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:

Absolute Liability

Absolute liability is a legal principle that holds an individual or entity responsible for their actions or products, without the necessity of proving negligence or fault.

Activities

Actions or tasks that individuals or groups engage in, often aimed at achieving a particular goal or outcome.

Violation

An act of breaking or failing to comply with a law, agreement, or set of rules.

Comparative Law

The study of the legal systems of different states.