Jerry and Matt Decide to Form a Business

question 56

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 32% marginal tax bracket and Matt is in the 24% 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 a partnership?

• A) $0
• B) $2,184
• C) $5,772
• D) $6,916
• E) $24,050

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Definitions:

Equilibrium

A state in which opposing forces or influences are balanced, often used in physics, chemistry, economics, and social sciences to describe stability in a system.

Great Elector

A title held by Frederick William, who was the Elector of Brandenburg and Duke of Prussia in the 17th century, instrumental in consolidating his territories and strengthening the state.