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 pre-tax 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 business expense, which reduces the company's taxable income. With a 30% tax rate, this results in a tax reduction of $3 million ($10 million * 30% = $3 million).

A Stationery Company Plans to Launch a New Type of Permanent