Analysis of Taxes

Correct Answer: Depreciation reduces taxable income by allowing the cost of an asset to be expensed over its useful life

Depreciation reduces taxable income by allowing the cost of an asset to be expensed over its useful life. This is the correct answer because depreciation is a non-cash expense that reduces a company's taxable income over the life of the asset. The other answers are incorrect: Depreciation does not increase taxable income by requiring the cost to be recognized as revenue. Depreciation is an expense, not revenue. While depreciation is a non-cash expense, it does impact taxable income by reducing it over the useful life of the asset. It is not correct to say it has no impact on taxable income in the current period.

Correct Answer: The payment of dividends to shareholders

The payment of dividends to shareholders is not a tax deductible expense for a company. Dividends are paid out of a company's after-tax profits and are considered a distribution of earnings to shareholders, not an expense incurred in running the business. Dividends are not deducted from a company's taxable income. On the other hand, depreciation of fixed assets and employee salaries and benefits are generally tax deductible expenses. Depreciation allows companies to spread out the cost of capital assets over their useful life, reducing taxable income each year. Salaries and benefits paid to employees are considered a necessary cost of doing business and are deductible in the fiscal year they are incurred.

Correct Answer: Interest expenses are generally tax deductible for businesses, subject to certain limitations

The correct answer is that interest expenses are generally tax deductible for businesses, subject to certain limitations. Interest expenses incurred by businesses on loans used for business purposes are typically tax deductible. However, there are certain restrictions and limitations that apply, such as the business interest expense limitation under IRC Section 163(j), which limits the deduction to 30% of adjusted taxable income for certain businesses. The other two answers are incorrect because they represent extreme positions. It is not true that interest expenses are never tax deductible or always fully deductible for businesses. The tax deductibility of interest expenses falls somewhere in between these two extremes, with most interest expenses being deductible but subject to specific rules and limitations.