Question

if a company has a higher than usual cost of goods sold in a year, what potential effect does that have on its taxes?

it potentially reduces them as a tax deduction.

it potentially reduces them as a tax credit.

it potentially increases them through declining balance amortization.

of goods sold does not affect corporate taxes.

Explanation:

To determine the effect of higher cost of goods sold (COGS) on taxes:

1. Recall tax concepts: Tax deductions reduce taxable income, while tax credits directly reduce tax liability. COGS is a business expense.
2. Analyze options:

• Tax deduction: Higher COGS increases expenses, reducing taxable income (and thus taxes), so this fits.
• Tax credit: COGS isn’t a tax credit (credits are for specific activities like R&D, not COGS).
• Declining balance amortization: Unrelated to COGS effect on taxes.
• COGS affects taxes: False, as COGS is an expense in income calculation.

Answer:

A. It potentially reduces them as a tax deduction.