Interest Tax Shield Calculator
What is the interest tax shield?
The interest tax shield is a saving from the tax deduction due to interest expense from the debt payments. The costs of the debt decreases the taxable income which results in lower tax liabilities.
Note that interest expenses are tax-deductible, while dividends to equity holders are not tax-deductible. That’s why debt is often a cheaper source of financing a business than rising money from investors.
Since tax benefits from debt payments have a significant impact on the cost of rising capital it is always considered while calculating the weighted average cost of capital (WACC).
How to calculate the interest tax shield?
The calculation of the tax benefits from interest expense is very simple even without the help of our calculator. The only thing you need to do is to substitute the values into the tax equation.
The interest tax shield formula
If you wish to calculate tax shield value manually you should use the formula below:
Tax_shield = Interest * Tax_rate
In order to calculate the value of the interest tax shield you may use this interest tax shield calculator or calculate the value manually like we do in the following example.
Interest Expense = $20,000
Tax rate = 35%
Tax_shield = Interest Expense * Tax_rate = $20,000 * 35% = $7,000