The first year if they organize the business as partnership

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Reference no: EM131212915

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 a partnership?

a. $6,734

b. $0

c. $2,184

d. $6,916

e. $24,050

Reference no: EM131212915

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