Which of the following statements is CORRECT?
A) Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
B) Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
C) The maximum federal tax rate on corporate income in 2010 was 50%.
D) Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.
E) The maximum federal tax rate on personal income in 2010 was 50%.

Question

Quizplus · Accepted Answer

Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%. This statement is correct and accurately describes the tax treatment of interest and dividends in 2010.

Which of the Following Statements Is CORRECT