Final answer:
The major advantage of the deductibility of interest expense for income tax purposes belongs to debt financing. This method allows firms to reduce taxable income through interest payment deductions, unlike equity financing where dividends are not tax-deductible.
Step-by-step explanation:
The major advantage of deductibility of interest expense for income tax purposes is found in debt financing. When a firm chooses debt financing, it means borrowing money through avenues such as bank loans or issuing bonds. The firm is then obligated to make scheduled interest payments, but these payments are generally tax-deductible, which can reduce the company's taxable income. In contrast, equity financing, involving selling company ownership through stock, does not offer the advantage of interest deductibility, since dividends paid to stockholders are not deductible expenses.
Debt financing is attractive to many firms because it allows them to maintain control of their operations, as opposed to equity financing where selling stocks leads to answering to shareholders and a board of directors. However, taking on debt also means committing to those interest payments, regardless of the company's income situation, which could be a significant disadvantage if revenue falls short.