[cschaef]

Explain how the federal income tax structure impacts a business decision to finance with use of debt vs. equity

[CaptainForest]

The interest is tax deductible.

[CaptainForest]

KongTheKonqueror agrees: Dividends if paid are also taxed twice. The company pays them after taxes and the person receiving them must pay taxes on them.

Dividends aren't exactly taxed twice.

While the corporation does pay tax on the dividends, it is not the same amount as the individual.

The idea is that individual + corporation equal a certain percentage of total tax paid.

Also, the individual does receive a divided tax credit, so their tax burden is reduced to the extent that the corporation paid tax.

[rhmax61]

If one company uses a lot of debt financing, whereas another company
With similar operations uses only common stock financing, the stock-financed company
Will have no interest, hence no interest tax deductions, hence a higher income
Tax bill. The company that uses debt will have a lower tax bill, and thus more of its
Operating income will be passed on to investors (stockholders and debtholders).
Thus, our tax system encourages debt financing.

[Bertrand Jr]

Hello out there. I have a question, how can I get bigger returns on my taxes?