DECA Hospitality and Tourism Cluster Practice Exam

How do businesses use expense deductions to benefit their taxes?

1. Reducing payroll costs

2. Increasing owners' salaries

3. Lowering taxable income

4. Increasing profits

The correct answer is: Lowering taxable income

Businesses utilize expense deductions to lower their taxable income, which reduces the amount of taxes they owe. By deducting certain business-related expenses from their total income, companies can calculate a smaller taxable income figure. This practice is a key aspect of tax strategy, as it directly impacts the net profit on which taxes are calculated. For example, if a business incurs significant expenses for operating, maintenance, and employee wages, these expenses can be subtracted from its revenues, thus decreasing taxable income. This reduction ultimately leads to lower overall tax liability, which allows businesses to retain more of their earnings for reinvestment or distribution. Increasing owners' salaries, while it may seem beneficial for personal income, does not inherently impact taxes in the way that expense deductions do and could potentially raise the tax burden if not managed properly. Similarly, reducing payroll costs can provide financial relief, but it doesn’t directly relate to the mechanics of tax deductions. Although businesses strive for increased profits, this objective is typically secondary to effective tax management strategies that involve minimizing taxable income through legitimate expense deductions.