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:

Upstream Reciprocity

A concept in social psychology suggesting that the act of being helped often leads to an individual helping someone else other than their original benefactor.

Pro Social Behavior

Acts performed with the intention to benefit others, such as helping, sharing, or comforting.

Rule Of Law

The principle that all people and institutions are subject to and accountable to law that is fairly applied and enforced.

Broken

Refers to something that has been damaged or no longer functions in its intended or original way.