Jerry and Matt Decide to Form a Business

question 17

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

• A)$0
• B)$11,700
• C)$28,600
• D)$33,800
• E)$44,850

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Definitions:

Homophobia

Prejudice, fear, or dislike directed against people who are homosexual or perceived to be homosexual.

Gender Role Socialization

The process by which individuals learn the gender norms and behaviors expected of them by society through various agents such as family, schools, media, and peers.

Sexual Orientation

The inherent or immutable enduring emotional, romantic, or sexual attraction to other people.

Social Historian

A scholar who studies the experiences, activities, and patterns of people in the past, focusing on social structures and changes.