Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

What is the primary financial benefit regarding interest when business owners choose debt financing?

1. The interest is not tax deductible

2. The interest is tax deductible

3. Interest rates are always fixed

4. Interest can be deferred indefinitely

The correct answer is: The interest is tax deductible

Choosing debt financing can offer significant financial advantages, particularly in the area of interest expenses. One of the key benefits is that the interest paid on debt is generally tax deductible. This means that businesses can subtract the interest payments from their taxable income, effectively reducing their overall tax liability. This deduction can improve a company’s cash flow since it lowers the net cost of borrowing. In contrast, the other options do not provide the same financial benefits. Tax deductibility is a primary reason many businesses prefer debt financing over equity financing, as equity financing does not typically allow for similar deductions against taxable income. Options that suggest interest is not tax deductible, that rates are always fixed, or that interest can be deferred indefinitely, do not provide the same advantageous position regarding tax savings that debt financing offers. Therefore, the tax deductibility of interest is a critical element that makes debt financing an attractive choice for business owners.