Tax Shield | Definition | Formula | Example | Calculation

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In this video on Tax Shield, we are going to learn what is tax shield? its formula, examples and calculation with practical examples.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐓𝐚𝐱 𝐒𝐡𝐢𝐞𝐥𝐝?
Tax Shield is the saving in taxable income for Individuals/Corporations by cutting the expansible allowance such as Depreciation, Mortgage Interests, Hospital Expenditure, donations for charity, amortization and depreciation etc

It has become an important part of decision making process in Corporate Finance and Project Finance.

In simple words we can say, a tax shield is the PV (Present Value) of future tax saving attributes to tax deductibility of a particular expense in P and L Account i.e profit & loss account.

𝐓𝐚𝐱 𝐒𝐡𝐢𝐞𝐥𝐝 𝐅𝐨𝐫𝐦𝐮𝐥𝐚
Below is the formula to calculate tax shield.

Tax Shield = Deduction x Tax Rate

𝐈𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐜𝐞 𝐨𝐟 𝐓𝐚𝐱 𝐒𝐡𝐢𝐞𝐥𝐝

Tax shield lower tax bills which is one of the major reason why taxpayers spend a considerable period of time determining which deduction and credits they qualify every year.

𝐁𝐞𝐧𝐞𝐟𝐢𝐭𝐬 𝐨𝐟 𝐓𝐚𝐱 𝐒𝐡𝐢𝐞𝐥𝐝

1. Tax Shield on Depreciation
2. Tax Shield on Interest
3. Tax Shield for Individuals

To know more about the Tax Shield, you can go to this 𝐥𝐢𝐧𝐤 𝐡𝐞𝐫𝐞:- https://www.wallstreetmojo.com/tax-shield-formula-example-definition-calculation/

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