Jerry and Matt Decide to Form a Business

question 11

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. How much tax will Matt pay in the second year (rounded to the nearest dollar) due to this business if they organize the business as a partnership?

• A) $10,920
• B) $9,464
• C) $7,956
• D) $8,814
• E) $4,732

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Definitions:

Cerebellum

A major structure of the brain that plays an essential role in motor control, balance, coordination, and speech.

Intention Tremor

A rhythmic, oscillatory movement disorder that worsens with targeted movement or when approaching a precise task, often linked to disorders of the cerebellum.

Muscle Tone

The continuous and passive partial contraction of the muscles, which helps maintain posture.

Comparator

In general terms, a device or system that compares two items or signals and determines their relationship or difference.