The company is positioned as a middleman between small business owners and independent tax attorneys. Innovation Refunds markets to clients, determines if they are viable candidates for the credit and then collects businesses’ documentation. For its services, it charges a contingency fee, which amounts to 25% of the refund once it’s paid out to the business, according to its website.
Innovation Refunds does not, however, make the final decision on eligibility for the credit or determine how much money a business should receive. For this, it says it contracts independent tax attorneys and professionals.
Some former employees said this could insulate Innovation Refunds from potential liability if ineligible businesses claimed the credit. Innovation Refunds doesn’t sign off on the returns submitted to the agency — the independent tax partners and small businessesdo, according to documents viewed by CNBC. The company also says it provides audit protection for small businesses, but would not outline what that entails when asked for comment.
A former employee in a leadership position said, in their opinion, because of this business model“management was encouraged to take aggressive tax positions on qualifications in order to maximize their contingency fee.” Two other former workers echoed this view, saying the company put through businesses whose eligibility fell into a gray area. This was not the case, however, for those who were outright ineligible, as those businesses were rejected, the two former workers said.
The government program, seemingly flush with cash, led to the emergence of an industry of its own, which focused on helping businesses claim the credits. Suddenly, a parade of adsencouraging businesses to apply for the credit were everywhere. Companies promised fast approvals and made statements claiming many businesses qualify for the Employee Retention Credit, or ERC. Some of the companies also took large percentages of the awarded refunds for their services.
Demand for the aid surged, asbusinesses deemed eligible for the credit could claim up to $26,000 per employee by submitting amended tax returns for years in which their operations were affected by Covid-19.
In September, the Internal Revenue Service, the agency that processes these credits, put a moratorium on new applications until 2024. The agency cited “questionable claims″ and “fraud” concerns across the entire industry. IRS Commissioner Danny Werfel said the ERC program was not meant to become a “gravy train” for companies that promote and profit from the refund. The IRS has not named individual promotion companies or consultants.
Innovation Refunds — a consulting firm that focuses on the ERC — was one of the most visible advertisers during the tax credit’s heyday. CNBC spoke to 20 former employees and contractors at varying levels of the company, many of whom requested to remain anonymous due to fears of retaliation.
From manyof those interviews, a picture emerged of a company focused on “aggressive” growth and sales of the product that some called “bullying” or “hound”[ing] of small businesses, up against a “shot clock” to cash in on the ERC. But others spoke well of both their time at the company and its practices, saying it complied with guidelines and helped small businesses access needed capital.
From 2010 to 2020, the minority population grew from 36.3% to 42.4%, but the rate of minority-owned businesses increased at a much slower pace — leading to a wide gap between population share and business representation.
Access to capital is a major issue, and there has been considerable progress in lending to Black entrepreneurs during the Biden administration. SBA loans to Black-owned small businesses surpassed the $1 billion milestone for the third consecutive year in fiscal 2023 and have more than doubled since 2020.
“To continue to under-invest and face these barriers in the communities is something that would limit our economy and our growth competitively,” said SBA Administrator Isabel Casillas Guzman. “The systemic issues around access to capital are of course foremost.”
The SBA’s lending programs aim to eliminate some of these barriers by offering government-backed loans with favorable terms to small business owners. SBA’s 7a loan program provides guarantees for up to $5 million to lenders that finance small businesses, and the 504 loan program provides longer-term financing for major fixed asset purchases, for up to $5.5 million.
Locally, community development financial institutions (CDFIs) have been helping with the mission to increase funding to underserved communities. According to Kerrington Eubanks, senior managing director of strategic partnerships of Black-led CDFI Lendistry, the combination of local CDFI relationships and new technology that allows for more flexibility are the main drivers behind the surge in lending.
More recent changes made by the SBA to the loan program on August 1 should continue to help increase the numbers. These moves include a simpler application process and removal of prior equity investment requirements for loans below $500,000, and implementation of a faster online system for eligibility verification.
Still, lending access remains a prominent barrier faced by Black entrepreneurs. According to Bank of America’s 2023 Minority & Business Owner Spotlight, 44% of Black business owners say they’ve experienced challenges accessing capital, including not knowing how to apply for capital (38%) and having no relationship with a lender (35%). Although Black owners are confident in their ability to succeed, over a third (35%) believe they will never have equal access to capital.
The growth in Black-owned businesses is having a significant impact on the economy. According to the Census Bureau’s 2022 Annual Business Survey, there are an estimated 161,031 Black or African American-owned businesses, with $183.3 billion in annual receipts, 1.4 million employees, and about $53.6 billion in annual payroll.
“If Black-owned businesses are getting funded, the inner-city economies will get better since many small businesses are urban-based,” Rohit Arora, CEO of lending platform Biz2Credit said.
The SBA’s efforts to boost lending rates among minorities can also be seen in growth of SBA-backed loans to Latino-owned small businesses, which also more than doubled since 2020, with over $3 billion in lending. “We know that this is the fastest-growing entrepreneurial community for the last 10 years of Census tracking, and since the pandemic, they grew by 20%.” Guzman said. “We are seeing this highly entrepreneurial community continue to grow, but same as their Black peers, oftentimes are under-invested and underfunded and unable to hit those milestone growths around job creation in GDP,” she said.
The Asian community has historically been strong in the SBA portfolio and highly-entrepreneurial, with more business per capita than the percentage of the population. However, it still faces considerable challenges in accessing capital from financial institutions. The Asian entrepreneurship rate has grown by 18% since before the pandemic, and lending increased from $4.7 billion to $6.4 billion, according to SBA data.
There is still more work to be done, and at a time when the SBA is facing political and legal pushback against a focus on disadvantaged businesses since the Supreme Court decision ending affirmative action has renewed efforts to overturn similar precedents outside an education context.
Guzman said the SBA will continue to strengthen financial literacy, capital readiness amongst entrepreneurs, and reforms to ensure small businesses are getting the assistance they need. “The SBA is about delivering that American dream of business ownership to more Americans,” she said. “In terms of wealth, our minorities are not at par with their white peers. In order to ensure that they have access to capital, we need to make sure that our products are accessible,” she added.
The real estate compensation model is at the heart of the issue. Plaintiffs contend that commission rates are too high, buyer brokers are being overpaid, and NAR rules, along with the corporate defendants’ practices, lead to fixed pricing. By contrast, NAR contends the rules promote competition and efficient, transparent and equitable local broker marketplaces.
NAR, whose CEO left shortly after the landmark court loss, is appealing the $1.8 billion jury verdict, so it could be several years before the case — which covers the Missouri markets of Kansas City, St. Louis, Springfield and Columbia — is resolved. But coupled with similar lawsuits that are in process, the potential for policy changes that could impact realtors’ pocketbooks is palpable.
The impact on the market continues to spread. Shares of Re/Max Holdings, for example, were down over 8% on Tuesday amid fears of litigation, even though it had settled with plaintiffs before the recent NAR case verdict.
Existing home sales recently dropped to their lowest level since 2010. According to an October report from University of Colorado Boulder scholar-in-residence Mike DelPrete, existing home sales are on pace for 4.15 million transactions this year, based on NAR data, which would be down from over 6 million in 2021 and 5 million in 2022.
At a time when home sales are already under pressure, “this lawsuit is just another punch in the gut for real estate franchises,” said Bill Gross, a self-employed real estate broker associate in California with eXp Realty.
Thus far, there’s been little-to-no trickle-down effect for individual brokers and agents as a result of the legal proceedings, but that may not be the case forever, depending on how legal battles, taking place on multiple fronts, shape up. An analysis from Keefe, Bruyette & Woods analyst Ryan Tomasello published last month, before the jury verdict was reached, estimated a 30% reduction in the $100 billion paid in real-estate commissions annually and as many as 1.6 million agents losing their source of income.
Pressure on transaction fees will increase
Fees generally have been under pressure for the past number of years, with technology leading to more transparency and the recent court battles intensify that industry pressure.
Also, as home prices have gone up, the fees are more apparent relative to the deal size, said Gilbert J. Schipani, founder of Tempus Fugit Law, which represents buyers, sellers, realtors, lenders and businesses through commercial and residential real estate transactions.
“It’s another step in the direction that we’ve been going for the past 10 years,” he said.
As the court cases progress, there’s likely to be more disclosure around fees in the future, for transparency purposes, he said.
As Glenn Kelman, CEO of tech-led real estate brokerage firm Redfin, recently wrote, “In the weeks leading up to the verdict, the National Association of Realtors already updated its guidelines to let agents list homes for sale that don’t offer a commission to the buyer’s agent. … Traditional brokers will undoubtedly now train their agents to welcome conversations about fees. … This is as it should be.”
RedFin, and another tech-focused realty brokerage firm, Compass, are among targets added to new legal challenges.
Not only are wages generally up from year-ago figures given the hot labor market, but minimum wage rates are rising in many states as a result of new laws. These can be a double-whammy to small businesses already dealing with inflationary pressures. At the same time, businesses know they need to pay more to attract top talent.
“It’s a very precarious situation that small businesses find themselves in,” said Steve Hall, vice president of economic development lending at the Local Initiatives Support Corporation, a community development financial institution.
Here are some of the biggest wage hikes set to impact Main Street in the coming year:
Beginning on April 1, 2024, California’s minimum wage for the state’s 500,000 fast-food workers will increase to $20 per hour. By comparison, the average hourly wage for fast-food workers in 2022 was $16.21, according to a state release announcing the change, which cites a 2022 research brief from The Shift Project think tank.
Chipotle chief financial officer, Jack Hartung, told analysts on a company earnings call that the chain will likely raise prices in California by a “mid-to-high single-digit” percentage. And McDonald’s chief executive Chris Kempczinski told analysts he couldn’t pinpoint the exact amount, but price hikes were likely to ensue.
This targeted food sector increase is separate from California’s hike to its minimum wage, which is rising to $16 in 2024 from $15.50, a 3.2% climb. Some cities and counties in California have higher local minimums.
“I struggled farming, I had too many disasters and was never able to put any money away,” Zimmermann told CNBC, speaking from an office at his current employer.
He’s now working in the manufacturing industry, maintaining equipment and setting up the sizing for customized metal parts. On his feet at the machines on the factory floor is physically demanding so Zimmermann works part-time.
His employer, Mitchell Metal Products, has fewer than 100 workers and lets its part-time employees participate in the 401(k) plan.
“I really appreciate being able to [participate in the plan],” Zimmermann said. “I don’t have a lot of savings built up right now, not compared to what I’m going to need and with inflation with the way it is.”
“Whether someone’s working full time or part time, we view them as our most valuable assets,” said Tim Zimmerman, president of Mitchell Metal Products, noting that 84% of his employees participate in the company retirement plan.
More part-time workers to get 401(k) access in 2024
Just 66% of private-sector workers in the U.S. have access to an employer defined contribution plan, according to the U.S. Bureau of Labor Statistics. Tax breaks under recent legislation are aimed at making it easier for companies to offer the benefit.
Under the original Secure Act, beginning in 2024, employers must extend eligibility for the company retirement plan to part-time employees who work at least 500 hours per year for three consecutive years. Starting in 2025, Secure 2.0 reduces the work requirement to two years. Companies already have been required to grant eligibility to employees who work at least 1,000 hours in a year.
“I think the real value is that we’re having conversations with plan sponsors,” said Eric O’Donnell, director of product strategy and marketing strategy for Sentry Insurance, which offers small and micro businesses retirement plan services.
Making part-time workers eligible for retirement benefits also opens up conversations about saving and investing with newly-eligible employees.
Such conversations, he said, helps them understand retirement plan investing “is for you, and it is something that you should be thinking about, it’s not for the wealthy, it’s for the everyday American.”
The IRSannounced Tuesday that 2023 would be a “transition year” for a new tax reporting requirement affecting such payments. Once in place, it will trigger Form 1099-K for just $600 in payments, even if that income stemmed from a single business transaction.
The $600 threshold will go into effect for tax year 2025, and taxpayers over the limit can expect to receive a 1099-K at the beginning of 2026.
However, business payments have always been taxable and filers should still report 2023 income even if they don’t receive a Form 1099-K.
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements,” IRS Commissioner Danny Werfel said in a statement.
The agency said it also plans on updates for Form 1040, which is used by taxpayers to file individual income tax returns, and related schedules, to “make the reporting process easier.”
“Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to the Form 1040,” Werfel said. “It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area.”
The announcement comes amid bipartisan scrutiny of the reporting requirement, with lawmakers and industry professionals citing concerns about taxpayer confusion. Prior to the delay, the IRS was expecting an estimated 44 million 1099-Ks for 2023.
The platform introduced TikTok Shop in the U.S. in September as an in-app shopping experience, capitalizing on the #TikTokMadeMeBuyIt trend. The shop gives opportunities to both content creators who could sell their own products and avid TikTok users who could buy directly on the app, following in the footsteps of other social media apps such as Instagram.
Though TikTok Shop previously faced backlash and was forced to shut down in Indonesia, consumers are increasingly trending toward buying off social media.
A recent Shopify-Gallup survey says nearly half of respondents ages 18 to 29 said they plan on buying some holiday gifts on social media apps. And according to an ICSC report, 86% of Gen Z shoppers — which it defines as ages 16 to 26 — say social media influences their shopping habits.
“There’s some crazy coupons on there combined with sale prices, and then you end up getting things 50% off or 60% off,” the Tennessee resident told CNBC. “There’s no good reason to not be using it as far as I can tell.”
Though some argue that using the platform strips shoppers of their privacy, Vaughn said it’s clear that consumers today are already giving up data in most of their apps. Instead, he’s leaned into the trend, with his most recent purchase being Pokemon cards. Whereas the market price for cards would normally be around $70, Vaughn said, he bought his on TikTok Shop for just $33 with free shipping — and they arrived in under a week.
Vaughn said he plans on doing at least some of his holiday shopping on the app and is recommending his friends and family use TikTok Shop as well.
Social media and commerce
With in-app purchases, the ability to buy quickly is even more prevalent. It’s a trend that was especially bolstered by the earlier days of the pandemic, when people were largely staying home either due to mandates or worries about catching Covid. According to the U.S. Department of Commerce, Americans spent $791.7 billion on e-commerce during 2020.
According to TikTok, the Shop platform has more than 200,000 sellers, and the #TikTokMadeMeBuyIt hashtag has more than 77 billion views as of this month. For this holiday season, TikTok said, the Shop feature will include multiple promotions, coupons and deals on trending products.
Though in-person commerce has made a comeback post-pandemic, according to Gartner digital commerce analyst Ant Duffin, consumers’ propensity to buy online has undoubtedly surged in the past few years.
The social media commerce landscape has constructed a particularly interesting ecosystem made up of brands, creators, technology and consumers, each playing a role in bolstering the e-commerce space, Duffin told CNBC.
“What you’re now starting to see is TikTok bucking the trend where they’re providing a complete social commerce ecosystem of tactics, from paid advertising to short-form video through to immersive shops and being able to transact all within the app,” Duffin said.
This new realm could be a “fresh battleground” for small and medium-sized businesses, according to Duffin. Especially over the holiday season, smaller businesses can raise awareness and build their brands successfully on the social media app and fill in the gaps for brands looking to capitalize on new market opportunities.
However, Duffin said he does not believe TikTok Shop will be able to rival the likes of Amazon or have an impact beyond a stocking stuffer purchase just yet.
But not everyone is a fan of being able to scroll and purchase simultaneously.
Grace Romine, a sophomore at Indiana University, said she first found the Shop feature to be annoying, especially with the increased advertisements. She also said she found it was drowning out some of the creative content produced by creators on the app.
Romine said she doesn’t agree with some of the ethics of the products being sold on the app, especially with lower prices prompting broader conversations about where those products are coming from.
“TikTok Shop does offer the opportunity for small businesses to succeed, and small businesses really need e-commerce platforms,” she said. “But a lot of the products I’ve seen that thousands of people are promoting are not small businesses.”
“They are, you know, the $4 purse,” she said, “and if they’re selling it for $4, what are the ethics behind that? Is it sustainably made? What kind of labor was used to make this product?”
Romine said the combination of fast fashion and overconsumption work together to sour her taste for the Shop feature, even as she sees classmates walking around campus in sweatshirts she’s seen ads for on the app. She’s also eager to see how the app adapts to its “first Christmas” in the holiday market.
For Fordham University senior and history major Ana Kevorkian, the ads have become increasingly tempting even though she’s “principally opposed” to buying anything on TikTok Shop. She said she’s specifically had her eye on a leather purse being sold for $3, but she’s still questioning the ethics behind it.
“I try to be intentional about my shopping, and I think TikTok Shop is the exact opposite of intentional shopping,” Kevorkian said, adding that it encourages people to overspend and overconsume.
“It takes 10 seconds to go onto [web browser] Safari and buy something, and that’s not a huge inconvenience,” she said. “If we need to shop so much that that is too much, then there is something wrong with the culture.”
Still, every time that leather purse pops up on her For You Page, Kevorkian said she hesitates. Since she’s never bought anything on the app, she has an automatic 70% discount for her first purchase.
President Biden’s approval among small business owners has hit a new low, according to the CNBC/SurveyMonkey Small Business Survey, with a net approval rating of 30. Measured from his first days in office, the president’s approval has dropped by 13%, from 43% in the first quarter of 2021. Business owners who strongly disapprove of his handling of the presidency (56%) far outweigh those who strongly approve (13%).
The latest data, taken from a survey of over 2,000 small business owners conducted by SurveyMonkey for CNBC between November 16-21, echoes recent survey work from NBC News and others showing new lows in approval for Biden and hypothetical election rematch scenarios in which former president Donald Trump has the edge in battleground states.
After a recent NBC News poll found that nearly 60% of registered voters disapprove of Biden’s handling of the economy, Treasury Secretary Janet Yellen appeared on CNBC to discuss the reality that is underlying the negative economic outlook, citing food prices and rent prices that remain high even if they have been dropping from the peak inflation period. “I do think we’re making considerable progress in bringing inflation down. But Americans do notice higher prices from what they used to be accustomed to,” she said on “Squawk Box” on Monday.
To be clear, the views of the small business community are significantly influenced by political partisanship, and it is a demographic that historically has skewed conservative. Only 7% of Republicans have a positive view of Biden, versus 85% of Democrats. The role of partisanship in the results flows down to issues as immediate as the holiday sales outlook, with 37% of GOP business owners expecting a worse sales season than last year, versus 15% of Democrats.
Among Democrats, the Biden endorsement is mixed. Those saying they “strongly approve” of Biden’s handling of the presidency (44%) barely eclipses those (42%) who say they “somewhat approve.” While the largest block of business owners (48%) who identify as Democrats describe the economy as good, a combined 40% of Democrats describe the current economy as fair (29%) or poor (11%). And as a general statement, Democrats are also less likely (69%) to say their party will do more to help small business owners than Republicans (86%) who say the same about the GOP.
Among the key block of independents, small business voters remain closer to Republicans in their view, with only 26% expressing approval of Biden, and independents who strongly disapprove of Biden (48%) far surpassing those who strongly approve (5%). Biden still has time to make up ground among independent business owners, with only 13% saying they have already decided on a candidate, according to the survey, and nearly half (45%) saying they currently have no preference.
The negative view of Biden comes amid a rebound in overall small business confidence, according to the survey, which saw it edge up to 46 in Q4 — matching the highest level it has reached during Biden’s presidency — and up from the all-time low of 42 the index had slipped back to in Q3. Confidence among Biden supporters, specifically, also rebounded from the prior quarter, which had tracked a notable slip. Also notable in assessing political versus economic views: small business confidence among respondents who disapprove of Biden has reached an all-time high for this survey during his term, at an index score of 40 in Q4. Across all political leanings, small business owners are more likely to rate the current conditions for their business as “good” or at least “middling,” as opposed to “bad.”
The sales and job outlook among business owners is also tilted to at worst a benign view. Nineteen percent of Republican small business owners and 20% of independents describe the economy as bad. Similar minorities of small business owners across political affiliations expect revenue and staffing levels to decrease over the next 12 months, and they are much more likely to predict, at worst, a stable outlook for both sales and hiring.
Inflation and interest rates remain primary reasons for Biden’s struggles to gain more support from the small business community, according to the survey. After the most aggressive Federal Reserve interest rate hikes in decades, many small businesses are faced with double-digit percentage loans, if they can even access lending in a much tighter banking and credit environment.
And even with all of the major inflation data points showing significant progress made by the Fed in bringing prices back under control, small businesses — which are much less likely than large corporations to benefit quickly from a drop in input prices — lack confidence in the inflation outlook, a view of the potential for reigniting inflation that in recent months has also been rising among consumers, even as prices fall.
In spite of both consumer and wholesale prices falling to multi-year lows in recent reports, a majority of small business owners say inflation has not peaked, with 70% saying prices will continue to rise, including 43% of Democrats who hold this view.
Seventy percent of small business owners, including over half of Democrats, say they are still experiencing a rising cost of supplies, while 42% say wages are still going up.
Sixty-six percent of Republican business owners and 62% of Democratic business owners say they have offered higher wages in the past three months to attract workers.
The Moores are fighting a levy on company earnings that weren’t distributed to them — which challenges the definition of income — and could have sweeping effects on the U.S. tax code, according to experts.
“This could have the biggest fiscal policy effects of any court decision in the modern era,” said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, who co-authored a report on the case.
The case challenges a levy, known as “deemed repatriation,” enacted via the 2017 Tax Cuts and Jobs Act. Designed as a transition tax, the legislation required a one-time levy on earnings and profits accumulated in foreign entities after 1986.
While the 16th Amendment outlines the legal definition of income, the Moore case questions whether individuals must “realize” or receive profits before incurring taxes. It’s an issue that has been raised during past federal “billionaire tax” debates and could affect future proposals, including wealth taxes.
Former House Speaker Paul Ryan, who helped draft the Tax Cuts and Jobs Act, said at a Brookings Institution event in September that the goal was to “finance a conversion from one system to another, and it wasn’t to justify a wealth tax.”
Ryan, who doesn’t support a wealth tax, said using the Moores’ argument to block one would require getting rid of “a third of the tax code.”
Pass-through businesses could be affected
Depending on how the court decides this case, there could be either small ripples or a major effect on the tax code, according to Daniel Bunn, president and CEO of the Tax Foundation, who has written about the topic.
If the court decides the Moores incurred a tax on unrealized income and says the levy is unconstitutional, it could affect the future taxation of so-called pass-through entities, such as partnerships, limited liability corporations and S corporations, he said.
