Ep. 113 – Steve Moskowitz – Small Business Tax Planning
Did you know that there are ways you can save on your taxes as a small business? Big Fortune 500 companies do it all the time, and they make more money than you.
There are different ways you can save money on taxes and protect your small business and assets, which include being smart with your pension. Working with a tax attorney is also another advantageous way to protect yourself under the attorney-client privilege than working with a CPA.
In this episode of the Secure Your Retirement podcast, we have Steve Moskowitz, a seasoned tax attorney who helps business owners and individuals resolve tax issues. We cover extensively how you can use different pension accounts to protect your small business and yourself from losses.
In this episode, find out:
- The difference between a CPA and a tax attorney.
- The advantages/privileges of working with a tax attorney over a CPA.
- How to save money with pensions in 2021 when filing returns plus extension.
- How Steve helps retirees offset investment income with pension deductions.
- The multiple pension accounts available as opposed to the most common ones.
- The power, flexibility, and safety of pensions to avoid paying taxes or losing your money.
- How to save money through the real estate professional tax exemption.
- How the government uses incentives in tax laws to keep us paying taxes.
- The many government giveaways to use to your advantage as a small business.
- “A lot of times we do get into other areas like crime because somebody will do something that has both a criminal aspect and a tax aspect.”– Steve Moskowitz
- “You can have a zillion dollars in your pension account, file for bankruptcy, and keep every penny of it.”– Steve Moskowitz
Get in Touch with Steve:
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
Here’s the Full Transcript:
|Radon:||Welcome everyone to our Monday podcast. We certainly do appreciate having you with us as we do each and every Monday. Murs and I, our goal, our desire is to bring to the table, someone, an expert that we can interview that can bring value honestly to Murs and I, as well as to our listeners and we have done that today on a topic that I think everyone on earth, but in particularly here in the United States are saying, “Hey, I want to know more about,” and that’s taxes and how to deal with that world. And we’ve got Steve Moskowitz all the way from San Francisco, California.|
|So Steve, thank you so much for being on our podcast today and answering some of what we think are complicated, but to you probably very easy questions and answers.|
|Steve Moskowitz:||Thanks so much for inviting me and this is my favorite thing in life, talking about taxes or really how to save them and not pay them. Look at the Fortune 500. They make billions with a b, and some of these companies don’t pay taxes. So basically if you’re a mom and pop store are on the corner, you know you’re paying more taxes than Apple computer, but I bet you don’t make as much money as Apple computer. My job is say, “Hey, wait a minute. The things the big boys do, the medium sized boys and the small mom and pops can do too.” We’re going to talk all about that.|
|Radon:||Fantastic. Well, we again, appreciate you being here. Can you, first of all, just kind of set the base here. You’re a tax attorney and we know there’s different things, there’s accountants, there’s CPAs, there’s enrolled agents, there’s all these different things. Could you kind of help us to understand the difference between a tax attorney and what that is as compared to maybe a CPA or those other things that we just talked about?|
|Steve Moskowitz:||I’m very familiar with that because before I was a tax attorney, I was a CPA. When I set foot into law school, I already had a bachelor’s and master’s in accounting, I was already a CPA. The reason that I went to law school was become a tax attorney because as a tax attorney, I could do everything that CPA could do, but a lot more. I could do a lot more in tax planning, and also I can go into court and defend anything that the IRS would challenge. And also very, very, very importantly, you only have attorney client privilege with an attorney. So that means if you come in, you say, “Steve, I have two questions for you. One, can I deduct my pension contribution? And secondly, I murdered my next door neighbor,” is what’s the problem with that? By law, whatever you tell me or any attorney is secret, the law enforcement, nobody can get it from you. I have a legal duty to take that with me to my grave, but nobody other than attorneys.|
|One of the problems with the IRS is that more and more, the IRS is calling CPAs to testify against their clients. They say, “Mr. or Ms. CPA, what did your client tell you? What’d you tell him or her? And give us all the paperwork.” How in the world, can you feel confident in talking to somebody when that person maybe called as a witness or could maybe put you in prison or take away your money? So that’s a big, big deal about being an attorney and that’s so vitally important.|
|The whole reason for attorney client privilege. I won’t give you too much history because back to England, when they were first deciding this concept of secrecy with an attorney and the people making the law at that time said, “Well, you have to do that because otherwise clients will have to pick and choose and figure out, ‘Well, what can you tell your attorney and what can’t you tell them?'”|
|They said, “You know what? Just tell them everything, the attorney will sort it out.” That is so vitally important.|
|In the tax world, so even tax attorneys, as an attorney, we can do any type of case. Literally, if you said, “Did you murder your next door neighbor?” Legally, I could do the case, although I wouldn’t, because I don’t do murder cases, but a lot of times we do get into other areas like criminal, because somebody’ll do something that has both a criminal aspect and a tax aspect.|
|For example, if you were murder for hire, you know the IRS would expect you to report your income on your tax return? Now most murderers don’t report their murder income. But look at Al Capone. We all know why he went to prison, for not paying his taxes. So you see that a lot in all types of cases, drug cases, and also cannabis. Cannabis is a very interesting topic because is it legal? Well, according to the feds, no, according to the various states, it depends on state law. It’s kind of in a Netherland area and those are very important. I know this is no a show on cannabis, the special rules as what you can deduct and what you can’t deduct there and so on and so forth.|
|What happens is a lot of times a tax attorney will get involved in all the areas of life. For example, a litigation. You’re suing your neighbor about something. Well, the tax attorney gets involved with the litigation attorney because what are you asking for? Some things that you’re asking for are taxable and some things are not. Obviously, if you were going to get a million dollar judgment, it would make a big deal to you if that million was taxable or not taxable, but it would also make a difference to the person that’s paying it because you might have a situation where what you care about is the bottom line. How much are you going to have in your pocket as opposed to having to pay the government? How would you like to have more in your pocket because the item was not taxable and the guy paying you is more willing to settle because the total amount he has to write to check for is less because of the taxes.|
|The bottom line is, I know people joke about taxes, but I just find taxes fascinating and there’s just so much you can do. I could really, we were joking before the show. I could do three days here, but I’ll keep it to the two day limit that you gave. As soon as you’re ready, I’ll go into retirement plans because retirement plans is such a phenomenal area for clients.|
|Speaker 4:||Yeah. Well, that sounds good, Steve, thanks for giving us the distinction there, and we are glad that you love taxes as much as you do because we need people like that in the world because I would say there’s quite a few out there that feel exactly the opposite about tax law and everything like that. So we’re glad to hear that you-|
|Steve Moskowitz:||They love saving the taxes though.|
|Speaker 4:||They do love saving the taxes and hate paying the taxes. Obviously there’s a place for good tax attorneys and CPAs in this world. Let’s talk about 2021 or 2020, if someone hasn’t filed their 2020 taxes yet. As you know, when we were talking before, a lot of the people that listen to this show, a lot of the clients that we work with, they’re close to retirement or already in retirement, so really in the forefront of their mind outside of, “Hey, when can I retire?” is, “How do I maximize my retirement savings, but also how do I maximize my tax savings as well?” As we’re getting close to the end of 2021 here, what are some tips or thoughts that you may want to put out there as far as things to make sure that we’re doing this tax year?|
|Steve Moskowitz:||Let’s start off with saving right away, and that’s why there’s pension area is just so great. For almost everything else, if you’re listening to this show in 2021 and you say, “Oh wow, that guy Steve gave me some great advice. I wish I had done that, I guess I could only do it from 2021 and on.” Pensions is the exception because there’s a lot of different pensions that you can set up and fund up to the time of filing the return plus extension. Right now it’s August 31st, 2021. You can have somebody that’s on extension on their tax returns, they haven’t filed 2020. Yet we could set up a pension for them today, fund it today, or anytime up to the filing of the return, for some people as late as October 15th of ’21, and still deducted from 2020. Most other things you have to write to check by December 31st, 20 to deduct it in 20. Pensions already, you can go ahead and save money, so that’s one of the things.|
|You mentioned people that are in retirement and that’s fine, but there’s so many areas where the pensions work. For example, suppose you have one of your listeners who’s in retirement. Says, “Oh, well, pensions that’s for guys that are working and I’m retired, I’m living off my investments.” Well’s then if that client called me, I have a very tough question I ask them. I say, “Would you prefer to A., pay less taxes and put your money away, that’s protected that if you get sued or you go bankrupt, your money’s protected and you keep it? Or B., pay more in taxes and have your money subject to seizure from a plaintiff or a bankruptcy court?” Then we go on for there.|
|For those listeners that are ready, most people choose the first one where they save the taxes. Here’s the deal. Say, “But wait a minute, wait a minute. He said I was retired.” Generally when you think about pensions, you think about people that have companies and they’re working and pensions are designed to offset company income. But one of the things that we can do is we can, and this is real common, especially with retirees. They’re retired from working at some company, but they’re managing their investments. We set up a company, we then do the investments through the company. We set up a pension for the company and effectively when the smoke clears, we get to have offset investment income with the pension deduction and the bottom line is the investor who said, “Well, I don’t have really much in the way of expenses. I’m going to stuck with these taxes,” you go ahead and you have a big deduction against that income. You can offset investment income that way by setting up the company. That’s something that most people just miss and they say, “Well, I’m an investor. I’m just stuck paying the taxes.” You’re not.|
|We can go over a little later in the show, there’s over 20 different types of pensions. Most people are familiar with the common ones, IRAs and 401ks, and there’s nothing wrong with them, but they’re so limited. When somebody gives you something nice. What do you say?|
|Steve Moskowitz:||See, that’s how I know you guys are not lawyers. Lawyer would say, “More. I want more.” What happens is with the type of pensions we’re going to talk about, they are enormous deductions. We have a lot of clients deducting hundreds of thousands of dollars, some even seven figures. That’s one of the big deals about a pension. The first thing we’re with pensions, it’s such a big deal, you can have such an enormous tax section and I’m not kidding. Talked about in simple terms, it’s like would you rather pay more taxes or less taxes? And if you choose the less taxes, the money goes to your pension fund instead of the IRS. I’ve yet in my career ever have somebody say that they’d like to pay more taxes. I don’t think I’ll ever hear those, even if I practice another 1000 years. That’s one big deal.|
|The next with investments, normally you get on your income, but when the money is in pension, it’s not taxed so that means your earnings are growing a lot faster, because you’re not paying taxes. Also what a lot of people don’t know is that pensions have special federal protection. It’s known as an exempt asset. What that means is unfortunately in today’s world, a lot of people like to sue. Sometimes when you have something, your neighbor says, “Well,” you have something and they don’t, so that’s not fair so they want to take it away from you. It’s unfortunate but that’s the way a lot of people think.|
|And a jury says, “Well, the guy has some money. He must have done something wrong.” If you get sued and the plaintiff wins, they can’t touch your pension. Although I hate to mention his name, the poster boy for this is OJ Simpson because OJ Simpson has an enormous judgment against him and has had for many years, but he hasn’t lost a penny of his pension because of this protection.|
|Even if things go bad for you and look, it’s the time of COVID and there’s a lot of people that have been around and successful for years that they can’t make it now. They went out of business, they have all kinds of debts, and if the absolute worst happens and you have to file a bankruptcy, well, if you have money in the bank, but for a little exemption amount, the court takes it away from you. But not pensions. You could have a zillion dollars in your pension account, file a bankruptcy, and keep every penny of it. To me, pensions are so incredibly powerful and they’re also so flexible.|
|Suppose you’re in a situation where sometimes people have an unusual amount of income. They have some event that gives them an unusual amount of money. Well, if you have an unusual amount of money, you have an unusually large amount of taxes. What can you do about it? With some of the pensions, what you can do is you can make multiple year contributions in one calendar year and when the smoke clears on that one, you have a much larger than usual annual deduction to offset that windfall that you got. So again, in practice, this is one of the things that I usually talk about right away with new clients say, “Hey, do have a pension?”|
|Sometimes, “Oh, oh yes, Steve. I do. We have a 401k in the company.”|
|I say, “That’s wonderful, but it’s so limited.” You can have multiple pensions. If you have employees, almost all of it goes to the owners of the business. That’s the way the laws are set up. The bottom line is, again, for me in practice, having done so many of these, I’ve yet to have a client say, no, he doesn’t want to put money aside, he’d rather pay the money to the IRS. That’s one of the many, and it’s safe. You don’t have to worry about somebody taking it away from you because in business, one of the things you’re always worried about, somebody’s going to come along and sue you. I’ve seen it in practice. It only takes one lawsuit to wipe out a lifetime of earnings and savings and it’s tragic. Especially if people are later in life and that lawsuit comes along.|
|Imagine you work hard all your life, you save, some guy sues you, jury says, “Yeah, you’re the business owner. You must be a bad guy.” Plaintiff wins, oh my God, you lost everything. Your pension is totally safe. You saved taxes, it’s safe. I could go on and on, but you can see I’m really, really, really see these pensions as just so terrific.|
|Radon:||Great. Well, obviously, if somebody’s in that position, that can be a great tool for them or a great way for them to at least consider that, so I appreciate you bringing that up.|
|Now, one of the things that we talked a little bit about before we started, and one of your topics is this idea of you call it the secrets of con contributing more to a 401k or an IRA than, I guess what we know as our normal limits. Is that connected to the pension or is that something different?|
|Steve Moskowitz:||Basically what it is is you’re setting up these other accounts. What happens is a lot of people, if you talk to them and say, “Oh yeah, I have a 401k. I max it every year.”|
|If you say to them, “Would you have the ability to put in more?”|
|“Oh yeah, sure, but I can’t go above the ceiling.” Now you can, because you set up another a cash balance plan. A cash balance plan doesn’t have a fixed limit to it. What happens is we do an actuarial evaluation depending on the earnings, the length of service, the age of the person, a whole bunch of stuff, but the bottom line is there’s no limit on it. Like it’s, “Okay, there’s a fixed limit.” That’s why these plans are so beautiful.|
|Then if you really want to max it, what we’ll do is we’ll have multiple pension plans and we actually show clients on a piece of paper. Okay. You can have pensions, A, B, C, D, and E and here’s the max you can put away and remember there’s the cash flow advantage. Because suppose for example, that we’re talking today, August 31st, 2021. Client hasn’t filed his return, his ’20 return, we can have a pension contribution for ’20 and then cash flow wise for ’21, we can go ahead and make a contribution, say today and go out more than a year in the future because you put your tax return on extension, Then you have up to the time of filing the return plus extension. It’s so flexible or thought of another way.|
|When the year, and I’ll call it year one. When year one ends, you still have about three quarters of the way into year two to fund the pension and deduct it from year one. One of the things that this would do is when you’re doing your estimated tax payments, because estimated tax payments are due four times a year, 4/15, 6/15, 9/15, and then 1/15 the next year. Well, let’s take a look at those dates. Let’s assume that you had a tax return that was do either 9/15 or 10/15. Those first three estimated payments 4/15, 6/15, and 9/15, you can actually pay less than estimate because your taxes are going to be less because you’re going to fund that pension in September or October of year two.|
|Look at the beauty of cash flow. There’s so much here for planning and that’s what we do with clients. We sit down and I’m a tax attorney. I’m not a pension salesman, so don’t worry. “This guy must be working for some pension company.” I don’t, I’m the head of our law firm. But to me, this is such a valuable, valuable area that you take a look at, along with so much else that we do in tax planning.|
|For example, you talk about retirees, well we know about the time value of money. That’s how banks make money. If you waltz into a bank and say, “Hi, I’d like to borrow some money.” If your credit’s okay, they’ll probably lend it to you because time value of money. You want the money today, but eventually you’re going to give them back more money because the time value of money. We’ll do things like a lot of retirees will have investments in real property. What we’ll do is say, “Okay, we can greatly accelerate the depreciation.”|
|You say, “Well, that’s wonderful,” because I can have the sweetest words in the English language. I can think of nothing more romantic than taking out the love of your life to dinner in a beautiful candlelit restaurant, very romantic, the soft music playing, you raise your wine glass and you say to her, “Positive cash flow with a tax loss.” What could be more passionate than that?|
|But I really mean it. You think about it. You have some building and you take in more cash than you spend, so, okay, good, you have profit. You don’t write a check to depreciation. It’s just a paper entry, it’s something to do with pencil or computer. But then through accelerated depreciation, this concept of cost segregation, with cost segregation, we send an engineer to the property and he or she says, “Well, normally these properties are depreciated over 39 or 27 and a half years, depending on if it’s commercial or residential, but with cost [inaudible], this is 15 year property. This is 10 year property. This is five year property. This property we can write off all in the initial year,” and you get a big amount of depreciation.|
|If you already have the building, you say, “Oh boy, I sure wish I knew that before I started my depreciation method,” you can still do this. It’s called a change of accounting method. We can do it. Then you wipe out all the profits from the building. That’s terrific.|
|But as we learned earlier, when somebody gives you something nice, what do you say?|
|Murs:||I want more.|
|Steve Moskowitz:||Ah, good. I feel good. I’ve trained you now. What happens? You say, “Well, if I have more depreciation, if that building shows a loss, could I write that off against my other investment income or wages or profits? Can I do that?” The general rule is no, your CPA’s say, “Well, internal record code section 469 says that’s a passive activity loss, you can’t do that.” However, there’s an exception to that. It’s called the real estate professional. If you’re married, only one spouse has to qualify and that allows you to take what narrowly would’ve been a disallowed, passive loss as a deductible loss.|
|Let’s assume that we have a brain surgeon who’s married to a house husband and she has a building where she makes a million dollars more in cash than she spends on expenses. but through depreciation, she’s got 2 million of depreciation, so now the building has a million dollar’s worth of depreciation. Then you say, “Okay, so no tax on the million we made on the building.”|
|Then she looks at her medical practice and let’s say that she’s made a half a million bucks in her medical practice but because Husband qualified as a real estate professional, she gets to use that depreciation loss against her practice. Look at my example, the brain surgeon and her husband here made a million and a half the dollars, but they legally don’t pay any income taxes on that. A lot of times people say, “Well, how could that be? Why should there be such a law?”|
|Here’s why there’s two reasons for our tax law. Everybody’s familiar with the first one, extracting money out of us. Everybody knows about that, but there’s another one. In a democracy, the government can’t order us to do something, but they want you to do it because it’s good for the economy. How does the government get you to do something that they can’t order you to do, but they want you to do? They give you tax incentives, say, “Hey, if you do this, you’ll pay less taxes.” That gets people to do things. Incentives.|
|One of the things that we’re looking at now, real big in practice, quote “ERC,” employee retention credit. This is phenomenal. The Congress in their infinite wisdom will qualified employers up to $33,000 for 2020 through 2021 for every qualified employee. Suppose for example, you have a business and you have 10 qualified employees. The government writes you a check for up to $300,000. What if you have 20 qualified employees? The government writes you a check for up to $660,000 and you say, “Well, why in the world would the government just give this money away?” It’s a stimulus payment to employers. We all about those checks that went out to individuals for stimulus. The government just gave you money. They wrote you to check. If you otherwise qualified, they just gave you thousands of dollars. “Here it is. Yours. Spend it as you please.” T.|
|he idea was to stimulate the economy. Well, they’re doing this for employers now too, because the government can’t say to employer, “We order you to stay open and keep paying your payroll,” but they can give you money instead. We have clients that are making millions from the government or hundreds of thousands, depending on a variety of factors. This is free money. It’s a grant. It’s not a loan that you have to pay back. It’s not like other things where you have to meet certain requirements. The government just gives you the money. Just like that stimulus check that a lot of people got. Do whatever you want with it. There’s so many incentives in the tax law and I could go on and on and on and on and on because you know, I really do love to talk about taxes.|
|But the whole idea here with tax planning is there’s so much there. But here’s where people run afoul. Suppose I walked over to your office there in North Carolina and I said, “Here I have a business card. Take this to the bank and the bank will hand you a million dollars in cash.” Would you take that business card over to the bank?|
|Steve Moskowitz:||Think you would. Suppose I drove up to your office in my dump truck, I had a dump truck full of business cards, regular business cards, I put in my special business card. I start it all up and then I dumped all of those business cards on your desk. Do you think you’d ever find a million dollar business card? You probably wouldn’t.|
|But what happens is the people in the know the people don’t pay taxes have guys like me or in case of Apple, armies of guys like me, who know where the secret business card is hidden. They say, “Oh, okay, let me dive in here. Here’s the secret business card. Take this to the bank and get the million dollars.” That’s what happens. You have all this stuff. It’s open to everybody, it’s in the law. Most people will never find that needle in the haystack. That’s what part of tax plan is. “Hey for you,” because when we talk to clients, the first thing I’ll do when I talk to them and say, “Oh, well, okay, I’m happy to do your tax returns, but wait a minute. What about this and this and this? Like R and D, research and development credit.” I could do shows on all this if you guys are interested.|
|But what happens with this one, this is another sweet one. The government wants businesses to be innovative, come up with stuff, and it doesn’t have to be new to the world, it just has to be new to you. Then they will give you a credit, they’ll write you a check for this year and three years back. Most people, when you say R and D say, “Isn’t that some kind of music?”|
|“No, no. I didn’t say R and B, rhythm and blues. I said R and D, research and development.” The beauty of this, we go into a client with R and D, you’re not spending a new dollar. We just go in and say, “Hey, let’s take a look at what you’ve already spent this year and the last three years. Oh, did you know all these do qualify for this government program called research and development, R and D?” Sign here and the government will write you these four checks.” People never heard of this stuff, and I’m not kidding you guys. I could go on and on and on and on. There’s so many government giveaways, but most business people, most retirees are looking at something else and saying, “Ah, he taxes are so complex and they’re not fair anyway. How much do I have to pay?” and they grumble when they write the check and then forget about. Don’t forget about it. This is savings available to everybody.|
|Murs:||Gotcha, Steve. So obviously there is a lot here. There’s a lot of strategy, there’s a lot of thoughts, different ways that we can use what’s already on paper to our advantage. I guess the moral of the story here is if you’re not going to do it yourself, if you’re not going to find that needle yourself, have someone in your back corner that’s going to be willing to find it for you, for your specific business or your specific situation.|
|Steve Moskowitz:||These things are available and they’re legal. For example, you guys, and hopefully people all over the world are hearing this podcast. But unless you’re in California, you probably never heard of me, but I’ve been on radio and TV here in California for 30 years. I’ve been talking about this on air for 30 years. These are legal things. For example, a simple IRA account, that’s a legal tax saving. Say, “Oh, well that must be something wrong with that.” It’s just that’s real common. Everybody knows about it. There’s a ton of things like that. They’re just not so well known and I’ve talked about them on air for over 30 years.|
|Radon:||Yeah. You’ve obviously shared with us some things that we ourselves have never heard of, or at least understood. We understood pensions, but not to the way you describe them. What is the best way, if somebody says, “Steve, you’ve blown my brain today, I need more information.” What’s the best way for them to get to you and to get more information, if they need to look at their specific situation,|
|Steve Moskowitz:||Either call us at 888-TAXDEAL, that’s 888-T-A-X-D-E-A-L, 888-TAXDEAL, or moskowitzllp.com. M-O-S-K-O-W-I-T-Z llp.com.|
|Radon:||Well, we’ll make sure we have that on our website as well as in the show notes so that people can, obviously if they’re in this situation, what you’re describing is extremely beneficial. For Murs and I, we certainly want to say thank you so much for coming on and giving us just a little snippet of your wisdom.|
|Steve Moskowitz:||Well, thanks so much for inviting me and honest to God, I have a great time talking about taxes, I had great fun. Thanks so much.|