Jerry and Matt Decide to Form a Business

question 78

Multiple Choice

Jerry and Matt decide to form a business.Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest.The business will take out a $25,000 loan to cover the balance of their working capital needs.They expect that the business will have a loss of $38,000 for the first year.In the second year,the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry.Jerry is in the 33% marginal tax bracket and Matt is in the 28% marginal tax bracket.Their marginal tax brackets will not change as a result of profit or loss from this business.What is Jerry's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as an S corporation?

• A)$0
• B)$1,386
• C)$4,274
• D)$4,389
• E)$4,655

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Definitions:

Breach

The violation of a law, obligation, tie, or standard, often referring to the breaking of a rule or agreement in a contract.

Reasonable Time

A legal concept that refers to a time span which is fair and appropriate under the circumstances for performing a contractual obligation or duty.

Warranty of Title

A guarantee in a sales contract that the seller has the legal right to transfer ownership and that there are no undisclosed encumbrances against the property or goods.

Implied Warranty

An unwritten guarantee that a product will meet a minimum level of quality and functionality.