Question

A motor company plans to launch a new type of SUV Advertising for the new product will be heavy and will cost the company $15 million, although the company expects general revenues of $280 million next year from sources other than sales of the new SUV. If the company has a corporate tax-rate of 30% on its pretax income, what effect will the advertising for the new SUV have on its taxes?

a. It will increase taxes by $4.5 million.
b. It will reduce taxes by $15 million.
c. It will have no effect on taxes.
d. It will reduce taxes by $4.5 million.

Answer 1

The effect of advertising for the new SUV on the taxes of the motor company will depend on whether the advertising expense is considered a deductible or a capital expenditure. If the advertising expense is deductible, it will reduce the taxable income of the company and therefore reduce its taxes. However, if the advertising expense is considered a capital expenditure, it will not have an immediate impact on taxes, but it will be amortized over a certain period.

Step-by-step explanation:

The effect of advertising for the new SUV on the taxes of the motor company will depend on whether the advertising expense is considered a deductible or a capital expenditure. If the advertising expense is deductible, it will reduce the taxable income of the company and therefore reduce its taxes.

However, if the advertising expense is considered a capital expenditure, it will not have an immediate impact on taxes, but it will be amortized over a certain period.

In this case, since the advertising expense is not specified as either deductible or capital expenditure, we cannot conclusively determine the effect on the company's taxes. We would need more information to determine whether the advertising expense can be deducted in the current tax year or if it needs to be capitalized and amortized over some time. Therefore, the correct answer is c. It will not affect taxes.