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:

Downshifts

The act of shifting a vehicle's transmission into a lower gear, increasing engine speed and providing more power or engine braking.

Governor Pressure

The hydraulic pressure in automatic transmissions that helps control gear shifts and is regulated by the vehicle's governor.

Transmission

A system in vehicles that transmits power from the engine to the drive axle, enabling the change of gears and varying the power and speed ratio.

Output Shaft Speed

The rotational speed of the shaft that delivers power from a transmission or differential to the wheels or other driven components.