Jerry and Matt Decide to Form a Business

question 53

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 Matt's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as an S corporation?

• A)$6,916
• B)$5,320
• C)$4,634
• D)$2,184
• E)$0

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Definitions:

Overhead Rate

A calculation used to allocate indirect costs to produced goods or services, often based on labor hours, machine hours, or direct labor costs.

Cost of Services Account

An accounting category that includes all direct costs associated with the delivery of services, such as labor and materials.

Job Costs

The total expenses associated with a specific job or project, including labor, materials, and overhead, used for pricing and profitability analysis.

Job Cost Sheet

A document used to track the expenses associated with a specific job or project, including materials, labor, and overhead costs.