To illustrate this, let's assume that a U.S. corporation pays a combined federal and state income tax rate of 40% on its last increment of income. If this corporation spends an additional $10,000 for a tax deductible business expense, its taxable income will decrease by $10,000. This means that the corporation will save paying $4,000 in income taxes ($10,000 less of taxable income being taxed at 40%).
In this situation, the cash flow net of tax is $6,000 consisting of the $10,000 paid for the business expense minus the $4,000 of income taxes that will not have to be paid.
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