Tax benefits of debt

Tax benefits of debt

In the context of corporate finance, the Tax Benefits of Debt or Tax Advantage of Debt refers to the fact that from a tax perspective it is cheaper for firms and investors to finance with debt than with equity. Under a majority of taxation systems around the world, and until recently under the U.S. tax system firms are taxed on their profits and also individuals are taxed on their personal income. A firm that earns $100 dollars in profits in the U.S. for example, would have to pay around $30 dollars in taxes. If it then distributes these profits to its owners as dividends, then the owners in turn pay taxes on this income. Say $20 on the $70 dollars of dividends. So that $100 dollars of profits turned into $50 dollars of investor income.

If, instead the firm finances with debt, then, assuming the firm owes $100 dollars of interest to investors, its profits are now 0. Investors now pay taxes on their interest income, say $30 dollars. This implies for $100 dollars of profits before interest, investors got $70 dollars. [ [http://faculty.fuqua.duke.edu/~jgraham/HowBigFinalJF.pdf Graham, John, "How big are the Tax Benefits of Debt" The Journal of Finance, 2000.] ]

See also

* Trade-Off Theory

* capital structure

*Dividend Taxes

References


Wikimedia Foundation. 2010.

Игры ⚽ Нужно сделать НИР?

Look at other dictionaries:

  • Debt settlement — Debt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.[1] Debt settlement is… …   Wikipedia

  • Debt of developing countries — The debt of developing countries is external debt incurred by governments of developing countries, generally in quantities beyond the governments political ability to repay. Unpayable debt is a term used to describe external debt when the… …   Wikipedia

  • Debt-snowball method — The debt snowball method is a debt reduction strategy, whereby one who owes on more than one account pays off the accounts starting with the smallest balances first while paying the minimum on larger debts. Once the smallest debt is paid off, one …   Wikipedia

  • Bankruptcy Costs of debt — Within the theory of corporate finance, Bankruptcy Costs of Debt are the increased costs of financing with debt instead of equity that result from a higher probability of bankruptcy. The fact that bankruptcy is generally a costly process in… …   Wikipedia

  • Tax forms in the United States — are used by taxpayers and tax exempt organizations to report financial information to the Internal Revenue Service (IRS). They are used to report income and calculate taxes owed to the government of the United States. TOC Federal tax forms 990… …   Wikipedia

  • Tax increment financing — Tax Increment Financing, or TIF, is a public financing method which has been used for redevelopment and community improvement projects in the United States for more than 50 years. With federal and state sources for redevelopment generally less… …   Wikipedia

  • tax-exempt income — Income that is specifically made exempt from taxation by Congress, such as certain Social Security benefits, tax exempt interest, welfare benefits, nontaxable life insurance proceeds, and nontaxable pension income. Category: Back Taxes & Tax Debt …   Law dictionary

  • Tax — Taxation An aspect of fiscal policy …   Wikipedia

  • Tax rates around the world — Taxation An aspect of fiscal policy …   Wikipedia

  • tax — A charge by the government on the income of an individual, corporation, or trust, as well as the value of an estate or gift. The objective in assessing the tax is to generate revenue to be used for the needs of the public. A pecuniary burden laid …   Black's law dictionary

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”