Questions and Answers
Interest on loans is tax deductible for businesses.
True
Mortgage interest is not tax deductible for businesses.
False
Issuing ordinary shares does not affect company control.
False
Newly established businesses are often seen as low risk.
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Cost of leasing payments can be tax deductible for a business.
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Dividend payouts are tax deductible for businesses.
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Potential sources of finance may not lend to higher risk businesses without guarantees.
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Interest on hire purchase repayments is not tax deductible for businesses.
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Tax deductible options do not help in reducing borrowing costs for businesses.
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Issuing bonds will dilute company control while taking out a loan will not.
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Strong security collateral may be needed for low-risk businesses to secure financing.
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All sources of finance consider the risk profile of a business before lending.
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Dividend payouts can discourage businesses from using ordinary share capital due to their non-deductible status.
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A business with a higher likelihood of making a profit is considered less risky.
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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.
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 covers various tax deductible options available for businesses, including loan interest, mortgage interest, and leasing payments. Understand how these deductions can impact borrowing costs and tax liabilities. Test your knowledge of what is deductible and what is not in the context of business finance.
