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Congressional candidate and Bay Area County Supervisor, David Canepa, discusses taxing the top 5% and Financial specialist Demrie Henry makes a both pragmatic and philosophical case for tax avoidance.
Episode Transcript
Intro:
Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.
Disclaimer:
The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.
Chip Franklin:
Welcome to Practical Tax with tax attorney Steve Moskowitz. Steve, how are you?
Steve Moskowitz:
Well, I’m looking forward to talking to our next guest.
Chip Franklin:
Our next guest is a veteran of the San Mateo County Board of Supervisors, and he is also running for Congress. David Canepa. David say hi to Steve.
David Canepa:
Hey Steve, how are you?
Steve Moskowitz:
Great, Dave, how are you?
David Canepa:
Great.
Chip Franklin:
So let’s just, let’s jump right into this. David, during COVID you wrote a letter to governor Newsom asking for a pandemic tech tax as groups like Facebook and Amazon were recording record profits. How did that work out?
David Canepa:
Look, I think, you know, that the governor had mentioned in 2018, clearly that there was interest on looking at a dividend for data and I think the impetus of that was obviously a lot of these tech companies, this before the pandemic, that they were receiving record profits and one of the things that I’ve seen and I’ve been a small business owner before I was in politics and I thought it was kind of interesting when I was looking for a job, I created my own job with my own business so that is something that I understand. I think the one thing that I’ve seen and about fourth generation San Mateo County resident is really, we live in the most prosperous times, but we also have a huge need and a huge need meaning there are people that really don’t have that tech skill set and so I’ll give you an example.
The average home in San Mateo County is $2.8 million okay? The home where my… I grew up in now is $1.9 million. My sister lives there, she’s a teacher. My parents bought the home for $90,000 and my dad was a chauffer, for my mom was a bank teller but they were able to afford this American dream. That’s out of touch for a lot of folks and so what the pandemic tax was to do, and hopefully the governor will consider it, there’s been no movement on it, but is to really make sure that these companies that have record tax, record profits that they’re taxed appropriately. As you know, in 20, I think it was 2017, Steve may correct me 2018, the Trump administration moved forward with some pretty aggressive tax cuts, especially around the biotech space and I know the tax rate and I don’t know what the exact amount was, but it was really just sort of cut in half.
And so I think we can all share in the fruits of our labor. I do believe that big tech has a responsibility. They have tremendous profits. Yes, they’ve been job creators, but at the same time, we’re not talking about a company that’s just in the United States, we’re talking about companies that are global and I do think there is a responsibility, whether that’s through a data dividend or through a tax that it’s appropriate and should be reinvested in communities that need it the most.
Chip Franklin:
Steve, there’s a lot here to unpack. Does the government know the tipping point where taxes on corporations begin to hurt the growth of these corporations and thus the jobs and ultimately causing the company to fail or even move locations, change locations?
Steve Moskowitz:
See, I would guess, no, because on the one hand, there’s some really good people and say, look, suppose you see somebody who has six refrigerators filled with food in his kitchen and you see somebody that, and the kids are starving. You say, “Well, you know, you have six refrigerators. You don’t need that much. Why don’t you give just one refrigerator? You still have five refrigerators left. That’s still more than you need. Why don’t you give it to that starving family?” And you know, socially, that’s a good thing. You’re feeding starving people, but economically somebody says, “Well, look, I paid for those six refrigerators and that guy doesn’t have refrigerator because he’s a lazy bum doesn’t want to work like I do.” I won’t get into the truth or drugs or anything else for that, but the feelings and one of my concerns for California and I love California, I moved here way over 30 years ago from New York City.
California is a wonderful place to live. I live in San Francisco. I think it’s great here but what I’m concerned about is how do you prevent companies that say, okay, you want to tax me some more? You know, Texas is very hospitable to business and they don’t even have a state income tax and how about if I just go there and you get nothing from me. How do you like that? That’s the toughie.
Chip Franklin:
But then an ice storm comes and it cuts power to the entire state.
Steve Moskowitz:
Well, again, I didn’t say everybody was going. I’m not going. I like California. I mean, I’m a tax attorney and obviously I don’t want to pay any more taxes than I have to but if you said to me, “Steve, would you personally move out of San Francisco to save taxes?” The answer is “No, I like living here”, but with some companies, they just make a decision on the numbers. When I make a decision, I like to make a decision on life. It’s beautiful here, the weather, a lot of things other than the numbers. That’s where I’m different than most financial guys. Most financial guys will just say, hey, here’s what the numbers are. Like, my little joke is you can move to Alaska and that’s a state where instead of having a state income tax, they’ll pay you to live there but do you want to live in a place where they pay you to live there? So we got to measure everything.
Chip Franklin:
David, it seems to me, it’s almost impossible to have a nuanced conversation about taxes without polarization, without one side wanting to burn everything down and anger and spite, and then the other side, ready to do the same.
David Canepa:
Yeah. I just think, you know, one of the things and, you know, the Senate is looking right now relative to the, you know, the… When Trump’s, you know, I hate to say Trump, but when he slashed the US corporate tax rate to 21%, they provided tax a tax haven for businesses so that they could get a lower rate so you look at that and in terms of the tax code, you know, and the Democrats right now, they’re looking at trying to fix that but these companies, they were getting a tax rate of 21%. Now with these tax havens, Bermuda, et cetera, now it’s down, it’s down to 10.5%. I think the fundamentals of all this is, I do think, just philosophically that people should pay their fair share of taxes and why.
Chip Franklin:
It seems to me it’s almost impossible to have a nuanced conversation about taxes without polarization, without one side, wanting to burn everything down in anger and spite and then the other side, ready to do the same.
Steve Moskowitz:
You know, I remember when president Reagan came into office. The top tax rate was 70%. He dropped it down to 28% and what he said is the lower you make the… Now as an attorney, I’m going to say comply with all laws, but what our former president said was “The lower you make the tax rate, the less incentive you have for people to cheat and vice versa.”
And you know, the other thing you have to realize too, is economics. You know, everybody says, well, you know, the tax, and then I have less, and the government has more, but suppose we had a situation where somebody came into office and says, okay, under me, as of today, the tax rate is half. You know what? Prices would adjust. Food would become more expensive and I’m not talking about the inflation we’re going through now, food would adjust and we’re talking about, you know, your parents bought a house for 90 grand, it’s worth almost two mil today.
David Canepa:
Yeah.
Steve Moskowitz:
Well, okay. So what happens is really did the price of the house change or the value of the currency change? Because to get that house back when your parents bought it, I only needed 90,000 of that asset. Now I need two million of it so what changed? So the bottom line is economics. It’s just like, I remember my starting pay in New York was by today, laughable, but back then it bought a lot of stuff. So again, in an economy, the prices are going to adjust so when you adjust the taxes, the prices are going to float.
Chip Franklin:
David, when you go to Washington next January to be sworn in, you’re going to have to deal with taxes, whether it’s raising them as many progressives want, or as conservatives want lowering taxes in order for corporations to grow. I guess the question is, can you find a way to reduce spending and trim the fat yet have enough money in order to get the things done, the necessary things, everything from infrastructure to Medicare, to social security? I mean, you’re going to have to turn some enemies into friends and some friends into enemies, right?
David Canepa:
Yeah, correct and you know, so it’s a double edged sword, right? So when you look at the California State Budget in particular. It fluctuates basically on really, it does a lot more than it did in the past because of who we’re taxing and one of the things that does not provide, and we should always tax. I mean, we should tax those who, you know, are billionaires, etc. We should tax them but with the state budget, what we have to worry about in the state of California, because we do place a huge emphasis on those who are extraordinarily rich that the budgets sometimes do fluctuate.
You got to take that into consideration. Now that being said, I think the Federal Government really should look at these oil companies in particular. I mean, they’re making record profits. There’s got to be a way in which we tax them fairly. We’ve got to close loopholes, we’ve got to close all sorts of things just to make sure that we’re funded appropriately.
Steve Moskowitz:
Or maybe give economic incentives that bring in even more money and then everybody wins. And you know, Dave, one of the things I like to personally offer you, when you get into Congress and you’re thinking about taxes, I would advise you to call me at 888 Tax Deal and I’ll just tell you what [inaudible 00:11:02].
David Canepa:
There you go.
Steve Moskowitz:
That should solve all your problems and I’m sure you’re going to rely on that very heavily in every campaign you’re ever in. Say, I need Steve Moskowitz.
David Canepa:
888 Tax Deal. Just like that Steve.
Steve Moskowitz:
It’s okay.
David Canepa:
Well [inaudible 00:11:15] my friend, thank you so much, Chip. It’s been great. Thanks Steve.
Steve Moskowitz:
Well now at least I have maybe one potential Congress person that’ll call up and ask for my opinion on taxes.
Chip Franklin:
And now it’s time to ask Steve. Steve, today’s question is how does a person with a cannabis business make deductions and take tax credits when the thing they’re doing is essentially illegal?
Audio:
Tomorrow, New Jersey will become the latest state to allow the sale of recreational marijuana to people over 21. It’s one of 19 states where such sales are legal or about to begin. But as William Bragham reports, these states are legalizing cannabis, a substance that remains illegal under federal law.
Steve Moskowitz:
The law has gone the pot here, Chip and what we have here is internal revenue code section 230 and if you’re in the cannabis business, you don’t like this section because almost any other business, you can deduct all of your business expenses. Because of 230, you can only deduct your cost of goods sold. All your operating expenses are non deductible.
Chip Franklin:
Wow.
Steve Moskowitz:
So what cannabis owners try to do is have a [inaudible 00:12:33] so let’s assume we have Chip’s pot store and you can go ahead and you have your gross revenue. You can deduct what the product costs you, but you also have a beautiful office in a class A building in San Francisco, you can’t deduct your rent. So what do you do? Say, well, you know what, I’m going to diversify. So what I’m going to do is I’m going to sell pot in the store, but I’m also going to sell T-shirts and hats.
Now the portion of the rent that you allocate to the T-shirts and hats, that is tax deductible. So then what happens is what you’re looking to is 230 is blocking a lot of deductions so how do you get around that, because, well, one is, what’s going to fit and cost a good sold? Well, you know, you say, if you have a warehouse, that’s part of course, a good sold and transportation so you want to put the maximum you can across a good sold and then with the diversification, you say, well, okay, even though I can’t deduct the rent for the pot selling, I can deduct it for the T-shirts and the hats. That’s one of the things the cannabis business is [inaudible 00:13:38].
Chip Franklin:
They get around it a little bit, yeah.
Steve Moskowitz:
And, and in my opinion, I really think that the federal law should confirm or comply with a lot of the state laws. You have a situation where it’s legal at the state level, but it’s illegal at the federal level and then you have a question of when is it going to be enforced or not? And you can have a business right here in California that’s legal in California. They could get rated any day and everybody goes away, not to mention the banks don’t want to touch them.
Chip Franklin:
Yeah.
Steve Moskowitz:
So they have all this cash. You talk about taxes, where you say these people are forced to do everything in cash. The IRS hates cash, but they’re forcing the cannabis owners to deal in cash because the banks don’t want to deal with them. That makes no sense to me. I mean, they have it up there with the real heavy duty bad drugs. So far the Congress hasn’t asked my opinion on anything.
Chip Franklin:
Our next guest today on Practical Tax with Steve Moskowitz is Demrie Henry. She’s a managing partner at Greenlight Tax Group, which helps taxpayers, among other things, save taxes, improve cash flow, have strategic financial planning and she’s nice enough to join us on Practical Tax with Steve Moskowitz. Hello, Demrie, great to have you here.
Demrie Henry:
Hi there guys. It’s been fun.
Steve Moskowitz:
We probably have a lot of stuff we could talk about.
Demrie Henry:
Oh my God, well I’ve really been enjoying listening to the previous guest. That was amazing. Thanks for letting me tune in so early.
Chip Franklin:
So let’s start with this question for both of you. Demrie, you first. What are some of the common tax mistakes you see small businesses make that could be easily avoided?
Demrie Henry:
Well, I mean, you know, that’s really our focus is small to medium sized business owners and it’s amazing how many business owners are just not getting the advice to get structured properly. Like for instance, silly little things like if you’re a single member LLC, you literally cannot pay yourself a W2 income and sometimes we see clients, when they come on board, they’re not paying themselves correctly. They’re not structured properly and so we help them with that. Also, they don’t understand the nuances between like the home office situation so we work with folks who, like during the pandemic, decided to work from home because they all had to and then all of a sudden they think they can have this home office expense. Well, unless you’re a business owner, you absolutely cannot have a home office expense.
Demrie Henry:
So we see a lot of that. And then we do see a lot of issues with the sales tax and franchise tax, things not getting done appropriately and it gets more complicated if they’re across multiple states so you have to look at all those individual things and one of the things we always tell our clients, I’m sure Steve, you’ll appreciate this is, man, you have got to get advice and counsel. Don’t go in on this alone because [inaudible 00:16:19]
Steve Moskowitz:
You must have been listening in every day in my career.
Demrie Henry:
Yeah. I mean it is, it’s not necessarily super complicated, but you have to dot your I’s and you have to cross your T’s and you have to do it appropriately. So that’s why we say don’t do anything without us because we can help you guide through these specific transactions.
Steve Moskowitz:
You know, I couldn’t agree with you more and things that I would add, and before I was a tax attorney I was a CPA, a good accounting system and it’s not just for tax compliance, which you need too, but there’s so much you can do with the accounting system to make you more money.
Demrie Henry:
[inaudible 00:16:55].
Steve Moskowitz:
I collect hours just with that, but I’ll leave it there, the accounting system. And the other thing is the typical business owner, like you, you know, we have a lot of small and medium sized clients. They work themselves to death.
Demrie Henry:
Mm-hmm.
Steve Moskowitz:
And they go home and their biggest decision is should I go right to sleep, or should I get something to eat first? And they miss out on so much tax planning. That’s why I became a tax attorney and switched from being a CPA because most people don’t think about their taxes, they have somebody shuffle the numbers from one place to another place, say “Here, pay this amount by this date.” There’s so much that can be done.
Demrie Henry:
Yes.
Steve Moskowitz:
But you have to know about it.
Demrie Henry:
Right.
Steve Moskowitz:
And most people just miss it. Most people pay way more in taxes-
Demrie Henry:
Mm-hmm.
Steve Moskowitz:
… than they ever have to. And Chip, one of the things I said on your radio show for years, most people cheat on their taxes. They cheat themselves by not taking every deduction to which they’re legally entitled.
Demrie Henry:
Oh, I love the way you said that.
Steve Moskowitz:
Thanks. And the bottom line is that there’s so much you can do because the tax system is two purposes. Everybody knows the one purpose to squeeze money out of us but the other purpose, in a democracy, the government can’t order us to do something, even though it’s good for business, good for society. So how does the government get us to do something they want us to do but they can’t order us? They give us a tax incentive and that’s what I’m all about and I go to business owners and there’s so much they can do with sometimes a tiniest change in behavior or maybe none at all.
Demrie Henry:
Mm-hmm.
Steve Moskowitz:
They have all these tax benefits that they would just miss. It’s incredible the difference and this is a subject that’s near and dear to me. I literally could go on for hours and hours and hours till you drag me off and say no more, no more.
Demrie Henry:
Right.
Chip Franklin:
I had comedy clubs and I deposited a lot of cash so I got audited and I learned two things out of the process. Number one, keep good books. Act as if you’re going to get audited every week and I guess the second, which was just as important, is to have really good counsel in accounting or a tax attorney, somebody that can guide you through those tough times.
Steve Moskowitz:
Absolutely. And that’s why we do tax planning with clients all year long. What I say is the tax return. A lot of people think of the tax return as the be all, end all. It’s not. The tax return should only be a mere summarization of a year of tax planning.
Demrie Henry:
Absolutely.
Steve Moskowitz:
And take a look at the big boys. Take a look at Cook over at Apple. He said that he spends so much time dealing with Apple’s taxes and I use Apple as an example. If I pick up a mom and pop store, I say, “So do you think you make more or less than Apple Computer?” “Ah, ha ha. I make less than Apple computer.” I said “So do you think you pay more or less taxes?” “Oh.” And that’s what I point out look at all these Fortune 500 companies that make billions with a B in profit and they legally don’t pay any taxes. How do you do that? Through the system of tax incentives that I mentioned a minute ago.
Chip Franklin:
When I started out a long time ago, I was advised by an accountant not to take a home office deduction because it was a red flag for an audit. What are some of the other red flags that businesses should avoid? Demrie, you first?
Demrie Henry:
Yeah, well, first off, yes, it absolutely can be a red flag, especially depends upon the industry that the person’s in but if somebody is a W2 employee, they absolutely can’t use the home office deduction at all, period, end of story. And then the other part is that it does have to be reasonable, right? So you can use the deduction, but it has to be based on the square footage and then the [inaudible 00:20:26] of the room, the square footage that all has to be calculated appropriately, which is why you need counsel.
Other things that we see as red flags is where we have companies, business owners structured SA and S Corp, but they’re not paying themselves enough in a W2 compensation. They’re only taking everything in a hundred percent distribution that could be a red flag. Other red flags could be mild deductions when it’s just really egregious, but they don’t actually have a portion for their personal use.
So we talked to folks about that, but really, and truly like what Steve said earlier, everything boils down to the accounting and like what you said, Chip, as it relates to the ledger and keeping accurate records because paper wins audits and if you’re accounting for everything properly, everything’s getting categorized and you’re getting the right counsel, then it’s okay, like you can do that but that’s where it comes in and we have clients all the time that come to us, and I’m sure, Steve, you can’t even imagine how messed up their books are and they want-
Steve Moskowitz:
Well yeah.
Demrie Henry:
… us to do their taxes and we say, “Before we can do your taxes, we’re going to have to do a full cleanup or we won’t touch your taxes ’cause we’re not going to, our folks aren’t going to sign that return.” So we have to get in there and honestly that’s just practical tax 101. Tell me about your books, tell me about your accounting system and if it’s just a spreadsheet or just a business bank account. Well, that’s not an accounting system.
Steve Moskowitz:
Absolutely. And you know, Chip as to red flags, what I’ve always said on the radio, I said on your show plenty of times, the fact that it’s a red flag, so what? You should-
Demrie Henry:
Right.
Steve Moskowitz:
… take everything to which you’re legally entitled, no more and no less. For example, driving a car is a red flag to a police officer. If you drive a car your whole life, at some point a cop’s going to pull you over and say, “Chip, I want to see that driver’s license.” Oh my God a confrontation with organized law enforcement. The guy has a gun. Well, so what? You know, “Officer, here’s my driver’s license. Here’s my insurance. Here’s my registration. I’ve not been drinking.” Few minutes and you’re on your way. Would you not drive a car because maybe sometime a cop would pull you over? Of course not. You should take everything to which you’re legally entitled.
Demrie Henry:
Absolutely.
Steve Moskowitz:
No more and no less and we’re also practical with things like with the home office deduction. Yeah, a lot of times it’s a red flag, but maybe you don’t want it for other reasons, for example, you plan on moving soon because you’ve converted a portion of your house from your primary residence to business property and there’s different taxes so the bottom line is, and what the numbers would say, okay, you can save X number of dollars here, but in the future, here’s what it’s going to cost you. Is it worth it? And we go over the things.
Chip Franklin:
Another question that a lot of people are probably thinking when I retire and I have pensions and social security coming in, how do I protect that money from taxes, right? I mean, should this be a real concern for people facing retirement?
Demrie Henry:
Oh, absolutely and that’s why, no pun intended, but you shouldn’t have all your eggs in one basket and we really encourage our clients to have multiple buckets if you will so you have a deferred-
Steve Moskowitz:
Absolutely.
Demrie Henry:
… bucket. So you’re putting money in the side and you know you’re planning on paying tax at some point on that deferred tax and hopefully you have a really strong financial advisor who’s helping you grow that investment all the while. And then we really encourage to say, you need to have a no tax bucket. We really need to look at your lifestyle. What are your goals? What do you want your retirement to look like? And based on that, you need to make sure that you have a non-tax bucket and oftentimes we’ll utilize permanent life insurance for that because obviously it has a great death benefit, but also has a great living benefit and we encourage our clients early on to really look at that for asset protection, for tax planning, for income protection, things like that and so it’s really important, like I said, to look at all the different buckets and plan for it accordingly.
Chip Franklin:
Steve, when do you think-
Steve Moskowitz:
And I would agree with everything Demrie said but what I would say, you say, well, when you retire, you’re going to take everything so, well, why are you doing that, incurring the taxes? You want to take the RMD required minimum distribution.
Demrie Henry:
Mm-hmm.
Steve Moskowitz:
But then you want to have a lifetime plan and if you have property, you could have a situation where you say, look, if you’ve accumulated enough assets that not only would be comfortable for the rest of your life, you have more than you’re going to need. You could have this situation. You bought a building when you were younger for $10,000. It’s now worth 10 million. Well, okay, if you sold that, the cap gains will be rather large.
Demrie Henry:
Right.
Steve Moskowitz:
So if you didn’t need that building to live on, there’s lots of other things you can do which I won’t even get into right now but if you pass that along to your beneficiary, you’d get a step up in basis. He or she could sell it, step up basis, fair market value at the date of the death of the descendant. They don’t pay any taxes. So again, even from the grave you say to the tax man, I legally beat you.
Chip Franklin:
You guys could talk about this for hours couldn’t you?
Demrie Henry:
Look, I honestly-
Steve Moskowitz:
[inaudible 00:25:35] for days and years and the rest of our lives in our death beds. I say, “Wait, wait, grim reaper, I have something else to tell you.”
Chip Franklin:
Demrie, Steve. And I thank you so much for coming on Practical Tax.
Demrie Henry:
Absolutely. Thank you guys so much.
Steve Moskowitz:
Thanks so much.
Chip Franklin:
You know, Steve, people probably don’t really see it, but you and Demrie offer an incredible service to people whether they’re going through tough times or good times by helping them guide their way and navigate the complicated world of taxes. It’s a great job you guys do. It’s really cool.
Steve Moskowitz:
Thank you, Chip and you look fantastic today, suit and tie.
Outro:
Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.