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

• A)$6,930
• B)$6,006
• C)$5,891
• D)$3,927
• E)$3,003

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Definitions:

Contract for Sale

A legally binding agreement where one party agrees to sell and another agrees to buy goods or property under specified terms and conditions.

Writing

A method of communication or expression through the use of symbols, characters, or scripts in a tangible form.

Agreement

A mutual understanding or arrangement between two or more parties that typically involves an exchange of goods, services, money, or promises.

Officer

An individual holding a position of command, authority, or responsibility within an organization, especially in a military, corporation, or governmental context.