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:

Same Crime

The principle that individuals committing the same offense should receive equal treatment and punishment under law.

Tried Twice

Being subjected to prosecution for the same offense in the same jurisdiction more than once, prohibited under the "double jeopardy" clause of the Fifth Amendment to the U.S. Constitution.

Civil Rights Act

A landmark piece of legislation in the United States that outlaws discrimination based on race, color, religion, sex, or national origin.

Discrimination

Unjust or prejudicial treatment of different categories of people, especially on the grounds of race, age, sex, or disability.