Question

The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.True or false?

Answer 1

Answer:

The correct answer is false

Explanation:

Interest payment is an expense incurred by a business as a cost of borrowing money to finance the  business. It is an allowable expense for tax purposes. Hence it is deducted from revenue before tax liability is computed.

Interest expense is a tax shield as it helps the business to reduce its tax liability.

Dividends are portion of a company profit paid to shareholders. Dividends are paid from profit after tax. Therefore cannot be used to reduce tax liability.

The correct answer is false