A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes

Question

Business

Jamie Washington

22 December, 08:03

A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes

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Broderick Spencer · Answer 1

The advertising spend would reduce income taxes by $2.8 million

Explanation:

The advertising expense since it is allowable expense from profits made in the year would reduce income taxes next year by $2.8 million ($8 million * 35%)

This means that because of its tax deductibility, it would make a business sense to incur the advertising cost of $8 million coupled with the fact the it has the potential to increase sales revenue over and above the current level of $280 million