Tax Shield Calculation Examples, Illustrations, Concept, Sample Help Online
Looking for Tax Shield Calculation Examples, Illustrations and Calculations help to do your assignment, homework or project then you are at the right place.
Meaning of Tax Shield
When the income of an individual or corporation becomes taxable we avail certain allowable deductions which reduces our taxable income and this is called as tax shield. There are certain expenses such as amortization, depreciation, interest expenses which are allowed for deduction from taxable income. Tax shield help a business to save cash outflows. Tax shield lowers the taxable income. There are certain tax shields which can be availed only by low-income taxpayers. There is an easy formula for calculating tax shield.
Tax Shield = Deduction x Tax Rate
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Tax Shield Calculation Examples Explanation
Let’s understand the concept of Tax Shield Calculation Examples with help of an example.
Example1: Suppose a company has a debt balance of $6000000 with 10% cost of the debt and the tax rate is of 35%. The interest tax shield of the company is $6000000 x 10% x 35% = $210000.
The above calculation shows that the taxable income will be reduced by $210000 or we can say the company saves $210000 to become taxable.
Example 2: the tax rate is of 35% and the interest expense of the business is 5000. The tax shield value of interest expense is 5000 x 35% = $1750
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