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 Matt's income tax savings (rounded to the nearest dollar)for the first year if they organize the business as an S corporation?
A)$6,916
B)$5,320
C)$4,634
D)$2,184
E)$0

Question

Quizplus · Accepted Answer

Matt's share of the loss would be $24,700 ($38,000 x 65%)but the amount he can deduct in the first year is limited to his $7,800 basis ($7,800 invested).The excess $16,900 loss is carried forward.His tax savings is $2,184 ($7,800 x 28%).

Jerry and Matt Decide to Form a Business