Question

Corporations earn most of their income from operations; however, they may also receive interest and dividend income. ____________ income is taxed as ordinary income; however, ____________ income is taxed more favorably. 50% of ____________ received is excluded from taxable income, while the remaining 50% is taxed at the ordinary tax rate. For businesses, ____________ payments are regarded as an expense so they are tax deductible; however, ____________ payments are not tax deductible. Consequently, our tax system encourages ____________ financing over ____________ financing. Depreciation expense is tax deductible, so the larger the depreciation, the -Select- the taxable income, the ____________ the taxes, and the -Select- the firm's operating cash flow.

Answer 1

Step-by-step explanation:

Corporations earn most of their income from operations; however, they may also receive interest and dividend income. Interest income is taxed as ordinary income; however, dividend income is taxed more favorably. 50% of dividends received is excluded from taxable income, while the remaining 50% is taxed at the ordinary tax rate. For businesses, Interest payments are regarded as an expense so they are tax deductible; however, dividend payments are not tax deductible. Consequently, our tax system encourages debt financing over equity financing. Depreciation expense is tax deductible, so the larger the depreciation, the lower the taxable income, the lower the taxes, and the higher the firm's operating cash flow.