Jerry and Matt Decide to Form a Business

question 71

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 an S corporation?

• A) $6,916
• B) $5,320
• C) $4,634
• D) $1,872
• E) $0

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Definitions:

Inclusive Unionism

A form of unionism aimed at representing a broad spectrum of workers, including those of different occupations, industries, and demographic backgrounds.

Minimum Wage

The lowest wage that employers may legally pay for an hour of work.

Labor Shortages

Labor shortages occur when employers have difficulty filling positions due to a lack of available, qualified candidates.

Equilibrium Wage Rates

The wage rate at which the quantity of labor demanded by employers equals the quantity of labor supplied by workers.