What is the effect of non-deductible expenses on corporate taxes?

What is the effect of non-deductible expenses on corporate taxes?

• A. They reduce taxable income
• B. They do not affect taxable income
• C. They increase taxable income
• D. They lower the overall tax rate

Answer: (C)

Non-deductible expenses increase taxable income for corporations. This occurs because, in corporate tax accounting, only expenses that are considered necessary and ordinary for business operations can reduce taxable income. Non-deductible expenses, such as certain fines, penalties, and certain types of entertainment costs, do not qualify as permissible deductions under tax law. Therefore, they are added back to the calculation of taxable income. Because these expenses are not subtracted from total revenue when determining taxable income, the result is an increase in that income figure. Consequently, the corporation faces a higher tax liability because taxes are calculated on this inflated taxable income. Understanding this relationship is essential for effective tax planning and financial forecasting within corporate structures.

Non-deductible expenses increase taxable income for corporations. This occurs because, in corporate tax accounting, only expenses that are considered necessary and ordinary for business operations can reduce taxable income. Non-deductible expenses, such as certain fines, penalties, and certain types of entertainment costs, do not qualify as permissible deductions under tax law. Therefore, they are added back to the calculation of taxable income.

Because these expenses are not subtracted from total revenue when determining taxable income, the result is an increase in that income figure. Consequently, the corporation faces a higher tax liability because taxes are calculated on this inflated taxable income. Understanding this relationship is essential for effective tax planning and financial forecasting within corporate structures.