Income Tax Effect
As the old saying goes, only two things are certain in life: death and taxes. Since income taxes take a large percentage of an organization's taxable income, they have to be considered with the cost of financing. Interest paid on loans or bonds is tax deductible. The costs associated with securing and closing these types of financing are deductible over the life of the financing. The ability to deduct for the payment of interest and related costs effectively reduces the amount of that cost when an organization has taxable income.
The costs of raising and securing common or preferred stock are not tax deductible; they reduce the organization's equity but not net income. Nor is the cash paid out as dividends deductible. In regard to Trade Debt and Customer Deposits (Retainers), a careful distinction must be made. Assuming the company reports on an accrual basis rather than a tax basis, certain businesses can elect to file their income tax returns on a cash basis as opposed to the accrual basis. The fundamental difference is that a cash basis recognizes the income or expense when physically received or paid. Accrual basis recognizes income when earned and deducts expenses when incurred.
The incurrence of trade debt or customer deposits (retainers) has tax implications, but their magnitude does not. For example, Organization 1 and Organization 2, with identical reporting periods, identical gross income, and identical net income, could report $100,000 in total expenses. ...