 20,000 plants growing within the nine-floor building, they might have been mistaken for an artist collective or a large alternative band. The Greenery crew is part of a new plant crowd — people who worked in theater, media, fashion, and the arts before deciding that they would be happier taking care of monsteras and birds of paradise for a living.”

• “Rebecca Bullene, the founder of Greenery NYC, said her company has been flooded with applicants lately. ‘They say, I keep seeing these plant stores. I need a lifestyle shift,’ she said. That’s a big change from a decade ago, she added, when she had a hard time finding workers, and most came from a landscaping background.”

• “Most offices require a team of three or four tenders, who spend a few hours watering, pruning and perhaps moving plants so that they receive the appropriate amount of light and shade. The Etsy workplace, at 200,000 square feet, presents a real challenge, and the crew may stay there up to 8 hours.”

• “In 2012 came The Sill, a New York store with the motto ‘Plants Make People Happy.’ Its founder, Eliza Blank, set out to not only sell chicly potted houseplants to nature-starved urbanites but to build a whole mood around plants. ‘It felt like this overlooked category that had all the makings of a beautiful brand,’ Ms. Blank said. Soon her company was installing thousands of plants in offices across the city, in luxuriant displays.” READ MORE

THE 21 HATS PODCAST

It’s Like Planning Your Own Funeral: This week, Jay Goltz tells Shawn Busse about the latest stop on his journey to figuring out whether an employee stock ownership plan is right for his business. Jay’s latest adventure includes waking up at 4:30 in the morning in Minneapolis too anxious to sleep and deciding to leave the seminar and drive back to Chicago. But on that six-hour return trip, Jay says his anxiety turned into clarity. In fact, he thinks he’s pretty sure he knows now what he wants to do. Of course, he has said that before.

• And we continue to learn more about ESOPs, this week hitting upon an interesting issue: ESOP enthusiasts love to tout the benefits of turning employees into owners. But are they really owners? And is that the right message to send them? “If you bought 10 shares of General Motors stock,” Jay asks, “would you tell your neighbors that you're an owner of General Motors?”

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

Thanks for reading, everyone. — Loren