Jerry and Matt Decide to Form a Business

question 58

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 stock basis at the end of the second year if they organize the business as an S corporation?

• A)$0
• B)$6,300
• C)$27,950
• D)$15,050
• E)$15,400

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Definitions:

Soviet Intervention

Refers to the involvement by the Soviet Union in the internal politics of other countries, often to promote communist governance or prevent the spread of capitalism.

Hungarian Uprising

A nationwide revolt against the government of the Hungarian People's Republic and its Soviet-imposed policies, occurring in 1956.

Suez Canal

An artificial waterway in Egypt, connecting the Mediterranean Sea to the Red Sea, allowing for a shorter shipping route between Europe and Asia.

Suburban Homeownership

The state or condition of owning a home in a suburban area, which typically implies a residential setting outside of urban centers, often associated with middle-class values and lifestyles.