Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for December, 2005

Posted by taxguru on December 30, 2005

Posted in Uncategorized | Comments Off on

Posted by taxguru on December 30, 2005

Ten Year-End Tax Saving Strategies – Act Before December 31! – from NATP


Treasury and IRS Finalize Rules Regarding Roth 401(k) Contributions


Feds still have permanent injunction against promoter of “Tax Toolbox” scheme to deduct personal costs as business expenses.


 The Gain And Pain Of Sarbanes-Oxley


Getting Fired… and Fired Up About Taxes





Posted in Uncategorized | Comments Off on

Posted by taxguru on December 30, 2005

Posted in Uncategorized | Comments Off on

Working Across State Lines

Posted by taxguru on December 30, 2005


Subject: One question on out-of-state business
Hi, has wealth of information.  However, I could not find information on one of my question.  Can you please provide an answer to this following question?

I am Single-Member LLC incorporated in Florida and have the approval of IRS for treating as S-Corporation. Income for my S-Corporation for this year 2005 is fully sourced from Pennsylvania. For Pennsylvania, basically, my business is out-of-state S-Corporation.  My S-Corp gets 1099 from a company in PA.

Assuming that S-Corporation receives 1099 income of $150,000 from PA and me as an employee of S-Corporation receiving a salary of $100,000, I would like to know the tax implications. Let us also assume another 10,000 towards qualified business expenses.

Am I supposed to pay Pennsylvania state tax for my W2 income of $100,000 and business income of 40,000? Can we treat $100,000 salary as Florida Income because it is paid by LLC/S-Corp in Florida and I am also resident of Florida?  In this case, I need to pay PA State tax only on $40,000 income.



You really should be discussing this with your own personal tax advisor.  If you are trying to operate an LLC or S corp without a professional tax advisor, you are asking for big trouble.  This is even more critical when operating in more than one state because the rules for reporting and taxation by each state are different.

Just from the sketchy details you provided, it is apparent that you will have to file an S corp return in PA, as well as a nonresident individual return to report and pay tax on the S corp income passed through to you on the K-1.  How much, if any, of the $100,000 W-2 income is taxable to PA will most likely depend on how much time you spent working inside PA.  There will also be the issue of PA payroll taxes if it is determined that any of your W-2 pay was earned there.

A good tax pro should be able to help you stay in proper compliance with the PA tax authorities.

Good luck.

Kerry Kerstetter


Thank you very much for your response.  I do have a CPA, but he is not familiar with PA taxes.  Looks like I have to check up with some one in PA who are familiar with PA Taxes.

Your input is vary valuable and thanks again for replying me.


My Reply:

Nobody knows everything about all of the states’ tax laws.  However, a good tax advisor will know how to research the rules for any one particular state so that you don’t have to hire a different tax pro for each one.  The fundamental concept of income-sourcing is fairly consistent in most states; so that only the finer details usually need to be determined for a particular state.

The best place to start is from the website to take you and your professional advisor to the state’s official website.  QuickFinders and Tax Materials, Inc. both have very fine reference books covering the various states’ tax issues.  These are what I use when one of my clients either moves to a new state or becomes in other ways required to file tax returns with a new state.

Good luck.

Kerry Kerstetter


Posted in Uncategorized | Comments Off on Working Across State Lines

New Math?

Posted by taxguru on December 30, 2005

I know that it’s been a very long time since I was in school; but when did they change the definition of a ton?


Subject: question about site info

hi there,

i read over the info on your site about section 179, and i didn’t find a clear answer about the suv’s.

can you tell me if i can take the 179 on the durango i just purchased in august of this year? it is only 4.5 tons i think, but the cost was only $25K. i am incorporated, as a S-corp. the durango is owned by my business 100%, it is not for personal use. i bought it mainly as a way to help with my taxes, and now i am confused as to if i am allowed to use this at all.

please help!



You really should be discussing this with your own personal tax advisor.  If you are trying to operate an S corp without a tax advisor, you are asking for big trouble.  Buying a new vehicle just for tax breaks was a mistake.  Don’t make matters worse by trying to do this on your own.

I assume that the Durango weighs 4,500 pounds and not 4.5 tons, which is 9,000 pounds.  The maximum Section 179 for a vehicle under 6,000 pounds is much lower than for one over 6,000 pounds.

I have this all explained on my website.

but only a qualified tax pro will be able to give you more specific numbers for your situation.

Good luck.

Kerry Kerstetter



i do have a personal tax advisor. she is on vacation until jan. 2nd, and i needed an answer before the 31st. i didn’t buy the vehicle solely for a write off, as it is my business vehicle. but it will act as a write off…
same as my computer equipment, software, and other items necessary for my business to operate. therefore my question was legitimate as i needed to know if i could use the section 179 towards the durango. (which would mean i needed to make another large payment by the 31st). i found out that it does weigh 6600 pounds, which makes it qualify. also, i always thought that 1000 pounds was a ton. i will double check on that math, because i could swear that is correct. then again, i am a just graphic designer… not a mathmatician.

Posted in 179 | Comments Off on New Math?

AARP doesn’t want younger folks thinking about actually owning their own retirement accounts.

Posted by taxguru on December 30, 2005

Posted in Uncategorized | Comments Off on AARP doesn’t want younger folks thinking about actually owning their own retirement accounts.

Posted by taxguru on December 28, 2005

The Informed Consumer’s Guide to Hiring a Tax Professional – From NATP


So, you want to learn Bookkeeping – Free online tutorial courtesy of Bean Counter Dave Marshall.  It’s a very good idea to understand the basic fundamental principles of accounting, even when working with QuickBooks.




Posted in Uncategorized | Comments Off on

Generating Year-End Capital Losses

Posted by taxguru on December 28, 2005


Subject: our stocks

Kerry –

We’re considering selling what stock we have left in all our portfolio and using those losses to help offset earnings for this year (2005) and re-investing what money we realize that same day in another stock.  We have at lease $12,500 in unrealized losses.  What do you think?  We were considering Walgreen’s for re-investment, would you have any other ideas for a company to invest in?


One thing to be careful of when dealing with capital losses is the fact that they can only be used to offset capital gains and only $3,000 can be used to offset other kinds of income. 

I don’t have any stock buying secrets.  In fact, nobody does, which is why I have always believed that real estate is the best investment and have never actually bought any stocks.



Subject: End of the Year 2005
Dear Kerry:

Please do not lump us in with “those spooked EOY” folks who worry about taxes.  But two actions occurred that may have some consequences. We sold some rental properties and failed to do 1031 exchanges

Stock broker says we have a $321.00 loss and we may want to SELL stock for a loss.

Whatchathink?  Go for more losses?


Selling stock just to generate tax losses is not the best way to manage an investment portfolio.  Stocks that have no potential for future gain and possible loss should be dumped and the proceeds put into something more productive.  If the stock has good upward potential, you should keep it.

The tax savings of losses would be about 20%, counting both Federal & State.  A $321 loss would save you only about $64 in taxes.  Selling them just to show a loss wouldn’t save enough to cover much more than the commission you would have to pay to your stockbroker.

Another thing to keep in mind in regard to generating capital losses with stocks is that IRS has what’s called the “wash sale rule” which prevents anyone from deducting losses on stocks that are repurchased within 30 days of the sale.  This is to prevent people from capitalizing on downturns in stock values to generate paper losses, and then buying the stock back to ride it back up.



Posted in 1031 | Comments Off on Generating Year-End Capital Losses

Schedule D Details Required

Posted by taxguru on December 27, 2005

Without a doubt, the most time consuming tax returns are those where the clients have been doing a lot of stock and option trading.  Entering the individual trades into the tax program for Schedule D takes hours and hours.  Luckily, Sherry has been able to enter most of those into Lacerte; but even with her much lower billing rate than mine, the clients’ bills are in the several thousand dollar range for their 1040s.

While it hadn’t been officially blessed by our masters at the IRS, some tax preparers were short-cutting the detailed entry process and just entering summary totals into Schedule D with backup detailed stockbroker reports either attached or “available upon request.” 

With the 2005 Schedule D, it looks like IRS will no longer accept such summary entries on Schedule D and is insisting on each individual trade being entered.  Last night, I downloaded and listened to a very informative podcast from CPA Ed Zollars, where he goes into great detail on this not new, but much more explicit requirement by IRS.  He shares the fears of some tax pros that not including all of the specific trade details could cause IRS to refuse to accept a 1040 as being properly filed.


Ed Zollar’s mp3 podcast on Schedule D instructions

Ed Zollar’s main podcast page

RSS feed to subscribe to Ed Zollar’s podcasts 


Posted in Uncategorized | Comments Off on Schedule D Details Required

Roth 401 (k) Plans

Posted by taxguru on December 26, 2005


Subject: Roth 401(k) plans

Mr. Kerstetter,
I am an accounting student pursuing my MBA with a focus in Accounting, satisfying my CPA 150 hour requirement. As a young professional I have been keeping my eye on retirement. So I can get out young and rich! I see there is a new retirement plan coming out Jan. 1, 2006 the Roth 401(k) plan. Unfortunately my company doesn’t offer it for 2006. But I had some questions regarding it. The Roth 401(k) plan, is made with after tax dollars and employer matches are made with before tax dollars. Being that we are taxed on these dollars, does the share of taxes paid by our employer increase with the Roth 401(k)?

As I have learned in my tax classes, Employers pay taxes based on their payroll. They pay federal income tax, social security and Medicare, and federal unemployment taxes.

I am under the impression that because traditional 401(k) plans lower our AGI, that because we aren’t responsible for tax on contributions, that our employer isn’t either.

If this new Roth 401(k) plan contributions are based on after tax dollars, doesn’t offering this plan increase an employers tax liabilities? If so, what is the motivation to them to adopt this retirement plan?

Your site is great! I read it everyday thanks for the knowledge and inspiration in my journey.


Roth 401(k)s are obviously so new that all of the details of how they function in real life are not yet settled.  Some of the basics are laid out in this free article from the WSJ.

I noticed a few misconceptions in your email.  Employers do pay a number of payroll taxes on the wages they pay their employees.  These include FICA, Medicare and Federal and State Unemployment taxes, plus occasional local taxes.  Employees are also required to pay FICA and Medicare taxes on their gross pay.

The employer does not actually pay Federal or State income taxes on the wages paid out.  Those are paid by the employees, but are withheld by the employer to be sent to the IRS and State on behalf of the employees.

My understanding of the Roth 401(k) plans is that the amounts put aside into the accounts by the employees will be subject to all of the standard income and payroll taxes by both the employer and employee.  The money being contributed to the account is thus after-tax dollars.  The benefit to the employee is that, if the money is in the account long enough and our rulers in DC don’t change the laws, all of the money in those accounts can be withdrawn tax free, including the income it earns over the years.

With the conventional 401(k)s, the employees don’t have to report the amounts contributed as subject to income taxes, but do have to pay payroll taxes on that money, as do the employers.  The trade-off here is that every bit of money taken out of the 401(k) or subsequent rollover IRA account will be subject to income tax when withdrawn.  

In regard to employer full or partial matching of employee contributions, these amounts are not currently subject to income taxes, but are hit with the normal payroll taxes.  While these are technically pre-tax dollars in conventional 401(k)s, I don’ think that will be possible with the new Roth 401(k)s.  Those are only designed to be funded with after-tax dollars. I haven’t studied the actual law; but it wouldn’t be consistent for our rulers to allow a mixing of pre-tax and after-tax contributions.

401(k)s of both types are generally very popular with employers because they allow their employees to fund their retirement accounts with their own money rather than additional company funds, as normal company sponsored pension plans require.  In a competitive labor market, employers want to allow their workers the same kinds of benefits that their competitors have in order to attract and retain productive people.

I hope this helps understand this issue a little better.

Kerry Kerstetter


Wow, Mr. Kerstetter, thank you for the great response. I am not sure how you do it, I guess my problem was a misunderstanding that employers don’t pay anything on our traditional 401k contributions. What I have seen from a couple Roth 401k calculators found on is that the employer match is put in as before tax dollars. I am not sure how they plan on handling the mixed distribution of those. But thank you for your response again!



Roth 401(k) Offers Tax-Free Bonanza in Retirement – From John Wasik of Bloomberg News.


Posted in Uncategorized | Comments Off on Roth 401 (k) Plans