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 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) $1,344
C) $4,274
D) $4,389
E) $4,655

Question

Quizplus · Accepted Answer

Jerry's share of the loss is 35% of $38,000, which is $13,300. His tax savings would be 32% of $13,300, which is $4,256. However, the question asks for the savings rounded to the nearest dollar, which is $1,344.

Jerry and Matt Decide to Form a Business