Question

erry 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 a partnership?

$0

$1,386

$4,144

$4,389

Answer 1

solution:

Given loss in the First year $38000

Jerry's share is 35%

Jerry's share of loss = $38000*35%

= $38000*35/100

= $38000*0.35

= $13300

Now Calculating Jerry's Income Tax Savings for the First year

Given Jerry's Marginal Tax Bracket is 32%

Income Tax Savings = Jerry's loss of share * Marginal Tax rate

= $13300*32%

= $13300 * 32/100

= $13300*0.32

= $4256

Note: if you have any doubts please comment. Thank you