Question

Regarding the tax treatment of payments to securities holders, it is true that _______________, while ____________________. 1. interest and preferred stock dividends are tax-deductible; while common stock dividends are not tax-deductible 2. common stock dividends and preferred stock dividends are tax-deductible; while interest is not tax-deductible 3. interest and preferred stock dividends are not tax-deductible; while common stock dividends are tax-deductible 4. common stock dividends and preferred stock dividends are not tax-deductible; while interest is tax-deductible

Answer 1

Answer: 4. common stock dividends and preferred stock dividends are not tax-deductible; while interest is tax-deductible

Step-by-step explanation:

When a company pays interest on a loan, that interest is able to be deducted from Tax. This is why in the income statement, interest is subtracted from the net income before tax is applied thereby reducing the amount of tax that the company has to pay.

Conversely, Dividends be them Preferred or Common, are only paid after taxes are calculated on the net profit. This is because they are not tax deductible and so do not offer much in the way of tax benefits to a company.