Questions and Answers
What is the impact of tax deductible finance options on the cost of borrowing for businesses?
Tax deductible finance options reduce the cost of borrowing by lowering the end of year tax liability for businesses.
Which types of interest payments are tax deductible for businesses?
Interest on loans, mortgage interest, and interest on hire purchase repayments are all tax deductible for businesses.
How does issuing ordinary shares affect company control?
Issuing ordinary shares dilutes company control, as it involves distributing ownership among more shareholders.
What is a major risk for newly established businesses when seeking external financing?
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Why might a business choose not to use ordinary share capital as a finance source?
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What factors may influence a lender's decision to provide finance to a business?
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Which financing option helps businesses maintain control while minimizing tax impact?
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Study Notes
Taxation
- Some finance options for businesses and households are tax deductible, while others are not.
- Tax deductible options help reduce the cost of borrowing by lowering year-end tax liability.
- Interest on loans is tax deductible for businesses, enhancing cash flow.
- Mortgage interest can be deducted by businesses, contributing to reduced operational costs.
- Leasing payments made by a business are also tax deductible, providing financial flexibility.
- Interest from hire purchase repayments is deductible, aiding businesses in purchasing equipment.
- Dividend payouts are not tax deductible, potentially discouraging the use of ordinary shares as a financing option.
Control
- Businesses must evaluate if a financing source will dilute their control over the company.
- Issuing ordinary shares results in dilution of company control, affecting decision-making authority.
- Loans do not dilute control, allowing owners to retain full decision-making power.
Risk
- Businesses with lower profit-making potential are categorized as higher risk compared to more profitable ones.
- Potential financiers assess risk levels, often refusing loans to higher risk entities unless guarantees for repayment are provided.
- Newly established businesses are viewed as high risk due to unproven viability and profitability.
- To mitigate risks associated with lending, strong security collateral may be required from higher risk businesses.
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Description
This quiz focuses on understanding various tax deductible options available for businesses and households. It covers how these options can reduce costs and tax liabilities, including details about interest on loans, mortgage interest, leasing payments, and hire purchase repayments. Test your knowledge on which financial options are deductible and their implications.
