Describe in general what tax shield is ?

Expert Solution

A tax shield is a reduction in taxable income for an individual or corporation achieved through claiming allowable deductions such as mortgage interest, medical expenses, charitable donations, amortization, and depreciation. These deductions reduce a taxpayer's taxable income for a given year or defer income taxes into future years. Tax shields lower the overall amount of taxes owed by an individual taxpayer or a business.

Calculating the tax shield can be simplified by using this formula:

Tax Shield = Value of Tax-Deductible Expense x Tax Rate

Depreciation Tax Shield Example

For example, if a company has an annual depreciation of $2,000 and the rate of tax is set at 10%, the tax savings for the period is $200.

For depreciation, an accelerated depreciation method will also allocate more tax shield in earlier periods, and less in later periods. The tax savings are larger because there is a larger deduction. However, it is important to consider the effect of temporary differences between depreciation and capital cost allowance for tax purposes.

jeff jeffy answered 1 year ago

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