A stationery company plans to launch a new type of indelible ink pen.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 of 40% on its pretax income,what effect will the advertising for the new pen have on its taxes?

Question

Quizplus · Accepted Answer

The $10 million spent on advertising is a deductible business expense, reducing the company's taxable income. With a 40% tax rate, this results in a tax reduction of $4 million ($10 million * 40%).

A Stationery Company Plans to Launch a New Type of Indelible