A stationery company plans to launch a new type of permanent marker. Advertising for the new product will be heavy and will cost the company $10 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax rate of 30% on its pretax income, what effect will the advertising for the new pen have on its taxes?

Question

Quizplus · Accepted Answer

The advertising cost of $10 million will be considered a business expense and can be deducted from the company's taxable income. Therefore, the company's taxable income will be reduced by $10 million, resulting in a tax savings of $3 million (30% of $10 million). Thus, the effect of the advertising on taxes is to reduce taxes by $3 million.

A Stationery Company Plans to Launch a New Type of Permanent