Question

Please, I need step by step how to solve this exercise.

Mary and Jeff decided to for a business. Mary will contribute $4,200 for a 35% interest and Jeff will contribute $7,800 for 65%. The business will take out $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 will distribute $5,200 to Jeff and $2,800 to Mary. Mary is in the 32% marginal tax bracket and Jeff is in the 24 marginal tax bracket. Their marginal tax bracket will not change as a result of profit or loss from this business.

How much tax will Mary pay in the second year due to this business if they organize the business as a partnership?

Answer 1

Calculation of tax payble by Mary for second year
Description	Amount($)
Profit will be of partenership business	52,000
Less: Loss will be in first year	38,000
Profit after sett off of loss for first year	14,000
Less: dividend will be declared (5,200+2,800)	8,000
Profit after dividend will be declared	6,000
Add: Dividend ( as it is ordinary dividend and will be taxable at ordinary rate.	8,000
Net profit	14,000
Mary's share of profit (14,000 x 35%)	4,900
Tax payble in second year (4,900 x 32%)	1,568
We are ignored social service tax and Medicare tax