Jerry and Matt Decide to Form a Business

question 78

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 33% marginal tax bracket and Matt is in the 28% 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)$1,386
• C)$4,274
• D)$4,389
• E)$4,655

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Definitions:

Identification

A psychological process in which an individual assimilates an aspect, property, or attribute of the other and is transformed, wholly or partially, after the model the other provides.

Self-Esteem

An individual's subjective evaluation of their own worth, or the confidence and satisfaction in oneself.

Defence Mechanism

refers to unconscious psychological strategies used to protect oneself from anxiety or social sanctions and to maintain self-esteem.

Reaction Formation

A defense mechanism whereby unacceptable thoughts or impulses are converted into their opposite within the individual's consciousness.