Tax Shield Calculator


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What is the tax shield?

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

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

Tax deduction allows a company to increase its Net Operating Profit After Tax and therefore helps them to grow faster.

How to calculate the tax shield?

The calculation of tax shields is pretty simple. It is important to understand the concept of deductible expenses and how the tax rate is applied. 

Deductible Expenses

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

Tax rate

The income tax rate may vary between states. That's why you need to make sure you input valid values before you calculate 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 like we do in the following example.

Deductible_Expenses = $50,000
Tax rate = 35%
 
Tax_shield = Deductible_Expenses * Tax_rate = $50,000 * 35% = $17,500
 
What are examples of deductible business expenses?

Luckily most of the business operating and investment costs apply for 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

What are examples of non-deductible business expenses?

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

  • Damaged stuff

  • Fines

  • Lobbying expenses

  • Political contributions

  • Not business related expenses

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


Authors

Created by Lucas Krysiak on 2022-06-10 14:12:21 | Last review by Mike Kozminsky on 2022-09-15 14:04:59

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