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 decrease 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 raising money from investors.

Since tax benefits from debt payments significantly impact the cost of raising capital, it is always considered while calculating the weighted average cost of capital (WACC).

How to calculate the interest tax shield?

Calculating 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

Example

To calculate the value of the interest tax shield, you may use this interest tax shield calculator or estimate the value manually, as we do in the following example.

Interest Expense = $20,000

Tax rate = 35%

Tax_shield = Interest Expense * Tax_rate = $20,000 * 35% = $7,000

Authors

Created by Lucas Krysiak on 2022-06-10 14:17:01 | Last review by Mike Kozminsky on 2022-09-15 14:05:56