What Is the 25% Rule?

There are two common usages of the term “25% rule”:

1. The 25% rule is the concept that a local government’s long-term debt should not exceed 25% of its annual budget. Any debt beyond this threshold is considered excessive and poses a potential risk, as the municipality may have trouble servicing the debt.
2. The 25% rule also refers to a technique for determining royalties, which stipulates that a party selling a product or service based on another party’s intellectual property must pay that party a royalty of 25% of the gross profit made from the sale, before taxes. The 25% rule also commonly applies to trademarks, copyrights, patents, and other forms of intellectual property.

Understanding the 25% Rule

In both uses of the term, the 25% rule is more a matter of customary practice or heuristic (i.e., a rule of thumb), rather than an absolute or optimal threshold, or a strict legal requirement.

In the public finance setting, the 25% rule is a rough guideline for fiscal planning based on the confidence of bondholders and credit rating agencies. In the intellectual property arena, the 25% rule evolved from the customary rates negotiated between intellectual property holders and licensees.

25% Rule for Municipal Debt

Local or state governments looking to fund projects through municipal bond issues have to make assumptions about the revenues they expect to bring in, often through taxation or projects like toll roads, which in turn will allow them to support bond payments. If revenue falls short of expectations, those municipalities may not be able to make bond payments, which can cause them to default on their obligations and hurt their credit rating.

Municipal bondholders want to make sure that the issuing authority has the capacity to pay, which can be jeopardized by getting too deep in debt. Bondholders are thus cautious about purchasing bonds from local or state governments that are in violation of the 25% rule.

Tax-exempt private activity bonds—bonds issued by municipalities on behalf of private or non-profit organizations—also have a 25% rule applied to the proceeds from the bonds. This rule states that no more than 25% of bond proceeds may be used for land acquisition.

25% Rule for Intellectual Property

Patent or trademark owners use the 25% rule as a yardstick for defining a reasonable amount of royalty payments. The rule assumes that a licensee should retain at most 75% of the profits of a patented product given that s/he took on the bulk of the risks of developing the product and bringing the intellectual property to the market. The patent owner takes the remainder as a license royalty.

Setting the value of intellectual property is a complex matter. Although royalties are typically assessed against revenues, the 25% rule applies to profits. Furthermore, the 25% rule does not closely define what “gross profit” includes, which creates ambiguity in the valuation calculation. Because it’s a simple rule, it does not take into account the costs associated with marketing the product. For example, the holder of a copyright will receive a 25% royalty, though the party doing the selling usually incurs the cost of attracting demand in the market through advertising.

In the 2011 court case of Uniloc USA, Inc. v. Microsoft Corp, the court of appeals for the Federal Circuit ruled that the 25 percent rule may not be used as a starting point for a patent damage analysis bound for the courtroom. The appeals court concluded that the rule does not rise to an admissible level of evidence and may not be relied upon in a patent lawsuit in federal court. While the 25% rule may still be used by other parties in estimating a proposed patent royalty, it should not be considered a legal mandate.

What Is the Affordable Care Act (ACA)?

The Affordable Care Act (ACA) is the comprehensive healthcare reform signed into law by then-President Barack Obama in March 2010. Formally known as the Patient Protection and Affordable Care Act and commonly referred to as Obamacare, the law includes a list of healthcare policies intended to expand access to health insurance to millions of uninsured Americans.

The law expanded Medicaid eligibility, created health insurance exchanges, mandated that Americans purchase or otherwise obtain health insurance, and prohibited insurance companies from denying coverage due to preexisting conditions.

Understanding the Affordable Care Act (ACA)

The ACA was designed to reform the health insurance industry and help reduce the cost of health insurance coverage for individuals who qualify. The law includes premium tax credits and cost-sharing reductions to help lower expenses for lower-income individuals and families.

The ACA requires most insurance plans, including those sold on the Health Insurance Marketplace, to cover a list of preventive services at no cost to policyholders that include checkups, patient counseling, immunizations, and numerous health screenings.

All ACA-compliant health insurance plans must cover specific “essential health benefits,” such as emergency services, family planning, maternity care, hospitalization, prescription medications, mental health services, and pediatric care.

The law allows states to extend Medicaid coverage to a wider range of people. As of September 2022, 39 states and the District of Columbia had exercised that option.

Every year, there is an open enrollment period on the Health Insurance Marketplace during which people can buy or switch insurance plans. Enrollment outside of the open season is allowed only for those whose circumstances change, such as marrying, divorcing, becoming a parent, or losing a job that provided health insurance coverage.

Key Features of the Affordable Care Act

Provisions included in the ACA expand access to insurance, increase consumer protections, emphasize prevention and wellness, improve quality and system performance, expand the health workforce, and curb rising healthcare costs.

Expand Access to Insurance

The ACA requires employers to cover their workers and provides tax credits to certain small businesses that cover specified costs of health insurance for their employees. It created state- or multistate-based insurance exchanges to help individuals and small businesses purchase insurance. 

The law expanded Medicaid coverage for low-income individuals and allows young adults to remain on parents’ policies until age 26.

Part of the ACA until 2017 was the individual mandate, a provision requiring all Americans to have healthcare coverage, either from an employer or through the ACA or another source, or face tax penalties.

Increase Consumer Insurance Protections

The ACA prohibits lifetime monetary caps on insurance coverage, limits the use of annual caps, and establishes state rate reviews for insurance premium increases. It prohibits insurance plans from excluding coverage for children with preexisting conditions and canceling or rescinding coverage.

Prevention and Wellness

The Prevention and Public Health Fund, established under the ACA, provides grants to states for prevention activities, such as disease screenings and immunizations, and the National Prevention, Health Promotion, and Public Health Council addresses tobacco use, physical inactivity, and poor nutrition.

The ACA requires insurance plans to cover preventive care such as immunizations; preventive care for children; screening for certain adults for conditions such as high blood pressure, high cholesterol, diabetes, and cancer; and a public education campaign for oral health.

Improve Health Quality and Curb Costs

The ACA requested investments in health information technology. It addressed guidelines to reduce medical errors and create payment mechanisms to improve efficiency and results and improve care coordination among providers.

The law requires oversight of health insurance premiums and practices, reducing healthcare fraud and uncompensated care to foster comparison shopping in insurance exchanges to increase competition and price transparency.

Pros and Cons of the Affordable Care Act

Updates to the Affordable Care Act

With his election in 2016, then-President Donald Trump launched efforts to repeal and replace the ACA, stating that the United States should delay “the implementation of any provision or requirement of the [Patient Protection and Affordable Care] Act that would impose a fiscal burden on any State.”

In December 2017, the Tax Cuts and Jobs Act (TCJA) removed the penalty for individuals not having health insurance and substantially scaled back the outreach program to help Americans sign up for the ACA, cutting the enrollment period in half. By 2018, the number of Americans covered under the ACA had dropped to 13.8 million from 17.4 million in 2015, according to a report from the Kaiser Family Foundation, a healthcare research organization.

In 2021, President Biden signed an executive order to focus on the “rules and other policies that limit Americans’ access to health care,” prompting federal agencies to examine five areas, including preexisting conditions, policies undermining the Health Insurance Marketplace, enrollment roadblocks, and affordability. COVID-19 relief legislation, the American Rescue Plan Act (ARPA), extended eligibility for ACA health insurance subsidies to those buying their health coverage on the Marketplace with incomes over 400% of poverty.

With the passage of the Inflation Reduction Act, signed into law by Biden on Aug. 16, 2022, financial assistance was extended for people enrolled in the ACA through 2025 instead of 2022. It also expands eligibility, allowing more middle-class citizens to receive premium assistance. The legislation passed in both the House of Representatives and the Senate.

The Bottom Line

The Patient Protection and Affordable Care Act (ACA) was passed in 2010 and is commonly known as Obamacare. It extended healthcare coverage to millions of previously uninsured Americans. The ACA launched the Health Insurance Marketplace, through which eligible people may find and buy health insurance policies.

All ACA-compliant health insurance plans, including those sold through the Marketplace, must cover several essential health benefits. The ACA has continued to evolve through three presidencies.

What Is Accounting Theory?

Accounting theory is a set of assumptions, frameworks, and methodologies used in the study and application of financial reporting principles. The study of accounting theory involves a review of both the historical foundations of accounting practices, as well as the way in which accounting practices are changed and added to the regulatory framework that governs financial statements and financial reporting.

Understanding Accounting Theory

All theories of accounting are bound by the conceptual framework of accounting. This framework is provided by the Financial Accounting Standards Board (FASB), an independent entity that works to outline and establish the key objectives of financial reporting by businesses, both public and private. Further, accounting theory can be thought of as the logical reasoning that helps evaluate and guide accounting practices. Accounting theory, as regulatory standards evolve, also helps develop new accounting practices and procedures.

The most important aspect of accounting theory is usefulness. In the corporate finance world, this means that all financial statements should provide important information that can be used by financial statement readers to make informed business decisions. This also means that accounting theory is intentionally flexible so that it can produce effective financial information, even when the legal environment changes.

In addition to usefulness, accounting theory states that all accounting information should be relevant, reliable, comparable, and consistent. What this essentially means is that all financial statements need to be accurate and adhere to U.S. generally accepted accounting principles (GAAP). Adherence to GAAP allows the preparation of financial statements to be both consistent to a company’s past financials and comparable to the financials of other companies.

Finally, accounting theory requires that all accounting and financial professionals operate under four assumptions. The first assumption states that a business is a separate entity from its owners or creditors. The second affirms the belief that a company will continue to exist and not go bankrupt. The third assumes that all financial statements are prepared with dollar amounts and not with other numbers like units of production. Finally, all financial statements must be prepared on a monthly or annual basis.

Special Considerations

Accounting as a discipline has existed since the 15th century. Since then, both businesses and economies have greatly evolved. Accounting theory is a continuously evolving subject, and it must adapt to new ways of doing business, new technological standards, and gaps that are discovered in reporting mechanisms.

For example, organizations such as the International Accounting Standards Board help create and revise practical applications of accounting theory through modifications to their International Financial Reporting Standards (IFRS). Professionals such as Certified Public Accountants (CPAs) help companies navigate new and established accounting standards.

What Is Agency by Necessity?

Agency by necessity is a type of legal relationship in which one party can make essential decisions for another party until legally recognized agents like someone with power of attorney or guardianship are put in place. The courts recognize agency by necessity during an emergency or urgent situation under which the beneficiary is unable to provide explicit authorization. Under such circumstances, those granted agency must act for the sole benefit of the beneficiary.

In finance, agency by necessity often takes the form of replacing an individual’s investment or retirement decisions.

Understanding Agency by Necessity

Emergency situations often lead to agency by necessity in the eyes of the court. For example, if an individual is sick and unable to make a critical investment or retirement decision, agency of necessity would allow an attorney, parent, or spouse to make decisions on behalf of the incapacitated party.

Agency by necessity becomes important in wealth management. For example, many wealth managers are involved in the creation of wills, trusts, and overseeing inheritances of wealth from one generation to the next. If a family member in possession of or who is an agent of the family’s wealth becomes incapacitated in an accident or is ill, another close family member of similar capabilities and understanding of the family finances may take over as an agent of necessity.

At times this can become fraught, however, particularly in cases of high net worth individuals or wealthy families that have to make decisions about wealth distribution for future generations. Family members and additional stakeholders may take issue with decisions that the agent by necessity makes.

Agency by Necessity and Estate Planning

Although many conduct their estate planning before becoming incapacitated, at times these tasks may be given to an agent by necessity. Estate planning entails a variety of critical tasks such as the bequest of assets to heirs and the settlement of estate taxes. Most estate plans require the help of an attorney. Estate planning can also take into account the management of an individual’s properties and financial obligations. If the individual owes debts and is not of sound mind to pay them, an agent by necessity may step in to figure out a plan for repayment.

The assets that could comprise an individual’s estate include houses, cars, stocks, bonds, and other financial assets, paintings and other collectibles, life insurance, and pensions. These must be distributed as the individual has chosen after passing. In addition to preserving family wealth and providing for surviving spouses and children, many individuals will undertake serious estate planning to fund children or grandchildren’s education or leave their legacy to a charitable cause.

Specific estate planning tasks could include but are not limited to:

• Writing a will
• Limiting estate taxes by setting up trust accounts in the name of beneficiaries
• Establishing a guardian for living dependents
• Naming an executor of the estate to oversee the terms of the will
• Creating/updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s
• Setting up funeral arrangements