Question

For a corporation, bond interest :

A) is treated the same as dividends for tax purposes.
B) has no effect on earnings and therefore has no effect on income taxes.
C) reduces income tax by reducing earnings.
D) None of the above.

Answer 1

Bond interest for corporations reduces taxable income and thus reduces income tax, which is different from dividends that are paid from after-tax income.

Step-by-step explanation:

For a corporation, bond interest is not treated like dividends for tax purposes. Instead, it reduces income tax because bond interest is an expense and therefore reduces the corporation's earnings before tax. Unlike dividends, which are paid from after-tax income and are not deductible, bond interest payments can be deducted from a company's taxable income. Therefore, the correct answer is C) reduces income tax by reducing earnings.