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What ratio of debt to equity does the IRS use as a rule of

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What ratio of debt to equity does the IRS use as a rule of thumb to determine whether or not there is too much debt to equity in the corporate structure?
Submitted: 2 years ago.
Category: Essays
Expert:  replied 2 years ago.

Hello Havana - hope you are having a wonderful Saturday.

The Debt to Ratio Equity shows the ratio between the assets of a company that it has funded through either borrowing or financing and the amount that it had funded through the equity of the company. Most corporate houses prefer to have large debt to equity rations, the IRS prefers a lower, and has a "rule of thumb" of a 4 to 1 ration. They believe it is better in order to fund a company with debt as opposed to equity due to the interest expenses that are usually deductible whether the company pays dividends or not. The various tax advantages make using the debt more important to the taxpayers of the corporation and, in the end, even shareholder advances are listed as debt, despite the fact that they usually resemble equity. This is why they prefer the 4 to 1 debt ratio as the tax advantages and benefits are considered.

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All the best in your studies.

:-)

Mr. Gregory White, Master's Degree
Category: Essays
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Experience: M.A., M.S. Education / Educational Administration
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