How does the federal income tax structure impact a businesses decision to finance with use of debt vs. equity?

Answer 1

This complex question has a complex answer which will need to take into account the following:

1) Net Operating Loss carryforward (NOLs) rules in which accumulated losses can offset tax liabilities when the business eventually turns profitable.

2) The extent that interest payments on debt servicing is tax favored beyond exclusion in Net earnings calculations. In certain industries, a tax credit is applied for use of funds to do R&D.

3) Potential repeal of the laws that tax dividends twice (corporate level and shareholder level) will favor equity financing.

Generally, debt is a tax-advantaged method of financing a business, if the business can manage the debt servicing.