Jerry and Matt Decide to Form a Business

question 63

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 Matt pay in the second year (rounded to the nearest dollar) due to this business if they organize the business as an S corporation?

• A)$10,920
• B)$9,464
• C)$4,732
• D)$3,276
• E)$1,456

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Definitions:

Normally Distributed Curves

Graphical representations of a normal distribution, showing how data points are symmetrically distributed around the mean.

Mean

A statistical measure representing the average value in a set of numbers, calculated by dividing the sum of all values by the number of values.

Median

The middle value in a list of numbers, which divides the dataset into two halves.

Mode

The value that occurs most frequently in a given set of data.