Trends – Roth&Co

“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.

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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.

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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.

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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.’

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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.

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Political passions run deep but allowing them to dictate investment decisions can be perilous. A 2020 UBS poll revealed that nearly half (46%) of American investors planned to adjust their portfolios based on the outcome of the presidential election. This highlights a concerning trend: letting political affiliation influence financial strategy. Beyond the inherent difficulties of market timing, throwing political aspects into the mix can lead to even greater risk.

Then there’s the research that exposes a more insidious enemy: confirmation bias.

Confirmation bias is the cognitive tendency to seek out, interpret, and favor information that confirms our pre-existing beliefs, while disregarding or downplaying contradictory evidence. In simpler terms, we often see what aligns with our established views, and readily reinforce them while dismissing anything that may challenge them. The thinking is always that if the “other guy” wins, markets will crash.

Even more concerning, party affiliation often colors perceptions of the national economy, with the party in power typically receiving higher approval ratings.

This chart illustrates a persistent trend: we tend to feel good about the economy if our party is in power, and vice versa. So it’s not only a divide in regard to what will happen in the future, we can’t even agree on what is happening right now! The last time public opinion was in agreement regarding the economy was during the Clinton administration, when strategist James Carville famously declared, “It’s the economy, stupid!” Apart from that, there’s always been a clear divide.

What may be surprising is that historically, investing only under a democratic president yielded a much higher return than investing under only republican administrations. The growth of a $10,000 investment in 1950 would have been $405,540 under the Democrats, versus only $77,770 under the Republicans. But here’s the kicker – had you remained invested the whole time, the growth of that $10,000 investment would have come to $3.15 million dollars!

Does the president actually have any sway on this? Or are market cycles the main actor? It’s hard to say that President Bush was at fault for the great recession and housing crisis of 2008, and it was definitely good luck for President Obama, to be in office during the recovery. Markets and business cycles sing to their own tune, and don’t care who is warming the chair in the oval office.

Despite being informed and educated, investors will often still want to base their “thematic investing” decisions, where they invest in a certain sector or theme, on their projected election outcome.

Consider someone who believed President Trump’s “drill, baby, drill” slogan would boost the oil and gas industry. Despite this expectation, the SPDR Fund Energy Select Sector (ticker XLE) plummeted by 48% during his tenure. Similarly, those who assumed natural gas would thrive under President Biden have been disappointed, with most ETFs tracking natural gas being down by about 70% during his time in office.

The takeaway? When it comes to your investment accounts, leave confirmation bias at the login screen. Focus on what truly matters: your financial goals. By employing a well-defined strategy tailored to your individual needs and risk tolerance, you can navigate the markets with greater clarity and avoid the pitfalls of political influence.

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Maximizing current-year depreciation write-offs for newly acquired assets is a must for every business. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1.

Here’s how to coordinate these write-offs for optimal tax-saving results.

Sec. 179 deduction basics

Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software, and fixtures — qualify for the first-year Sec. 179 deduction.
Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.
Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP).

QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework.
The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)

Bonus depreciation basics
Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.

For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.

Sec. 179 vs. bonus depreciation
The current Sec. 179 deduction rules are generous, but there are several limitations:

- The phase-out rule mentioned above,
- A business taxable income limitation that disallows deductions that would result in an overall business taxable loss,
- A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and
- Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations.

First-year bonus depreciation deductions aren’t subject to any complicated limitations but, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.

So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.

Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000.

- You can deduct the $300,000 on your corporation’s 2024 federal income tax return.
- You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation.

So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.

Manage tax breaks
Coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea and a useful tool in a business’ tax strategy toolbox. Applied correctly, this strategy may allow your business to potentially write off some or all of its qualifying asset expenses in Year 1. That’s good for your books and good for your business.

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Taxpayers and practitioners agree that attempting to contact the IRS by phone can be a frustrating endeavor. Every year, millions of taxpayers seek IRS assistance by reaching out to the IRS’ toll-free and international telephone lines with their federal tax questions, requests for tax forms, to check on the status of their refunds, or to follow up with IRS correspondence or notices. All too often, they are met with long wait times, disconnected calls and general anxiety. The Taxpayer Advocate Service, an independent organization within the IRS, was created to champion the taxpayers’ cause by mediating between taxpayers and the IRS to help resolve tax issues. But a recent study of TAS phone lines conducted by the Treasury Inspector General for Tax Administration (TIGTA), found that catching TAS for a heart to heart talk is equally as challenging as contacting the IRS directly.

With the Inflation Reduction Act (IRA) of 2022, $80 billion in supplemental funding was allocated to help the IRS up its game. One area of improvement focused on increasing the level of service via IRS telephone lines. In November of 2023, the Treasury Inspector General issued a report on the quality of customer service with the objective of determining whether IRS help lines were operational and able to provide taxpayers simple, fast, and accessible customer service.

Testers called 102 IRS customer service telephone numbers during the 2023 tax filing season to evaluate the quality of customer service and found that 21 of them placed the caller on hold for more than 30 minutes, before the caller ultimately ended the call. Other flaws emerged; taxpayers were referred to incorrect phone lines, the offer to provide messages in either English or Spanish was inconsistent, taxpayers did not always receive a return call as promised and hold times were excessive. In its Objectives Report to Congress for fiscal year 2025, the National Taxpayer Advocate service cited flaws in IRS taxpayer communications and advocated for the IRS to, “do a more comprehensive measure of phone service that includes the quality of the caller’s experience.”

Despite the Advocates Service’s best intentions, when TIGTA turned its spotlight on TAS itself, it didn’t fare much better. In July of 2024, TIGTA issued an evaluation report about how ready and responsive TAS phone lines were; the results sounded familiar.

TAS telephone lines were found to be inconsistent in providing taxpayers with the ability to speak with a TAS representative. TIGTA called all 76 local TAS telephone lines in the United States, using the telephone numbers listed on the TAS and IRS websites. Some telephone lines were found to be out of service, voicemail boxes were often full and unable to address the call, and recorded scripted messaging and callback times were inconsistent. Of the 76 calls made, only two were answered by a TAS representative. Automatic voicemail prompts promised that callbacks would be received anywhere between one business day to as long as four weeks. TIGTA also compared contact information for telephone numbers, fax lines, and local addresses between what was listed on the TAS and the IRS website and found several discrepancies. It identified voicemail messaging that had significant differences in the information being communicated.

After reviewing TIGTA’s draft report, TAS stepped up to the plate and agreed with much of its results and recommendations. TAS took corrective actions to make changes to voicemail messages, made updates to the IRS and TAS websites, and is striving to provide more consistent information to taxpayers. However, as claimed by its compatriot, the IRS, TAS management contends that it is short staffed and cannot adopt all of TIGTA’s recommendations.

Despite ongoing efforts to improve, IRS-taxpayer communications remain a messy business. In our experience, communicating with the IRS is best achieved by utilizing their call-back feature; which we have found to be fairly dependable and helpful. Nevertheless, when attempting to work out your issues with the IRS, patience and perseverance must rule the day.

Democracy’s Price Tag

Recent FTC Rule Could Affect Value of Non-Compete Agreements

Video: Real Estate Right Now | SDIRAs

Roth&Co Welcomes Alice Lerman as Chief Growth Officer

Navigating Tax Complexities: Craft Partnership Agreements and LLC Operating Agreements with Precision

Politics and Portfolios: A Recipe for Confirmation Bias

Maximizing Tax Savings: The Advantages of Section 179 and Bonus Depreciation Deductions in Year One

Is Anyone Home? TAS Telephone Operations Scores an All Time Low