Tax Shield Calculator

What is the tax shield?

A tax shield is a reduction of taxable income due to decreasing it by deductible expenses like interest, amortization, and depreciation. Those deductions lower the company or individual's income tax in a given year.

The tax shield is an incentive for investing because it allows one to receive tax benefits before an investment generates profits. 

A tax deduction allows a company to increase its Net Operating Profit After Tax and helps it grow faster.

How to calculate the tax shield?

The calculation of tax shields is pretty simple. Understanding the concept of deductible expenses and how the tax rate is applied is essential. 

Deductible Expenses

The deductible expenses are all the necessary costs you must cover to operate your business.  

Tax rate

The income tax rate may vary between states. That's why you need to input valid values before calculating the tax shield value.

The tax shield formula

If you wish to calculate tax shield value manually, you should use the formula below:

Tax_shield = Deductible_Expenses * Tax_rate

Example

If you wish to calculate the value of a tax shield, you may use this tax shield calculator or work out the value manually, as we do in the following example.

Deductible_Expenses = $50,000

Tax rate = 35%

Tax_shield = Deductible_Expenses * Tax_rate = $50,000 * 35% = $17,500

Examples of deductible business expenses

Luckily, most business operating and investment costs apply for a tax deduction. Below we list some common examples:

• Advertisements
• Bank fees
• Interests
• Car fleet upkeep
• Commissions
• Insurances
• Educational expenses for employees
• Employee salaries and benefits
• Building maintenance and repair
• Furniture and office equipment
• Investments 
• Rent or lease
• Software
• Amortization 
• Depreciation

Examples of non-deductible business expenses

Unfortunately, not all business costs apply to a tax shield. Below we list some typical examples:

• Damaged stuff
• Fines
• Lobbying expenses
• Political contributions
• Not business-related expenses

Many companies, to grow faster, use debt leverage. It allows them not only to conduct more significant investments but allows for tax optimization using Interest Tax Shield.

FAQ

What are deductible expenses?

Deductible expenses are necessary costs incurred in the operation of a business. These can include advertising, bank fees, employee salaries, office maintenance, and more. Such expenses can be subtracted from your gross income to lower your taxable income.

Are all business expenses tax-deductible?

No, not all business expenses are tax-deductible. Non-deductible expenses include fines, lobbying expenses, political contributions, and any costs not directly related to business operations.

Can personal expenses ever be considered deductible?

Generally, personal expenses are not deductible for tax purposes. However, if certain expenses can be clearly allocated between personal and business use (such as a car or home office), the portion used for business may be deductible.

How do I determine the correct tax rate to use in the calculator?

The applicable tax rate can vary depending on your location and the nature of your business. It's important to use the current tax rate provided by your local tax authority or consult a tax professional to determine the correct rate.

How often should I calculate my tax shield?

It's advisable to calculate your tax shield annually, as part of your tax preparation process. However, if your business experiences significant changes in expenses or income, recalculating more frequently can help you adjust your financial planning accordingly.

Can using a Tax Shield affect my chances of being audited?

Properly using tax shields as allowed by law should not increase your chances of an audit. However, aggressive tax planning or incorrectly claiming deductions can raise red flags. Always ensure your deductions are well-documented and in compliance with tax laws.

Where can I find more information about tax planning and strategies?

For more detailed information, consider consulting a tax professional or financial advisor. Additionally, governmental tax websites and reputable financial education resources offer guidance on tax planning and strategies.

By addressing these FAQs, users can gain a better understanding of tax shields, how to utilize the calculator effectively, and the broader context of financial planning for tax optimization.

Authors

Created by Lucas Krysiak on 2022-06-10 14:12:21 | Last review by Mike Kozminsky on 2022-10-14 15:33:47