The influence of income taxes on the use of inside and outside debt by small businesses

We investigate the effect of tarts on the utilization of inside debt (loans from owners) and outside debt (loans from nonowners) across small businesses organized as taxable corporations and flow-through entities (Subchapter S corporations and partnerships). We find that the tar incentives to use debt differ accord ing to the type of debt and the type of entity. Our results indicate that the effect of marginal tar rates on the use of outside debt and other non-debt tar shields is similar for both taxable and flow-through entities. In contrast, we find that are unrelated to the use of inside debt by flow-through entities.