“Democracy is the theory that the common people know what they want and deserve to get it good and hard.”

— H. L. Mencken

It’s that season again — when those running for public office start making promises of all shapes and sizes, even those that defy the laws of economics. But let’s not forget their ultimate goal: to get more votes. As Churchill lamented, “The best argument against democracy is a five-minute conversation with the average voter.”

Let’s examine a few recent examples:

Vice President Harris, in her “economic plan” released on August 15th, promised to ban price gouging. This term usually refers to sellers exploiting market power to unfairly raise prices. With grocery prices up 26% since 2020, addressing this issue sounds appealing. However, even The New York Times felt compelled to critique this proposal, quoting economist Jason Furman: “This is not sensible policy, and I think the biggest hope is that it ends up being a lot of rhetoric and no reality.” Harris’s economic advisers surely know that price gouging bans have never and will never work, but they’re banking on voters not noticing.

Then there’s former President Trump’s tariff proposal: a 10% tariff on all imported goods. While this might appeal to voters who favor “America First” policies and resist globalization, these tariffs would ultimately raise prices for consumers. Although certain adverse measures can be justified in certain areas like computer chips (national security) or medicine (as seen during COVID), they ignore the fact that importing cheaper goods has long kept American lifestyles more affordable.

A final example is the bipartisan silence on the solvency of Social Security and the national debt. Telling seniors they might face pay cuts, or juniors that they need to pay more into the system, doesn’t win votes. As a result, these topics remain taboo until they become ticking time bombs.

Historian Niall Ferguson recently highlighted his “personal law of history:” “Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Habsburg Spain, t ancient régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the U.S. beginning this very year.” Tackling this issue isn’t politically advantageous, so it’s conveniently ignored.

While were not here to predict the future, it is important to recognize the incentives driving political stances. To draw from the Churchill well once again, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” It’s high time for voters to wake up to economic reality – politics is often a game of fantasy.

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

Non-compete agreements have always been considered a valuable business tool, especially after a merger or acquisition. However, these agreements have become more complicated in the wake of a new and controversial final rule, issued in April 2024, by the Federal Trade Commission (FTC) proposing a ban on noncompete agreements for most employees and independent contractors. The rule would have gone into effect in September 2024.

To counter the FTC’s effort, the U.S. Chamber of Commerce and several business groups filed federal lawsuits challenging the final rule, arguing that the FTC lacked the authority to enact the ban and that it violated the Constitution. By August 20, 2024, they prevailed, and the rule was struck down. The Court concluded that the FTC’s decision was “arbitrary and capricious,” stating that the Non-Compete Rule was “unreasonably overbroad.” The Court was specifically offended by the rule’s “one size fits all” solution to the potential hazards of a non-compete.

This ruling will not impact state laws on non-competes. Several states have already limited their use. Minnesota banned workplace non-competes in July 2023, and New York nearly passed a similar ban before it was vetoed. States like Indiana have also restricted non-competes in specific cases.

Non-compete agreements have been around for decades. Some are required at the get-go, as a prerequisite for employment, and some kick in upon termination of employment. The employer will require an employee to sign a non-compete agreement to protect the employer’s business interests, guard against disclosure of trade secrets, and prevent the employee from poaching customers or clients. These agreements will generally limit employment activities in the same field, for a specified period, and their goal is to protect the employer.

Non-competes also may come into play in business combinations. These agreements typically prevent the seller from competing with the buyer within a specified geographic area for a certain time period (usually five years or less).

A non-compete agreement may be estimated in various circumstances, including legal disputes, mergers, financial reporting and tax matters. The most common approach to valuing a non-compete agreement is the ‘with-and-without’ method. Without a non-compete agreement, the worst-case scenario is that competition from the employee or seller will drive the company out of business. Therefore, the value of the entire business represents the highest ceiling for the value of a non-compete.

The business’  tangible assets possess some value and could be liquidated if the business failed, and it is unlikely that the employee or seller will be able to steal 100% of a business’s profits. So, when valuing non-competes, experts typically run two discounted cash flow scenarios — one with the non-compete in place, and the other without.

The valuation expert computes the difference between the two expected cash flow streams and includes consideration of several other factors:

• The company’s competitive and financial position
• Business forecasts and trends
• The employee’s or seller’s skills and customer relationships

Next, each differential must be multiplied by the probability that the individual will subsequently compete with the business. If the party in question has no incentive, ability, or reason to compete, then the non-compete can be worthless. Factors to consider when predicting the threat of competition include the individual’s age, health, financial standing and previous competitive experience. When valuing non-competes related to mergers and acquisitions, the expert will also consider any post-sale relocation and employment plans.

A critical factor to consider when valuing non-competes is whether the agreement is legally enforceable. The restrictions in the agreement must be reasonable. For example, some courts may reject non-competes that cover an unreasonably large territory or long period of time. What is “reasonable” varies from business to business, and is subject to the particulars of the business, the terms of the agreement, state statutes and case law.

What does this mean for your business? The legal battle over non-competes has drawn attention to their use, prompting the corporate world to reconsider work relationships without restrictive covenants. Non-competes will likely be viewed differently moving forward. As with all business-related legislation, businesses should stay updated and informed of changes and revisions that may affect its employment practices and its bottom line.

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

Real Estate Right Now is a video series covering the latest real estate trends and opportunities, and how you can make the most of them. Below, we talk about the benefits of investing in a Self-Directed IRA (SDIRA).

If you’re an independent-minded investor looking to diversify, an SDIRA, or Self-Directed IRA, might be the way to go.

An SDIRA is an individual retirement account that can hold alternative investments. Besides for standard investments – like stocks, bonds, cash, money market funds and mutual funds, an investor can hold assets that aren’t typically part of a retirement portfolio, like investment real estate. A custodian or trustee must administer the account, but SDIRAs are directly managed by the account holder, which is why they’re called self-directed.

SDIRAs come with complex rules and carry some risk, but they offer the opportunity for higher returns and greater diversification.

Self-directed IRAs are generally only available through specialized firms, like trust companies and certain banks. As custodians, these entities are not allowed to give financial or investment advice about your SDIRA. The account holder is responsible for all research, due diligence, and asset management within the account. Some downsides of maintaining an SDIRA include custodial fees and – if you’re not a savvy investor – exposure to fraud.

When investing in real estate through an SDIRA, the IRA’s funds are used to purchase the property. That means that the IRA will own the property, and it can only be used for investment purposes. Know that there are potential tax consequences when an SDIRA carries debt – like a mortgage – and the SDIRA will probably get taxed at a higher rate.

The upsides of investing in an SDIRA are its flexibility, diversification and the control it gives to the investor. SDIRAs offer a wide range of investment options, so the investor is not limited to stocks, bonds and mutual funds. SDIRA holders may also invest in real estate, private debt, privately held companies or funds, or even cryptocurrency. SDIRAs give the investor control to choose which specific assets he believes will perform the most advantageously based on his own research, due diligence and risk tolerance. And similarly to any IRA, investors benefit from tax-deferred or tax-free growth on their investments.

There are a number of rules an investor must be aware of when considering investing in real estate through an SDIRA, like steering clear of “prohibited transactions” and not engaging in transactions with “disqualified persons.”

Disqualified persons are people or entities that cannot be involved in any direct or indirect deals, investments, or transactions with the SDIRA. These persons include the investor, any beneficiaries of the IRA, all family members, any of the IRA’s service providers, any entities (corporations, partnerships etc.) that are owned by a disqualified person, or officer, shareholder or employee of those entities. The investor cannot transfer SDIRA income, property, or investments to a disqualified person, or lend IRA money or to a disqualified person.

Prohibited transactions are those that earn the investor personal financial gain on the investment. The investor may not sell, exchange or lease their personal property to the SDIRA as an investment (a.k.a “double dealing”). Moreover, the investor cannot supply goods, services or facilities to disqualified persons or allow fiduciaries to use the SDIRA’s income or investment(s) for their own interest. In practicality, this means that if you own a construction company or are another type of service provider, the SDIRA cannot contract with your company to do work on the property or provide it with any service. All income from SDIRA assets must be put back in the IRA and the investor must make sure that all rental income from an investment property owned by the SDIRA is deposited in the SDIRA account, and not in his personal account. The investor is not even allowed to spend the night in their SDIRA-owned rental property.

The consequences of breaking these rules are immediate. If an IRA owner or their beneficiaries engage in a prohibited transaction, the account stops acting as an IRA as of the first day of that year. The law will look at it as if the IRA had distributed all its assets to the IRA holder at fair market value as of the first day of the year. When the total value of the former-SDIRA is more than the basis in the IRA – which was the investor’s goal – the owner will show a taxable gain that will be included in their income. Depending on the infringement, they may even be subject to penalties and interest.

Reach out to your financial advisor to learn if an SDIRA is the right tool for you.

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

Roth&Co is pleased to welcome Alice Lerman, JD, MBA as its new Chief Growth Officer. This new role reflects Roth&Co’s dedication to driving strategic growth and innovation, while enhancing the delivery of premium, value-added services and customized solutions to clients nationwide.

Alice has over twenty years of experience as an innovator of strategic growth strategies through industry specialization. She has led industry strategies at two of the nation’s top-10 accounting firms, and managed client experience at two of the top-20 CPA firms. Most recently, at Marcum, a top-15 CPA firm, Alice served as Chief of Industries and led firm-wide growth initiatives, including building out eight nationally-known industry practice groups with leadership teams, and achieving 16% year-over-year organic growth from 2018 to 2022.

Zacharia Waxler, CPA, Managing Partner at Roth&Co, expressed confidence in Alice and Roth&Co’s future trajectory. He said, “Alice Lerman’s role as Chief Growth Officer is not only an inspiring choice in terms of the skill and expertise she offers; it is a crucial step towards driving and shaping the future of Roth&Co. It will lead to substantial growth and will accomplish bold objectives. We are confident that Alice’s strategic vision will propel Roth&Co’s success to new levels.”

As CGO, Alice will partner with Roth&Co leadership to implement its strategic vision for market positioning and growth. She will work alongside Roth&Co’s industry and service line leaders, business development group, and marketing team to increase revenue, discover new business opportunities, expand market presence, establish strategic partnerships, and optimize client experience.

About Roth&Co

Roth&Co is a top-150 U.S. accounting and advisory firm specializing in tax compliance, tax controversy, accounting services and advisory services. With over 250 team members spanning five locations around the globe, Roth&Co was ranked by Inside Public Accounting as one of the fastest growing firms of 2022 and named by Accounting Today as a 2024 Mid-Atlantic Regional Leader and ’Firm to Watch.’

Partnerships, and some multi-member LLCs, are a popular choice for businesses and investments because of the federal income tax advantages they offer – particularly pass-through taxation. In return, they must also follow specific, and sometimes complex, federal income tax rules.

Governing documents
A partnership is governed by a partnership agreement, which specifies the rights and obligations of the entity and its partners. Similarly, an LLC is governed by an operating agreement, which specifies the rights and obligations of the entity and its members. These governing documents address certain tax-related issues that dictate how profits and losses are allocated, outline tax responsibilities, and ensure compliance with relevant tax laws.

Partnership tax basics
The tax numbers of a partnership are allocated to the partners. The entity issues an annual Schedule K-1 to each partner to report his or her share of the partnership’s tax numbers for the year. The partnership itself doesn’t pay federal income tax. This arrangement is called pass-through taxation because the tax numbers from the partnership’s operations are passed through to the partners who then take them into account on their own tax returns (Form 1040 for individual partners). Partners can also deduct partnership losses passed through to them, subject to various federal income tax limitations, such as the passive loss rules.

Special tax allocations
Partnerships are allowed to make special tax allocations. This is an allocation of partnership loss, deduction, income or gain among the partners that’s disproportionate to the partners’ overall ownership interests. The best measure of a partner’s overall ownership interest is the partner’s stated interest in the entity’s distributions and capital, as specified in the partnership agreement.

An example of a special tax allocation is when a 50% high-tax-bracket partner is allocated 80% of the partnership’s depreciation deductions while the 50% low-tax-bracket partner is allocated only 20% of the depreciation deductions. All unique tax allocations should be set forth in the partnership agreement and must comply with complicated rules in IRS regulations.

Distributions to pay partnership-related tax bills
Partners must recognize taxable income for their allocations of partnership income and gains — whether those income and gains are distributed as cash to the partners or not. Therefore, a common partnership agreement provision is one that calls for the partnership to make cash distributions to help partners cover their partnership-related tax liabilities. Of course, those liabilities will vary, depending on the partners’ specific tax circumstances.

The partnership agreement should specify the protocols that will be used to calculate distributions intended to help cover partnership-related tax bills. For example, the protocol for long-term capital gains might call for distributions equal to 15% or 20% of each partner’s allocation of the gains. Such distributions may be paid out in early April of each year to help cover partners’ tax liabilities from their allocations of income and gains from the previous year.

When creating a partnership or LLC, it’s crucial to document tax considerations in a formal agreement to avoid future complications. This includes clearly outlining how income, losses, and deductions will be allocated among members, as well as specifying the tax responsibilities each member will bear. By addressing these tax issues upfront, partners and members can avoid potential conflict and ensure compliance with federal tax regulations.