Jerry and Matt Decide to Form a Business

question 74

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 stock basis at the end of the second year if they organize the business as an S corporation?

• A) $0
• B) $11,700
• C) $28,600
• D) $33,800
• E) $44,850

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Definitions:

Preconstruction Review Process

A regulatory procedure undertaken before the start of construction projects to assess compliance with environmental laws, zoning regulations, and other requirements.

Clean Air Act

A federal law designed to control air pollution on a national level by regulating emissions from both stationary and mobile sources.

Major Modifications

Significant changes or alterations to a system, product, or structure, often requiring considerable work and resources.

Environmental Impact Statement

A document that the National Environmental Policy Act requires federal agencies to prepare in connection with any legislative proposals or proposed actions that will significantly affect the environment.