If a Corporation Cannot Use Its Interest Payments as a Tax

question 39

Multiple Choice

If a corporation cannot use its interest payments as a tax shield for a particular year because it has suffered a loss, it is still possible to use the tax shield because

• A)the carry-back provision allows corporations to carry back the loss and receive a tax refund up to the amount of taxes paid in the previous two years.
• B)the carry-forward provision allows corporations to carry forward the loss and use it to shield income in subsequent years.
• C)the carry-back provision allows corporations to carry back the loss and receive a tax refund up to the amount of taxes paid in the previous two years and allows corporations to carry forward the loss and use it to shield income in subsequent years.
• D)the firm will lose the tax shield.

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Definitions:

Short Run

A period in economics where at least one factor of production is fixed, influencing the responsiveness of a company to changes in market demand.

Marginal Revenue

The additional income earned from selling one more unit of a product or service.

Average Total Cost

The total cost of production divided by the total quantity produced, representing the cost per unit of output.

Profit-maximizing

A strategy or behavior where a firm aims to achieve the highest possible profit from its operations, considering costs, revenue, and market conditions.