This tax shield example template shows how interest tax shield and depreciated tax shield are calculated.
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A Tax Shield is an allowable deduction from taxable income that results in a reduction of taxes owed. Tax shields differ between countries and are based on what deductions are eligible versus ineligible. The value of these shields depends on the effective tax rate for the corporation or individual (being subject to a higher rate increases the value of the deductions). Common expenses that are deductible include depreciation, amortization, mortgage payments and interest expense. There are cases where income can be lowered for a certain year due to previously unclaimed tax losses from prior years.
To increase cash flows and to further increase the value of a business, tax shields are used. The effect of a tax shield can be determined using a formula. This is usually the deduction multiplied by the tax rate.
Tax Shield = Deduction x Tax Rate
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