Jerry and Matt Decide to Form a Business

question 50

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 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) $1,344
• C) $4,274
• D) $4,389
• E) $4,655

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Definitions:

Endoderm

The Endoderm is the innermost layer of cells or tissue of an embryo in early development, which gives rise to the lining of the digestive and respiratory systems.

Ectoderm

The outermost layer of cells in the early embryo from which the nervous system, skin, and other external tissues develop.

Proximodistal Development

A pattern of development where growth starts at the center of the body and moves towards the extremities, observed in the physical development of children.

Fingernails

Keratin-based structures at the tips of the fingers that protect the fingertip and enhance tactile sensation.