Little Known Tax Strategies That Could Save You A Fortune with Steve Moskowitz

How do you make business problems disappear? Wrap them in bacon. For business owners, marketing execs, and anyone trying to grow your business, pump your profits and make more while doing less. Welcome to Bacon Wrapped Business with Brad Costanzo. Sizzling hot business advice guaranteed to make you fat profits. Every week, our chefs will serve you proven recipes for ramping up your revenue. Now, here's your host, Brad Costanzo.

Welcome back to Bacon Wrapped Business. This is Brad Costanzo, and today I am going to bring on a guest that I have got a bunch of questions for. For obviously selfish reasons. If you've been listening to this podcast for long, first of all, thank you. But second of all, you'll know that I've gotten the most selfish podcast on all of itunes because I only bring on guests that can bring actionable advice for something that I'm doing in my business or businesses as well as any of my clients. And I love digging down deep, talking with thought leaders and experts in spaces that.

Just have value to add that you don't really get elsewhere. And that's why today I brought on Steve Moskowitz. And he is the founder of Moskowitz llp, an accounting firm and advisory company who saw that while big corporations are consistently navigating the tax code to their advantage, smaller businesses and individuals were not. And he saw an opportunity to help businesses of all shapes and sizes really understand how to even the playing field and maximize the savings in their taxes and so that they can grow their business and do this in a very legal and ethical and responsible way, but without missing out on all these opportunities. This is one of those areas that I've, as I said, I've always got personal curiosity about, and I'm going to be asking some questions that are going to apply to me, and hopefully, as my listener, they apply to you. By the way, if you have any questions after this episode, you can always email me@askbradakenrabusiness.com if you're not a subscriber to the show, hit subscribe, because you're about to get some really great episizles coming out just like this one. Steve, welcome to Bacon Wrapped Business.

Thanks so much for inviting me. And we're a law firm. And before I was a tax.

Yeah, law firm. That's right, we're a law firm.

But before I was a tax attorney, I was a cpa. So our firm, we actually do both legal work and accounting work, and that just goes together so well. Kind of like bacon and eggs.

Exactly. Well, yeah. I mean, I hear the sizzle yeah, you don't do your taxes. Right. You're going to need an attorney, correct?

Well, hopefully what the attorney does is rather than rescue you from doing something horrible is say, hey, you know what? Small business, all this stuff that the Fortune 500 does, that's available to you too, but you have to know about it. And here's what confuses a lot of people when you talk about taxes. Everybody knows that the purpose of the tax law is to extract money from you. But there's two purposes to the tax law, and most people don't know about the second one. The second one is in a democracy, the government, when they want you to do something, they can't order you to buy a new machine or buy a new building or hire somebody. So how does the government get you to do something that they want? Because I think it's good for the economy. But they don't have the power to order you. They give you a tax incentive. That's what tax planning is all about. That is how the Fortune 500 make billions in a B. And they don't pay taxes because the government says, here's an incentive. And today we can talk about all these incentives. And a lot of them are relatively simple. They're there, they're statutory. So it's not like, oh, you read a case and try to torture some interpretation. These are solid black letter law where it's available for the taking light. Like anything else, you have to know it's there. And what I say to people is, it's like you're starving to death and you're walking through an apple orchard and you're looking at the ground for some fruit that dropped on the ground. I say, my God, man, just look up. There's all that fruit. I'll just go ahead and take it. That's what we're going to do.

That's fantastic. All right, well, let's jump into that. Let's talk about some of these topics that you know. First of all, if you're listening to this, if your CPA or tax attorney or combination isn't talking about this stuff, this is important. So let's talk about some of these probably often overlooked strategies.

You know, that's, that's why I made the switch from being a CPA to an attorney. Because when I was practicing as a cpa, I didn't want to be the person that said, well, you can't do this and you can't do that. And what I, what I noticed were CPAs, as a general rule, when I was practicing that way, we're very conservative and they were telling you all the things you couldn't do. But also a big problem that I found is that a lot of people were just taking a bunch of forms and taking the numbers off of one form, putting on a tax form and say, here you go. I said, well, I don't want to be that guy. I want to be the guy says, look, you can do this, you can do that. To me, a tax return is merely the summary of a year of tax. Tax planning. Tax planning is how you save. So you say, okay, Steve, oh my goodness, this is the best podcast I've ever heard in my life. But here it is, 2021, and I sure wish I knew about this stuff before 12-31-20, because I would like to save on my 2020 taxes and not wait till 2020. And I say to you, good news, there's a lot of things we can do right now, today, in 2021, and save US taxes for 2020. Let's start with retirement accounts. Now, most people know about the simple ones like an IRA or a SEP or a 401K, but there's over 20 different types. And I basically put them into two groups. The simple ones like the 401K SEP IRA, and the fancy ones like a cash balance plan. And with most of these plans, not all of them, but a lot of them, you have up to the time of filing the return.

Plus extension to set them up and fund them. So what that means is, depending on the type of entity you are, if you file an extension on your tax return, you have until either September 15th or October 15th, depending on your entity. And what that means is that right now, in 2021, we can set up, create brand new, start a retirement account, put the money in about 3/4 of the way into 2021 and still deduct it from 2020. Isn't that great?

That's fantastic. Yeah, I know. I don't have any employees. I use contractors at the moment. But careful with that. Yeah. And yeah, that'll be the topic of.

Another one if you invite me back.

Exactly. Luckily, like the ones that I use for my business at the moment, my primary consulting business, these are true contractors where they'll do project work as opposed to ongoing things. But the like, I've set up a solo 401k plan for my own, which has been, you know, working fairly well with checkbook access, etc. But what are some of the other. What are some of the other types of retirement plans that for small Businesses, let's just say, you know, less than five or 10 employees, you know, down, down to even one that you think.

People really, any plans work, whether you have a lot of employees or you're the solo in the shop. And when you look at these plans, they're so flexible, they offer so much. For example, when somebody gives you something nice, what do you say?

Thank you.

See, now I know you're not a lawyer because a lawyer would say more, I want more. And what happens? Suppose you had a stellar year and you say, you know what, I'm a real estate agent and I just sold several commercial properties and I made beaucoup this year and I don't want to pay beaucoup in taxes. What can I do? Well, with these plans, there's a way where you can make multiple plan year contributions in one calendar year and deduct it all in that big year. So the bottom line is don't worry about the technicalities. But if you do BoCo, you can make an adjustment to make an unusually large deduction and not pay those taxes. And that's one of the things you take a look at. And also you say, well, what's the max I can put away? There is no set max like a 401k or the other plans where here's the max you can put away. But there's a determination based on a variety of factors. It's an actuarial determination based on your age, length of service, how much money you've made, and what happens is if you own a business, the lion's share goes to the owner. Most of our clients usually about between. And again, this can vary of course, but our average client, maybe 90 to 94% is for the owner and the rest is for the employees. Now with a pension plan, first thing is, you know, when I talk to clients about it, I said, I'm going to ask you a tough question. Are you ready? They say, yes, I'm ready. And I say, would you prefer to A, pay less taxes or B, pay more taxes? And everybody laughs. Ha, ha ha. Less taxes. I said, well, do you have a retirement account? No. I said, well, in reality you chose the other one. So the first thing is you save taxes. So something like real, fundamentally, let's take a simple example and suppose you were in the top tax bracket, which approximates half.

And I say to you, okay, you know what? You could put away $200,000 in this retirement account. And so I don't know if I want to do that or not. And I said, well, okay. If you don't put that 200 away for yourself, pony up an extra hundred grand for the government. What? Oh, wait a minute. You mean I could. If I don't put away the 200 for myself, I have to give half of that, a hundred to the government? Yeah. Then you begin to understand the tax effect. So that's number one.

Also, we talk about cash flow advantages, time value of money. When that investment is in.

The retirement account, it earns, but it's not taxed while it's sitting there. Unlike if you had a stock account or any other type of account that's taxed. And obviously, you don't need to be a genius to figure out that if your earnings are not taxed and it's sitting there for a number of years, the amount you're going to have when you're ready to retire is going to be way more than if you had a regular stock account or any type of account, but you pay tax on it. Time value of money.

Yeah. The power of deferring taxes and growing through that is just. It's unbelievable. And on the other side, the detrimental effect of paying taxes on all your growth and investments every single year, et cetera, just really, really hurts returns.

And there's still another benefit if you're in business. Unfortunately, in our country, there's a lot of people that make their livings by saying, well, you know, I'm going to sue you and take it away from you. And a lot of times a jury will look at a business owner and say, well, you know what?

You own a business, so you must be evil, and we're going to punish you, and we have a big judgment against you, and it only takes one lawsuit to lose everything you've worked for in a lifetime. Yeah. But once again, the retirement accounts are exceptions. So on an ERISA protected plan, which most of them are.

They'Re what's known as an exempt asset. So that means is if the plaintiff recovers a judgment against you in excess of your insurance, they can't touch your pension. And even if everything goes wrong and you have to file a bankruptcy, you keep 100% of it, which makes somebody very, very willing to settle with you. And when you talk about judgments, although I hate to mention his name, poster person for this is O.J. simpson.

Oh, yeah.

As you know, he has a huge judgment against him. He's never lost one penny of his pension. So that's just part of what you talk about when you look at doing a retirement account. This is tremendously powerful. And I'M just getting started. There's lots more things we can do too.

Yeah. What are some of the other. What are some of the other strategies? You know, one of them. Go ahead.

Another one I like is research and development credits. R and D. Okay. What is that? So this, you know. And again, the beauty here, it just brings a tear to the eye as I saw you wiping it away. This is for those of you that are listening. Your host just wiped a tear from his eye. This is touching. This is touching it. And what happens is this, with most other things in tax come along and say, look, if you invest in this, you get a tax deduction. This is great. But you still have to have the money to pony up. With R and D, you're not spending one extra penny. But we're going back to remember the government wants us to do certain things. Yep. So one of the things they want us to do is be innovative, figure out better ways to do things. Now, you don't have to be the first one. This doesn't have to be research quality of a university, but just if you improve a product, a process, a service. So what we do is we go in and we take a look at the money you've already spent. Again, you're not spending an extra penny. And basically we put it in two sacks. It qualifies for RD or it doesn't. And anything that qualifies, we reduce your current year's taxes and we can go back and amend three years, which means you say R and D. I never even heard of it. You mean I qualify for it? Yeah, you qualify.

What are some of the things that qualify for R and D spending?

You've created something, or even a process, you've improved something. You do something, you say, you know what, there's a better way to do this. And if you think about it from the government's point of view, it makes sense because they always want business to improve and do new things. It keeps us ahead of the competition. So what happens is not only do you get to reduce your current year's taxes, you get to go back three years and get the money back from your last three years taxes. So the bottom line is you say, wow, I get to reduce my current year's taxes and go back and recover money from the last three years. And again, you've not spent an extra penny. What you have done is you've recovered money.

From your taxes from money you've already spent. That's beautiful.

Can you give me an example? So one of the things I'm lost there on this scenario. So obviously, if I've spent money in my business, I bought something that's an expense, right? That obviously reduces my taxable income. Is this a general expense? So how do general expenses versus R&D, how are they different?

Let's assume you're a dentist, okay? And you say, you know, people get root canals, but I found a way to do the root canals better. This is an innovative process. Then what happens is we say, okay, Well, I had Dr. Smith and Dr. Jones working on this, and I bought this machine for this and I did this. And all of that money towards that process or that product serves for the credit and for the audience. There's a difference between a credit and deduction you just mentioned. So a deduction which most people are familiar with only benefits you by the amount of your tax bracket. That's what I was just talking about a minute ago with the retirement accounts. So if you were in the top tax bracket and you spent $100, you'd save 50 bucks. A credit is dollar for dollar. So if you had a $10,000 credit, you'd save $10,000 in taxes.

Perfect. That's exactly. That's the missing link that I was missing.

Okay, so.

What are some other. Are there any other, like, tangible examples of expenses or things that people who are. I know this all depends on the type of business owner who's out there.

But.

Something to kind of jog their brain, like, hey, if you did this, it could be an argument.

There's a lot of them. Basically, you come in and you say, whatever you're doing.

Here'S a better way to do it, whether it's a product or a process. For example, we're on Zoom right now. So if somebody, Zoom said, you know, instead of having to type in this, why, I could just click my fingers and say, magic Zoom, and it goes on. That would be easier. That would be an improvement. You say, well, you know what? We had six people in our research lab working on that, and we just, we paid them $100,000 each. That's a $600,000 that we're going to put towards this.

Okay, what if somebody is creating.

I want to go to maybe a more extreme example. I've got a lot of people who listen to this show. Some of them, like, I know for a fact I've gotten emails from executives at Ford or lower levels, executives at Ford Motor Company. But then I've got people who are freelancers and digital marketers and information marketers who create courses. And so it's like this really broad thing from professionals to corporate to like almost like solopreneurs. In the case of people who create content, for instance, like people who create course content and then they sell it. Maybe they're, you know, they're doing the production of it. Because this is going to be a eight week course for xyz. Obviously there's a lot of money that can go into the development of that kind of product. Would something like that ever qualify for R and D credits?

That's the beauty of it because it's not defined. So you say, here is why I qualify. And I'll tell you something else that it's really nice. Suppose you say, you know what, I've listened to this podcast and this has so inspired me. I'm going to quit my job and I'm going to start my own business and I'm going to hire six of my friends and we'll get going. And I got funding from the bank or a relative and you get started and you say, you know what? I love that R and D credit. And here it is. We now have our first year. But you know what.

A lot of times when you start a business.

The expenses exceed our revenue. So suppose we start off in our first year here. And I said, well, you know, you got me all excited about this R and D, but it's my first year in business, so I can't carry it back three years. And I didn't make any money this year, so I'm not paying any taxes anyway. So I don't have a credit. Oh no, guess what? The government is so into this that you can use it against your payroll taxes. So remember those six friends you hired? Even though maybe this is just a tiny, tiny bit technical, but we know that we didn't make a profit. Our expenses exceeded our gross. We made a loss.

But I still had payroll expense. I still had to have my payroll taxes. I can use the R and D to offset that. Isn't that beautiful?

I'm writing that down. That's a writer downer.

That's a writer downer. And then let's also talk about losses because this is an area, especially in 2020 and the COVID And God forbid you own a restaurant and there's so many small businesses that just suffered terribly and they lost a lot of money. Because here's what happens with a small business. A small. I've always said a small business is like a child. You've created something, it lives. And if, God forbid, your child is in the hospital and the Doctor says, well, I think I can save his life, but the treatment's going to be expensive. What? Parents says, well, how much, Doc? Yeah, let him die.

No.

Parents say, I'll give you my house, I'll give you my savings.

I'll go into debt on my credit card. I'll give you everything to save my kid. Well, most people do that and they took out all their savings. And let's assume that in 2020 they had a horrible loss.

Well, a couple years ago when the tax law changed, there used to be something called NOLs, not operating losses. And it used to be you could carry back and carry forward. And then the last tax law change before the most recent one adjusted that for most businesses and said, no more carrybacks, just carry forward. But then the CARES act came out in response to Covid, said, you know what?

We're overriding that. If you lost money in 2020, 2019 or 2018.

You can now carry back for five years. It used to be three, now five years. So the money that you paid from 2014 on, you can get that back. So again, it's rotten losing money in business, but if you did, at least you can get a big check from the government. So what's happened is it is it's called an nol, not operating loss. So if you've lost the money, you can do that. And now you start to see how maybe some of these things work together. Because we've talked about retirement accounts, we've talked about R and D, now we're talking about NOLs. Well, some of these things, like if you didn't do them at all, maybe you wouldn't have a loss. But the retirement account, the R and D might create a loss and then by creating the loss, you get to recover money from the last five years.

That's beautiful.

It is beautiful.

One of the things I wonder on the R and D stuff I've got myself and two partners have been for the past five months working on a startup. It's an E commerce startup, new exciting marketplace I'll be announcing to my listeners here very soon, but not yet. And we have not spent an inordinate amount of money yet, but there's a lot of startup costs from web development to.

Research and getting things done, et cetera. I'm curious at how various startup costs qualify for R and D because it is a lot of research and a lot of development to start a brand new.

So then we would have to get into something that's a little bit technical where we want to have the Difference between not startup costs, because startup costs you have to amortize over 15 years as opposed to an expense which you can deduct right now. So again, basically what you need is some person like me to go in and advise you and say look, here's what to do. And another thing, what people like me do is sometimes change behavior. Sometimes what you don't want to hear from a guy doing your taxes is oh, it's too bad you did it that way.

And instead you want a guy like me who says, well you know what, you were thinking about doing X, Y and Z, well that's not going to benefit you tax wise. Instead of doing X and Y and Z, if you did A and B and C and it's not that much different than X and Y and Z, then you have all these tax benefits. So that's what you want to do. That's what tax planning is all about. And usually before you do things, what you want to do is talk to your tax advisor. That's why when we talk about the Fortune 500 making billions, they don't pay taxes. They have an army of guys like me and full time job is say do this and whatever you do, don't do that and do this and do this and do this. But anybody can do it. You don't have to be a Fortune 500. You can be mom and pop and do it. But what usually happens with mom and pop, mom and pop get up early in the morning, work hard all day, they go home and then basically the decision is which do I want more, a meal or sleep and thought about tax planning or accounting or anything like that. The furthest thing from their mind. But I'm going to do it this weekend. This weekend comes and they're busy, you know, that's the weekend. I'm going to do it on Monday, Well, I'm too tired tonight and all of a sudden years pass by. So the bottom line is you need somebody advising them. Plus these laws change all the time. Another thing that I would talk about.

In response to Covid, the government came up with PPP Paycheck Protection program. And essentially what it did, it said, well look, under certain circumstances the government will give you some money. Now it starts off as a loan.

But it's a forgivable loan. So if you spend it the right way and you spend it in the appropriate time period.

It'Ll be forgiven. So that means you get free money. So what happens is when you get the money, there's not a taxable event and then you have. It used to be eight weeks. Now it's 24 to spend it. And you say, well, what I can spend it on? You can spend it on payroll and at least 60% of it and some rent and some other expenses. You say, oh, golly gee whiz. You know, I'm a sole proprietor. I just have my own little shop. The government keeps expanding these things and including more and more people. And then to give you another idea, there's something called the employee retention credit. So when PPP came out. And now we're in PPP too. But when PPP came out, the government said, okay, you can either have PPP.

Or Employee Retention Credit. Choose. Most people chose PPP because it was better. Then on December 27, 2020, the Congress said, you know what? Heck with what we just said, you can have both.

So now what happens is, you say, well, all right, here's what I need to do. I need to apply for forgiveness for my PPP1.

Then I figure up my employee retention credit. Then I amend my 941. What's a 941? That's the payroll tax form that you file with the government. And guess what? The government writes you a check. So basically what. And that goes back to what I was saying with taxes. There are basically two.

Reasons for the tax law. One, to get money and two, to have incentives. It's like, you know, the IRS issuing these stimulus checks. Well, what does that have to do with tax law? Absolutely nothing. But the congresspeople, in their infinite wisdom, say, we want you to do this. It's the same way when the PPP first came out, the IRS said, okay, well, you don't have to pay tax when you get the money, but no tax deduction for what you spent that money on.

Then the Congress also, at the end of last year, said, irs.

That was not the intention of Congress. It's the intention of Congress that you can deduct it. So think of the beauty of this. You get this free money.

You don't pay tax on it. If you spend it the right way, you don't have to give it back. It's a gift, and you get a tax deduction. So now you can have a situation where maybe you create a loss and you say, well, okay, under my I don't want to say thank you, I want more rule. Now I'm going to go back and get some money from the past five years that I paid with the nol. Why is the government doing all this? Because they are trying to prevent the economy from coming crashing down. So they're saying, okay, we're just going to give you some money. And besides outright giving you money, like with ppp, if you do what we want you to do, which we think would be good for business, we'll give you all these tax benefits. So what that means is if you have a small business, most people are really busy running their business. I have dedicated my professional life to this.

This is super fascinating and I love this because it's definitely not the same old stuff you hear about taxes and it's not the same old things like this. You're definitely bringing the sizzle.

Well, I was honored to be invited to your show and I said I got a sizzle, I got a sizzle for this show.

It's working well. And it definitely makes me, you know, like open my eyes and go, yeah. Because this is also the stuff that a lot of entrepreneurs, it's not top of mind. We're all trying to grow businesses and we're thinking sales and marketing and just get cash in. And a lot of times as you, I mean this is, you know, you see this all the time. We think of taxes and the way we treat our cash and the way we treat our expenses and revenue and as like an afterthought where if you prepare for it up front, it can really help make the difference between surviving and thriving and failing. One of the things you and I spoke briefly about before we started recording is something I think it was like you said to bring up, like what was it? 199A. I think that's what it was. But let me preface this. So I was having a conversation with a various astute colleague, business owner, et cetera. And this was a conversation over drinks. So we didn't get too deep into it. But one of the. Yeah, that could be it too. But one the context was, you know, it when doing business formation and operating, you know, your operating business, you know there's typically the pass through entities and then the C corp, right. So like for me, I operated with an LLC which is a pass through. Pass through and was LLC files as nest. And he was mentioning the operating as a C corporation. And he says a lot of people think, well the C corporations are bad because you get double taxation because you're, you know, the corporation is taxed on its profits and then if you take dividends and you know, whatnot salary, you're taxed on that. But he said most people don't do it correctly. They you know, you don't have to take all that money out of the company. There's ways to access that money perfectly legally but while keeping your the other stuff down and you can make investments in the company, you can do a lot of different things at a C corporation you may not be able to do normally. And then we didn't go into too much detail beyond that. He was kind of like yeah, just look into that. And so I'd love the opportunity to hear your thoughts on is this is a structure like this something that can be very tax advantaged if not like yeah, just I'll leave it open ended for you to kind of discuss.

So first of all, why do we become an entity at all? Why not just be a sole proprietorship? It's easier. One of the reasons you become an entity, an entity like a corporation or an LLC or even a partnership is for what's called limited liability. Right. So what that means is if you're a sole proprietor and you don't pay the rent for your Candy Store, then the landlord will come after you and all your personal assets and income. But if you're Candy Store Inc. And you don't give a personal guarantee and Candy Store Inc. Makes the lease with the landlord, you could be a multi trillionaire and it doesn't matter. You can't touch your personal assets. So one of the reasons people form entities is for limited liability. Now there's exceptions to that and limitations. We can do another whole show on that. But that's a number one reason people do it. But also what happens is there's something called 199A. What's one Steve, pull some number out of his hat. What's he doing? That's 199A of the internal Revenue Code and this came in a couple of years ago and it's also known for pass through entities. So basically if you qualify and it's a bunch of qualifications.

You get to pay tax on only 80% of your profit instead of 100%. So number one, that's good.

So I could get real technical now.

And well is this if you're a, this is if you're a pass through entity or is this for either 1?

So 199A applies to business people. It doesn't apply if you're an employee but so if you're a sole proprietor or if you have an S Corp, not a C Corp Partnerships, it applies but what happens is without getting too technical.

There'S limitations on non entities. So for most people. And again I'll do it if you want but I'm Gonna have to use numbers and I'll get it.

Yeah, go for it.

Okay, so suppose we have this situation. Suppose we have.

A business that's a million dollars as a sole proprietorship, made a profit, okay, no 199A for them because they're above the ceilings.

C Corp. No 199A because you're above the ceilings.

But suppose the next door neighbor makes a million dollars profit and they're an S corp. So with a little planning, here's what happens. You get the lesser of 20% of. It's called qualified business income. So in my example, that's 200,000 or some limitations. One of the limitations is the lesser of that or half the wages that are paid. And the wages includes anybody to yourself, to anybody else. So you say, well, wait a minute, why can't I do that as a sole proprietor? Because the sole proprietor can't pay himself wages. Has to be an entity to pay your wages. So let's assume in my example that the only employee of the X Corporation is Sally. Sally says, hey, I listened to this podcast. This is fantastic. So what I did was I made sure to pay myself at least double the amount of wages as that deduction. So in my example, remember, we had a million dollars profit, we got a deduction of 200. So Sally pays herself a salary of 400. So again from the S Corp, she's not paying double taxes because she's going to pay tax on 1 million, but she also saved a little bit of Social Security tax, but I won't go into that. But anyway, what happens is she's going to get a million. She could be a million in distribution, or in her case, she takes 400,000 as wages and 600,000 as a distribution. So on her tax return, she's reporting a million of income either way to satisfy this 199A limitation. Now let's go back and now let's do the calculation. So we have a million dollars profit. 20% of that's 200,000. I get the lesser of 200,000.

Or.

50% of the W2 wages. So Sally paid herself $400,000 in wages. Half of that's 200. I get the lesser of 200 or 200. So Sally only pays taxes on 800,000 as opposed to her next door neighbor that pays taxes on the million because he had a C corp and he didn't qualify. Now also, there's still another way to get out of this through depreciation, but that gets a little bit more complicated. So basically, what I'll say is you can use this to work with depreciation, you can use this to work with wages. And we talk about depreciation, we go into time value of money. So let's assume that you say, you know what, I think it would be good to invest in real estate. So you invest in real estate and then you say, well, is this commercial real estate or residential? Commercial. I have to depreciate over 39 years, whereas residential, I depreciate over 27 and a half. Well, that's a long time to wait for benefit, isn't it? So you can do something called cost segregation analysis.

Very familiar. That was my. I was selling. I was a cost segregation consultant. Literally, biz dev and sales. Was it back in 2000, like five through seven or eight?

So, okay, so I won't trouble you with the details then, other than to say, if you do this, you can greatly accelerate your depreciation. And a benefit today is much better than a benefit 39 years from today. If I said to you, you know what, I owe you some money and I can pay you today or 39 years from this, I take the money today. Yep.

Okay, so along these lines, now let's compare. So you've got, you've got Sally, who's got an S Corp or LLC that files an S Corp, single member llc. You know, all this other stuff. So, and she, she does exactly this. She's paying herself 400,000. And then because of that, she qualifies for the only paying taxes on $800,000.

Well, because she's meeting the limitation. So I didn't get into all the technicalities.

That's fine. Yeah. So then let's assume that she lives here in California. So she's paying a whole bunch of money. She's probably in the highest, if not maybe second highest tax bracket at that point, I'm guessing. So.

She'S paying 800,000 times. Oh, man, I would have to guesstimate this. What would you say if she was living in California, her combined?

Well, the top tax rate is 13.3 in California, although California is thinking about raising it to 16.

Oh yeah, they like money.

Well, that's why so many people are leaving California, by the way. That'll be another show for us.

Yeah, no kidding.

Actually, California, can they still tax you sometimes? Yes.

Yeah, I've heard, I've heard they're aggressive as hell, but. So compare this then to the A C Corp owner and it could be like a single member C Corp owner, which, you know, it's Possible. Right. So let's say I owned a C Corp that did $1 million in, in profit.

And I know that the corporate income tax rate is what Corporate for a C corp is approximately what, 20. Is it 20 or 21?

Cool.

So there's 21%. Now obviously I probably take. That's on profit, but I've taken the salary. Let's just say I paid myself $100,000 salary and that's deductible against.

That's a deduction. That's so my.

It's deductible. But well we'll get in some other rules. It's deductible as long as it's what's called reasonable compensation.

Sure. Yeah. So let's assume it's reasonable. So now I'm not. That's like 1 million profit minus 100,000. That's.

Now the C corp pays tax on $900,000 of profit, whereas the S corp paid zero.

Ouch.

Wait, the S corp pays zero on.

Remember that's through. An S corp is a pass through entity.

Yeah.

So they don't pay tax.

Correct. But I, but I. Sally's personal taxes. She's paying taxes on.

No, we haven't gotten there yet.

Okay, cool.

We're talking about the corporate return. The 1120, 1120s. Gotcha. Corporate level. The C corp pays tax on your example. The C corp pays taxes on 900. Yep. The S corp pays zero. Correct. So we starting off with hey, the C corp's paying a bunch of taxes and the S corp isn't. And then what happens is you say well all right, Sally with the S corp, she's paid taxes at the personal level. Eventually you're going to take that 900 out of the corporation, distribute it and you say well wait a minute, number one, a corporate distribution is not a tax deduction.

And that's where the double taxation comes in. Because tax on the individual level. Now they anticipate you, you say well you know what.

I'll just sometimes see a C corp owner will say I'll just take all the profit out as salary, not a problem. So now I got zero profit like an S. That's where the unreasonable compensation comes in. The IRS looks at that and says well wait a minute. A reasonable salary for you is not a million dollars a year. So let's assume you're. I'll use your example. If the reasonable salary was 100. 900 is a disguised dividend. They add that back and the C corp pays taxes on the 900. Another example what we were talking about off air is you say, well you know what, I don't really need the money right now. I'll just leave it in C Corp. There's a special tax for that. It's called the.

Unreasonable accumulation of earnings penalty tax. So the IRS says, hey, wait a minute, why do you have that $900,000 sitting in retained earnings? You have to have a, you can't say, well I don't want to pay tax on it. You have to have some business reason other than that. Okay, well you know what, I was thinking about building a new factory or I was thinking about buying new equipment. So I need the money. Okay, that's a good reason. But then they check back, well, when are you going to buy that new equipment? You buy it the next year, no problem. You're after that? Probably. Okay, now it's five years later, hey, I thought you needed new equipment. What did you do? So there's all kinds of problems. I'm not saying that in no circumstances should you be a C Corp. But I'm saying usually it's the exception. And without getting really technical, sometimes there's some international considerations and also the size. Once you go above a certain size, you can't be a C Corp. Anyway. Excuse me, An S Corp anyway, General Motors can't be an S Corp. Way too big, have too many shareholders.

Right. How would the C Corporation be able to make.

Other investments? For instance, and maybe these investments aren't even necessarily in the same line of business they're in. Like let's say I manufacture widgets. But that C Corporation with its earnings wants to make investments in portfolio of real estate or this, that or the other. Does it, Are there, are there things.

That they keep them tax wise, that's fine. But we'd have to take a look at the corporate charter because a shareholder might sue and say well wait a minute, you know, I invested in a company that's building cars. I didn't invest in a company that's gambling in the stock market.

This would be, in this scenario, this would be like for a single, single.

Then you can do whatever you want. But there's all kinds of problems that go along with it.

Yeah.

And another thing you might say, some of your listeners is saying, oh my God, I didn't know that. I've been as a C Corp all these years. I wish I was an S. You can convert from a C to an S. That's good.

So it's not a, it's not one of those no brainer strategies like yeah, you should totally Be using a C Corporation.

Pay yourself if you want A no brainer.

Yeah.

In most, but not all cases you're better off as an S. There are times when you would prefer to be a C, but that's the exception. The general rule is you want to be an S. Right.

Here's a, here's a scenario, especially a California one. And let me know if this is. If this is even legal gray or whatever. But like let's say I live in California as a. And which I do, right? I've got my operating business. Let's use, I'll use one example here because you know we're starting an E Commerce business. Got an E Commerce business. Totally. It's a California corporate llc. It's a California everything. Say there's a Nevada C corporation that provides marketing services, media buying, et cetera and charges that. And so million dollars comes into this. Maybe a half a million goes out to the C corporation in Nevada who's providing services to that company. Those with the exception of maybe salary, et cetera. All those earnings stay in the Nevada Corp. C Corporation.

Who owns the Nevada Corporation?

Let's say, let's say I'll keep it real simple. Let's make it like me. One person, one person owns. This is not true. But one person owns the E commerce business.

One person is California is going to tax you on worldwide income. So if your Nevada corporation made money, then you're going to pay tax on.

It, but only if I pulled that money out as the debt.

Well, are we a C or are we an S?

The Nevada is a C corporation, the California is an S. Okay, so number.

One, you're paying money to the IRS that you don't have to. And then they're taking. And then the ir. Well, the state would look at the IRS and say is this guy having an unreasonable accumulation of earnings? If yes, then they're going to do these. See what happens is this. The government has these things where you can do whatever you want when you have your own business. But they come in, they look at your books and then they can reallocate things and say, you know what's called substance over form. They say you called it X, but you know what? It's not really X, it's really Z. And although X was not taxable, Z is pay up.

Yeah, well, and they're also looking at.

What you're trying to. Wait a minute.

Yeah, they're looking at the spirit of what you're trying to do. If it's obvious that you're trying to skirt Taxes, they get you for that. I understand that piece that I just know. I know I've got a friend who years ago, he was telling me something about the way he structured his business with something like that in Nevada and California, I think, you know, granted, he moved to Nevada, so he moved out of California.

That's a different story. Yeah. Because if you move, then we get into.

Is he a resident or domiciliary. But if you do it properly, California can't tax you anymore. But if you don't, even though you're living someplace else, California can tax you. I've had cases. I represented a gentleman who moved back to mainland China and California says, no, you still owe taxes. Another gentleman who.

Moved to England, they went after him. I represented a professional baseball player that lived on the East Coast. He played for an east coast team and he paid taxes on the California games. California tries to say no. Yo, tax on all of your.

Everything.

Yeah.

Is there a rule of thumb there to where. I know we could talk about this for the entire other episode, but I'd love to talk about it a little bit because it is such a. I mean, we both live in California. I know a lot about me back.

I'll tell you all about it.

Yeah. So let's say that I'll use me. In fact, like one of my last episodes was about digital nomadism and nomad capitalism, you know, maybe leaving the country. But.

So before we went on, I told you, I listened to. That was very interesting. Yeah.

Yeah. So in this case, let's assume that I was going to leave. I was going to leave California. My wife and I are going to leave California and move. It doesn't matter whether it's to a foreign country necessarily or Nevada or somewhere else. Right. Some other state.

What would be China or the moon?

Yeah. What would be the right way to do that?

To minimize the likelihood of California coming and trying to stay close to claim on my money.

That really does need a full show.

Yeah.

So, I mean, there's a lot to it. And if your listeners are interested, if you want to give out our website, we have the 19 points that California looks at. So if you look@moskowitz LLP.com you look at. We have a nice writing where we go over the 19 points that California looks at.

Oh, nice. I'm going to look for that and maybe if I. If I can't find it, I'll have you let me know. So I'll put it in the show notes. But like, I have heard that you generally have to cut all ties to California, you have to make sure that you're not. They don't.

Well then you have what I call pebbles in the scale.

Yeah.

Suppose you say to me, well, you know what, we cut all ties and you live in Nevada now.

But on Christmas morning you cross the border to go to Disneyland and you leave California before midnight. You've spent one day in California. That gets you taxed on worldwide income. If that's the only contact. No. Suppose you stay for the weekend. No. So you know what? I like it here so much in Anaheim that I bought a vacation home here. Well, we get a different story. And you know, I hate those rental cars. So I just leave in a car in the garage. We're just going to use it when we go to Disneyland. You start adding pebbles to the stone on the other. Pebbles to the scale. On the other hand, what if you want to make an investment? You say, well, I think investing in property here would be a really good investment. Well, that's California source income. But would that get me taxed on everything else? So what happens is there's a lot of standards we have to look to and no joke, we could really make an entire show out of this.

I imagine. I've got, I know I have got some friends who have lived here. Then they move to like they'll spend more like six or seven months in like Florida and they'll come spend several months back here. Now granted, I think they rent when they're here, like long term rentals. So they don't buy a car, they just do long term rentals, et cetera. If you're doing that, and I know this depends on a lot of different things, but, but if you just keep.

Answer it depends, but go ahead.

Yeah, exactly. If you keep it as simple as possible, like, you know, leave everything here, go establish a house in Florida, Nevada, Texas, something like that. And then, but you come back here and you rent for three or four months, rent a house on the beach, just pay an Airbnb or you know, something of that nature and you know, you're, maybe you rent a car, you just uber around. All things considered, if you, if you haven't violated the other, like if you don't have more pebbles under the scab, is that potentially okay?

Or that one. If you walked into my office and you asked me that question, I'd say we have to do an analysis. Yeah, I would imagine you have to be careful. And again, California is very aggressive. So what? We and clients ask that all the time. We actually take A look at their entire situation and say, okay, look.

This will get you taxed. This would be relatively safe. And we weigh those pebbles in the scale.

Yeah. I've heard that the California IRS is more aggressive than the federal IRS as well.

Yeah. And the California versions, FTB franchise tax law.

Yeah.

And most people in the tax profession believe that the FTB is in fact more aggressive than the irs.

Wow, that's crazy. But it's California. You know, they like the money, they like to spend, spend it and they like to collect.

It is why so many people are leaving.

Right.

When.

Are there any other, are there any other strategies or concepts or things that you think we haven't covered yet that you really are like, people need to know this. Like, am I missing anything? Because you know, we kind of, there's.

All kinds of things and I mean, I could take up your whole day, but I can think of nothing you enjoy more.

Yeah, I enjoy, I'm having fun. I don't have a hard time.

I'm having fun too. So let's go back to when you were doing the cost seg. Yeah. And you say, well, alright, so we have this building and let's assume we have this situation.

Now Sally is a brain surgeon and she's making a million dollars a year.

And she's married to a house husband.

And.

Sally also bought a building that she rents out.

And she wants one of the most beautiful things in the English language, a positive cash flow with a tax loss. So you come in, you do the cost seg. And so cash wise, let's say she's, she's taken in 10 million gross revenue, she's written checks for 9 mil. So she actually has a cash profit of a mill.

Okay.

But through cost seg, she's got 2 mil of depreciation. So we see that the results from the building are a loss of a million bucks. So we're not paying, we're not paying any tax on the mill cash profit she made. But the question is, can Sally take that million dollars that she's lost on her building.

Offset against the million dollars she made in her medical practice? So essentially make $2 million in cash and not pay the income tax on it.

So then we get into Internal revenue code section469 and we say the general rule that most of the accounts will say, oh well, that's a passive loss. And you can't offset a passive loss against ordinary income. So no. But there's an extent.

Now Sally married to Ralph and Ralph's a house husband. If Ralph becomes a real estate professional, the passive activity loss rules don't apply, and you can't offset it. And with a married couple, only one spouse has to qualify.

So now we take a situation where Sally's made 2 million bucks and she's not paid any income tax on it. Because what we did is we used our principle of, you gave me something nice, but I want more. And so what we like to do is if we can couple.

The cost seg with real estate professional, not only do we wipe out all the profit on the building itself, and we take the paper. Remember, for those of you that are listening, you don't write a check to depreciation. It's a paper entry. You don't write a check. But what happens is, through doing the real estate professional, now, we're able to offset income that Sally earned from her medical practice. And that's a beautiful thing.

It's beautiful. Yeah. Yeah. The nuances here are. They're really incredible. I mean, the tax code is so damn complex, but with people like yourself.

Who understand the complexity that way for a purpose. Yeah, because the. The.

I'm not making any allegations against anyone but some other unnamed people that I've heard floating around and talking believe that some congress people will give benefits to, you know, certain taxpayers, like the big corporations. Yeah. But you just can't come out and say, okay, to my buddy X Corp, I'm giving this, but not for anybody else. So you make the law so convoluted that most people don't realize is there. Suppose I did this. Suppose I took a hundred dollar bill and I put it on your kitchen table. You'd see it, right?

I don't know. Let's try that out.

You know, that's a good idea. Give me the hundred and I'll show you on my table. It works very well. There you go.

Okay, so you put out a hundred.

We put the $100bill on your kitchen table, on your dining room table, and it's easy for you to take the $100 bill, isn't it? Yep. But suppose that $100 bill is $100 tax savings, and we put it on a piece of paper and says, if you give this piece of paper to the IRS, they'll knock $100 off your tax bill. Now, I take a dump truck filled with paper and I dump it on your dining room table.

Now, you do have that piece of paper that says, take this to the IRS and they'll knock $100 off your bill. But my dump truck has just taken a Million pieces of paper and dumped them on your table. That's overflowed to the floor.

Now it's a needle in a haystack.

You got it? I said, well, hey, you know what? Both guys are equal. I took that hundred dollar savings to the IRS and I put it on one guy's table and I put it on the other guy's table. They're both there. It's just that you hire a guy like me and says, hey, I know where that hundred dollar bill is. I have that basically kind of like a metal detector. I can find it. I know where it is. But for the most part, you look at that million pieces of paper and you say, oh, what a mess. Let me out of here. I got to write that check to the IRS for 100 bucks. Too bad. And I don't know how the Fortune 500 doesn't do it, but I'm a, you know, I'm just a simple business person. And here's my $100 IRS.

Yeah. Yep. That's the way most people do it. I can absolutely see that. I know. I've gotten to that point too. Like, especially in the past, like the first business I ever started, it was so complex. I was like, I just, just write a check, I just go away.

Well, that's what happens with those people. And also, there's a physical element to that. It's most business people work really hard. And suppose your phone rang and somebody says, you know, I'm considering retaining you. Come right out to my business and tell me about what you have to offer, and I'll decide if I'm going to hire you or your competitor. Are you going to attend to that call or are you going to start looking through the Internal Revenue Code to see what you can say?

Exactly. Well, even if I don't have anything to do, I'm not going to look through the Internal Revenue Code because my, you know, my brain will melt because.

Well, but again, the thing is, I've dedicated my professional life to this.

Exactly.

Just like if you start asking me medical questions, I'd say, well, you know, my medical advice is don't smoke, eat lots of vegetables, and see your doctor regularly.

Well, that's why people in your position are so valuable, because you do the things that people in my position just don't have any inclination to. Like, even if I had all the time in the world. We just don't have the disposition or ability to comb through the technicalities and put together the strategies and how it's.

Interpreted by the courts. Yeah, and Also since the 1700s, Western economic theory is specialization of labor. Adam Smith, where in the old days, you did everything. You made your clothes, you grew your food, you did everything. And then neighbors started looking each other and said, you know what? I'm really good at growing crops, but my clothes making just as terrible. And your next door neighbor says, you know, I can really make clothes nicely, but I'm not so hot at growing crops. Well, hey, you want to trade? Yeah, I do. So commerce began, and it's that way today. It's. This is what I know about, but I wouldn't presume to know what a doctor knows. A dentist knows, an architect. And each, you know, person has his or her area of expertise, and that's where you stay. And everything else, you know, it's. It's like if my sink springs a leak, I'm not going to try to figure out how to fix it. I'm gonna call a plumber.

Exactly. You know, speaking of specializations, I'm curious as far as this specialization inside the tax code goes right now, because it's so brand new and absolutely crazy, but taxes on cryptocurrency investing, oh, that's another big area. Because I know, like, for instance, myself, I am a. You know, I have holdings there. I'm not a trader, but I have cryptocurrency holdings, supposedly don't come hack me. But.

I do know that the various tax consequences of that are just so. It's so up in the air right now. They're still trying to figure out all of the things. But I know that almost everything you do with cryptocurrency trading, swapping, selling, et cetera, paying for something is technically a taxable event. That it's. I know that everybody's just trying to figure out what the heck's going on.

And to add a little gasoline to that. Yeah, for just over a decade, the IRS was really hot on foreign bank accounts and foreign transactions. Starting in 2009 is where they started. Jason Ellis. And now they've shifted the focus to crypto. Crypto is the poster child now. And what the IRS has done, they've taken a lot of research in what they did in ferreting out these foreign accounts, using it for the crypto. And they've served all types of notices on this company. They've got all kinds of records, and a lot of people dealing in crypto think, oh, it's a secret currency. It's not. And there's a lot of good records there. And the IRS got them. And now A major area for them is crypto. So the bottom line is there's a lot of people who perhaps made a good faith, honest mistake in preparing their returns and didn't do the proper reporting. You should talk to your tax person or somebody like us and say, you want to look at my returns and do I need to amend? Because I will tell you, in dealing with the government, it makes a big difference if the taxpayer goes to the government before the government goes to the taxpayer.

Yeah, be proactive.

Yeah, huge difference.

One of the things I know I had sold, I first bought a little bit like a couple thousand dollars of one coin back in May of 2017. And I wrote it up and down, et cetera, and I ended up selling it either for break even or may. I think it was a little bit of a loss. It wasn't anything big. And this is, you know, a couple years ago, I think I sold it in 2018, maybe, but I never even thought about it. I never claimed that loss. I definitely, you know, I didn't report it or I just didn't even think about it. And I've thought about going back and saying, well, I should have taken that loss. But, like, I'm just going to let that sleeping dog lie because I'm sure that if you go to them telling them you owe money, they like you a lot more than the other stuff. But I definitely know it's one of those things that's made me really reticent to sell stuff even when I kind of want to.

And the tracking. But I also. One of my best friends is the chief revenue officer for a company called Chainalysis, and they work directly with. They basically do all the forensic tracking and tracing of cryptocurrencies. And he was telling me, he's like, yeah, this ain't anonymous. We can track almost everything that's out there. And we work directly with the IRS and doj, et cetera, to do this stuff all the time. So.

You want to.

Avoid taxes. Crypto is not the way to do it.

And one of the things I always tell people is most people cheat on their taxes. They cheat themselves by not taking everything they're legally entitled to. So let's have an example of something. Suppose you sold a million dollars worth of crypto. It cost you 10 mil. Oh, my God, I lost nine mil. Well, there's certainly no taxes on that. And you don't bother reporting it. Yeah, you can get nailed for unreported income because you had a million dollars of income that you didn't report. You say, but wait a minute, wait a minute. I had 10 million of expenses. See, there's no tax. I said, hey, wait a minute. IRS will determine all of that. You have a million dollars.

So go back, Wait, go back to the, like you said.

Yeah.

Go back to the original example. The example that. Just rewind a little bit.

You sold a million dollars worth of crypto. Yep. That cost you 10 mil. You lost $9 million.

Okay.

You don't report anything.

You can get in a lot of trouble for that. Because, number one, on the criminal side, the government says you have a million dollars of unreported income. Wait a minute, I lost 9 million. What are you doing? I said, yes, but you have a duty to report your income and then you can report your expenses on it.

But isn't that, is that an income or is that a capital. Is it an unrealized capital gain? Because if I buy bitcoin at a.

Thousand, remember my example? I said you sold a million. Yeah, you sold a million, okay? And therein lies the problem. Because you had a million dollars worth of income, the tax on that's going to be zero. Because your cost was 10 million, you lost 9 mil. Yeah. But on the criminal side, the government said you failed to report a million dollars worth of income. But I had all those expenses. But you didn't report the income. On the civil side, the money side, the IRS will do something where they say, okay, they tax you on the gross, not the net. And they say, here's your bill for the million dollars worth of crypto you sold. You say, well, wait a minute, wait a minute, I lost $9 million here. What are you talking about? They send you the bill, here's the bill on the million, pay up. Then you have to fix that.

That comes up all the time where.

People, if some, but if somebody typically, let's say they, they put a hundred thousand in and it went up to a million. Right. They got a $900,000.

But you haven't sold it yet.

Right. They haven't showed it yet. So a, I just don't believe you have to.

Or any other asset.

Yeah. You don't have to report that to the government.

Right, Right. It's not realized.

And I don't think the government's right now asking you for an inventory of how much crypto you own. Like, they're not asking for that.

Should keep records on. Oh, yeah, totally, totally.

But so then obviously, if I sell, if I were to sell that, you know, either shorter long term capital gains on the 900,000 but if I now, if I had bought a million dollars worth of crypto and then sold it for 500,000.

That'S not the same as the example you were just giving. That would just be, I report a, hey, I bought it at the top of the market. I lost 50%. That's just a tax loss.

Right.

A short term capital gain or a short term capital loss or long term capital loss.

Right. Subject to the capital loss limitation rules.

Yeah.

Yeah. So the part that drives me crazy too is like, yeah, if you swap a coin, if you pay for something with crypto, if you do any of this, they consider all that stuff taxable events. And it's, it's one of those very precarious things to where I think it's one of the things that I believe will keep cryptocurrencies necessarily from becoming a currency. Because if it's a taxable event every time you go to spend something, you're not going to get adoption that way. But I haven't been looking at the crypto markets as a currency, just much more of a speculative store of value, but whole other conversation.

Well, when you talk about tax, I mean, it's literally endless because one thing will bring up something else. And now you know how I spend my life.

Yep.

If you gift something to somebody. I was reading this earlier, so I know you have to file a gift tax return if it's over, what, $15,000. If I gifted you $16,000 right now, wrote you a check, I think I.

Could only answer that question if you gave me the 16 grand.

So we should try it out. We should, we should definitely go through this role, play it like as live as possible. But did I read right that citizens have a $11 million lifetime gift exemption?

So what you have is, there's current, under current law, 11 and a half million dollars per head. So you and the wife could give me $23 million as a gift. Yeah. Zero income tax on that. There's no gift tax on the recipient. You'd use up your lifetime exemption, but you pay no gift tax. President Biden wants to drop that way down, though.

Oh, I believe that, but. So neither the recipient nor the donee or the donor has to pay a tax on that as long as it's underneath the exemption.

So gifts or again, there's exceptions, but gifts are not income to the recipient.

Okay, I know if I did read, if it is an asset, like if I were to gift somebody crypto or stock or real estate, do they not. Is it, is it true that they receive the same cost basis as I would. So if I gave somebody a house.

Now President Biden wants to change these too. Yeah. If. Suppose for example, your grandpa bought a building for the $10,000 when he's a young man. He's alive. And he gives it to you today and has a fair market value of a million. Okay. You sell the next day, you have a gap gain of 990.

Suppose we take the same facts, but you get the building from grandpa in his will. Yeah. You get what's called a step up in basis. So your basis now is not Grandpa's cost. And again I'm simply.

But Grandpa has to die for that to happen. It has to be inherited. Not.

But you get a step up in basis, which is the fair market value, date of death. There's other rules, other exceptions too. But let's keep it simple. Sell it the next day. Million minus a million is zero. President Biden wants to do away with that too.

Of course.

And another thing you have to watch out for. I told you that if you receive a gift that it's free of income taxes. And that's true. However, if you receive a gift of over 100 grand from overseas.

You have to do a special reporting to the irs. Your tax on it is still zero. But if you don't file the special form reporting it, the penalty is 25% of the gift.

Oh, so you basically have to say I received it. Right.

My wife's mother is actually Brazilian.

Right. So your mother in law gave you a gift of a million bucks.

Your income tax on that would be zero.

But because it came from outside the United States, we have to tell the government.

We got it.

Tell the government about. And if you didn't, the government says, hey, you forgot to tell us about it. So your penalty is a quarter of a million bucks.

Yeah.

Ouch.

And then the. If it's under 100,000, you don't have to do that though if it's oversafe. She wrote us a check for 90,000.

Yes. But watch out for what's called the attribution rules.

Attribution.

Yeah. So what happens is, suppose we have this situation.

Suppose that.

Your mother in law gives you 60 grand as a gift in the same calendar year, and your father in law gives you 60 grand. Well, each gave you under 100. But certain people are considered added together. So in the example that your mother in law and father in law each gave you 60, that would be considered a gift of 120. And you'd have to file the form.

Gotcha. Okay, that makes sense. I wonder if we gave them a gift, because they're not, unfortunately, they're not like Brazilian oil money. We're much more likely to give them a gift.

Than to receive one.

You can give gifts Internet to Internet to foreigners. We could give a gift whether it's 10,000 or 100,000 to them and then they just have to deal with however Brazil reports, but it wouldn't be a tax.

You have to be careful with the transfers because there's some special reporting that goes along with that too.

What do you mean?

When you transfer money out of the country, in some cases you have to do special reporting. And again, if you don't, especially in the foreign area, there's these horrible, grossly disproportionate, draconian penalties. Yeah. So the minute you say, I'm going to do something outside the country, you really need to talk to a guy like me.

Well, I will say one of the things we just did. Um, so my wife is buying a, a condo in Sao Paulo, Brazil. And it's approximately, I can't remember exactly if it's like US$50,000 or something like that, so. Well, number one, I've heard that one of the things that is not reportable, that's not necessary to report under most circumstances, but not all, is if you buy a, if you buy a real estate in a foreign country under your name, not a business name, et cetera.

You know that rule. I was going to tell you about that rule.

Yeah. You don't have to report. Right. You can just do that. Now granted, if it's an income producing property and it's, it's. You're, you're making money on it and that money's going in a foreign bank account, etc. I know that, you know, that's typically whatever, but if you just buy a house somewhere else, a. Is that correct? It's not.

Well, generally, but then there's some special rules sometimes for a while. Mexico had a special rule that if you bought property within so many miles of the water, you had to be on a trust and then you had to go ahead and have a special reporting. So there you also have to watch out because sometimes the foreign country has rules affect our taxes.

Yeah, I totally get that. But in this case, I know that she decided to send the cash.

I would always. Well, then there's special rules for sending cash. Yeah. My answer to everything is always talk to your tax guy.

Totally.

Because I didn't think it was a problem. Sometimes can turn into a big Case. Okay, why go through that when you can ask and do it right the first time?

Well, that's a good point. And in this case, it was fairly, I want to say it was a fairly simple thing, but she decided her uncle is there and he was going to finish out the transaction. And so she, she used a company called Transferwise to in essence, wire the money down to him and he was gonna, you know, take care of it. I do know that, like Transferwise came back with supposedly their banking partner needed just unbelievable amounts of information on who is this, where is this going, where did it come from, Blah, blah, blah, blah, blah. And it's like, consider it a gift to my uncle.

Right.

They don't need to know. But in case, in something as simple as that, because her actually sister is going to live in it, she's not going to rent it out, she's not going to do that kind of stuff. Is this something we still need to kind of consider taxable? I know it's hard to say.

I always say, talk to your tax guy and then you can get into other things too. If the sister lives there, is she paying you rent?

Not right now.

Well, then you're making a gift. Does the fair market value of the rent exceed the amount we have to file a gift tax return? Yeah. So again, I'm not kidding you. You really need to talk to your taxpayer because most people wouldn't even think of that, but an IRS guy would.

Yeah, that's a good point. Well, it's definitely something to consider. Here, let me. I want to switch it over to like your practice. I mean, this has been awesome.

I gotta admit, it's rare that I can talk about tax stuff for this long. Like a lot of people, like, taxes are boring, but you definitely don't make it boring. You make this stuff really kind of exciting and thought provoking to go, huh? Like, I never thought about that before.

So talk about some of the types of clients you personally or your firm work with, like business owners, individuals. Are there certain sizes that you're typically trying to work with?

Everything in tax, from individuals.

To companies of varying sizes, from very small to very large, everything in between.

Okay.

And we do everything in tax. We also do estate planning. And a lot of times things go together where somebody will come in and say, you know, here's what I'm doing. And basically we restructure their lives to give them asset protection, give them tax savings and take care of them. Another thing that we do with something called profit optimization, where we say, well, okay, you Know, typical business person, let's assume that they sell 10 different items or 10 different services and they make a good profit. Say I've made a good profit. I've done a good job. But we do with profit optimization is we look at each item and say, well, you know what, on seven of the items you made a good profit, but on three of them you made a loss. But when you put them all together, net it's still a profit. So you can make more money and do less work if you get rid of the three losers. Or you need to charge more for those three or be more efficient. And we also measure things like suppose you have 10 salespeople and eight of them are selling about 80 grand a month and two of them are selling 10, 20amonth. You say, well, wait a minute, are those two salespeople goofing off? Or do they need more training? Or do they give them a whole horrible territory? Another thing we take a look at is what's the individual? Let's go back to those 10 lines and suppose on one of the lines you make a 90% profit and something else you make a 3% profit. Well, you know, 3% is better than nothing, but it's not very much. And if I took my advertising dollars and I was advertising equally, I would be much better off moving my advertising dollars from that three 3% line to the 90% line. We call it profit optimization in the firm where we give advice, we measure things, we do everything for business people, their income taxes, the profit optimization. Sometimes we want to set up entities, whether they're domestic and foreign, give them advice, the estate plan, asset protection and everything that goes along with it.

Beautiful, beautiful.

And then tax returns too.

Oh yeah, obviously the. And then if people want to.

Get a hold of you, schedule time they like, you know, they listen to this show like, yeah, this is. This sounds like somebody that I need looking at my business. Is there a preferred method to either find out more or get ahold of you? Obviously the website will link to that in the show notes.

So you have our website. You can take a look at us at Moscows LLP or just call us. 888-tax deal. That's 888-tax-D E A L 888.

Good phone number.

I like that. I chose that number when the 888 numbers came out because basically a large part of what we do is we make deals. Also, you know, there's other things too. Sometimes people are in trouble, they are being audited and maybe they did something upon reflection, they wish they hadn't. We want to minimize the exposure. We don't want any type of criminal allegations being brought against them. Yes, we do, both criminal and civil tax. But we much prefer to settle things at the, you know, at the minimum level we possibly can. We don't want to see a case go criminal. We don't want to see somebody paying more than they have to.

Yep.

Another case is. And this happens all the time, people just can't pay their taxes. What happens when the IRS is knocking on your door and say, buddy, you owe and you don't have it and you got kids to feed and you don't want to lose?

They send Vinnie down to break your kneecaps.

Well, we stand in front of Vinnie and we work out a deal with the government. There's all kinds of deals. So basically everything intact. Whether you want tax advice, you're thinking about doing something, say, do it this way and don't do it that way. Doing your tax return, doing planning, whether it's setting up the entities or defending you, or you just have a situation where, look, you know, you just can't pay your taxes. So it's everything. It's a very broad spectrum from people that are very, very successful to the other spectrum where people have had some challenges and we need to get through them. So we do everything in tax and business. And, you know, because I was a CPA before I was a tax attorney, we can do their accounting, and we really have a broad range of services for people.

That's great. And, you know, when it comes down to, you know, offenses, like, I know a lot like the IRS probably invokes more fear than any other government agency out there. For one, like, you know, most people are out there, aren't out there robbing banks and committing petty thefts, but everybody has to pay taxes. And a lot of us worry about, you know, did I do it wrong or what if I made this mistake, et cetera? Is typically. Is it typically, like, when it comes time to, like, criminal jail offense, that comes down to probably, like, intent. Intentionally trying to evade taxes and make, like, mistakes.

Correct me if it's not criminal.

Yeah, you made a mistake. This is in good faith, but, yeah, I screwed up.

Like, they're probably criminal.

Yeah, you need intent, right?

Typically, Usually, yes.

Okay, good. Good to know. It's like, hey, you don't have to be that scared. Worst case scenario, you're gonna.

And almost all. And if you do get audited, in almost all cases, we go for you. You don't Talk to the government, deal with them, have anything to do with them. And the auditor is not like portrayed on tv. He or she is not judged during executioner. If we disagree with the auditor, we go right over his or her head. We have a lot of experience in tax court. And also, once you go above the audit level, there's a very meaningful system of compromise. And an auditor isn't like that. An auditor is, again, with exceptions. And in fairness to the auditor, he or she doesn't have much authority. Where is the receipt? An order is more like a light switch. It's on or it's off. There's nothing in between. Yeah, once you go above the initial auditor, the people above them have a lot of discretion. And now instead of that light switch, we have a dimmer switch. It can be full brightness, it can be total darkness and everything in between. And we make a lot of deals. Hence why I took the name so many years ago. 888 tax deal. Yeah.

I love it. That's fantastic. Well, I gotta tell you, Steve, this has been wonderful. It brings us to the end of the episode. But as I always like to ask my guests, right now, this is where I can kind of flip it over. And potentially me or some of my even listeners help you. I like to ask, you know, what's a nut that you're trying to crack, maybe in your business right now? And that obviously, you know, there's things you'd like to do, such as, you know, get more clients and grow your business. That's the obvious stuff. But are there any particular challenges you're trying to solve? People you're trying to meet, hire, fire? Like, just anything that you're kind of like, man, if I could only fix or find an answer to this, things would be better. This allows me and my listeners, I.

Would like to be able to talk to people and tell them what's available for them. Because so many people work really hard in their businesses, but they plow ahead with their head down and they pay way more in taxes than they have to. Just, you know, even something simple like setting up a retirement account for. There's so much we can do for so many people. Like everything else, you have to know it exists or you don't look for help in that area. So I'd like to talk with these people and say, hey, let me learn about your situation. Let me tell you what's available, and we'll learn from each other.

That's beautiful. And this is one of the things you're doing now, right? You're out. You're talking to me on this podcast and obviously you probably, you've probably either done some other podcasts or, and, or planning on it. So that's definitely one thing. Has there been anything you've tried on that that has either not worked or is something that you've been thinking about doing besides, just for instance, more podcasts to get more publicity to that?

I don't know if you know or not, but I'm also a television legal analyst and I've been on the radio for many years. I didn't know that. So. Yes. So I've been on broadcast TV and broadcast radio and I'm talking about network stations, you know, Fox and NBC.

Okay.

Did those work out or have they been. Are you still doing those like TV and radio?

Yes, knock on wood. It's been very good. And I do, you know, live tv, live radio. I've also done a number of speeches.

I've done things both domestically, internationally. I was honored by the.

National government of South Korea when they had me go over to Seoul and address their national Congress on international taxes, which is a whole area. Oh yeah. And I love talking about taxes. You know, it's a compliment that I received and I take seriously is that, you know, people say you take a subject that's usually thought of as dry as dust. Yeah. You make it understandable and fun and entertaining and show people how the small business person can utilize the tax law to his or her advantage and not just have their head down and say, well, you know, it's just so unfair. I'm paying too much. Write the check and go back to work.

Yeah, well, you've done a good job of that. Let me just tell you this. So I'm add and a bore easily and you haven't bored me one bit. This has been.

Oh, I'm had a refund. Yeah.

Fantastic. Well, that brings us to the end of this episizzle. As you may have heard, other podcasts have episodes. Ours are epicizzles too.

That's what it should be.

To all my listeners. Yeah. So to all my listeners, I hope if you've made it through this long a, you're awesome. Congratulations. And it probably means that you're the type of person who understands the importance of. Of topics like this that oftentimes go ignored, especially on podcasts where podcasts like to just have the super most exciting.

How to grow and scale and do all this other stuff. But this is one of the most fundamental things that every business person, every citizen has to deal with. And if you don't get ahead of it, it'll get ahead of you. And if you don't make time to learn, you're going to get schooled. And.

It'S a topic that I think I know I've ignored it for too long. Other people have as well. So hopefully, if you're listening to this still, you got the value also out of me, not just doing layup questions, but asking the questions that I really want to know. And hopefully you've taken some notes and hopefully if Steve has said anything that made you realize that you need his help, get in contact with him with the phone number 888tax deal or Moskowitz LLP.com all of this will be linked in the show notes. If you are if you are inspired to give us a review on itunes, that'd be fantastic. And also send an email to ask bradakenratbusiness.com if anything comes your way that you're either, you'd either like to see us cover or if in your business you're just stuck with something and you'd like, you know, a second opinion on it, feel free to reach out. Steve, thanks again for thanks so much for inviting me.

I hope you invite me back and I had a great time.

Absolutely.