Question

"Which one of the following will reduce a corporation's tax liability? A) Distributing dividends to shareholders...

"Which one of the following will reduce a corporation's tax liability?

A) Distributing dividends to shareholders instead of increasing their salaries by the same amount of the dividends

B) Choosing a net operating loss carryback to prior years whose marginal tax rate was less than the expected marginal tax rate of future years

Briefly explain why."

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Answer #1

The answer is option “b” - Choosing a net operating loss carryback to prior years whose marginal tax rate was less than the expected marginal tax rate of future years.

This is because if the rate in the carryback period is higher than the estimated tax rate in early carryover periods, it may make sense to carry back the loss. If the rate is lower in the carryback period, it may be better from a tax perspective to forgo the carryback period.

On the other hand dividends are distributed from after tax profits and so distributing dividends to shareholders instead of increasing their salaries by the same amount of the dividends will not reduce a company's tax liability.

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