What is a Tax Shield?

You can—and should—claim all tax credits and deductions you are eligible for. A tax deduction is a rule within the tax code that allows you to, in some circumstances, reduce your taxable income by a certain amount. Tax deductions are also sometimes called “tax write offs”, tax shield because they allow you to “write off” a portion of your income. If you are not eligible for Free File or Direct File, you can still e-file your return. You may even qualify for other free options to prepare and e-file your basic federal and state income tax returns.

You’ll also likely hear about tax credits, which are not the same thing as tax deductions. A tax deduction reduces your taxable income for the year, but a tax credit is a dollar-for-dollar reduction to your tax bill. Depending on the taxpayer’s total rate and cash flows for the specific year, tax shields differ from nation to nation and have different benefits.

Key Considerations When Adding Back a Tax Shield

At Northwestern Mutual, he provides in-depth tax planning ideas for high-net-worth individuals and those working with expatriate/foreign national tax issues. The equation proposed by Fernández is valid for perpetuities and for companies with any pattern of growth. The problem is how to calculate the present value of the net increases of debt, which requires knowing the appropriate discount rate to apply to the expected increase of debt. Kelsey’s Killer Key Lime Pies is considering buying new equipment to accelerate the key lime pie manufacturing process. Right now, the store can keep up with local demand, but Kelsey’s social media presence has massively increased the amount of online orders. The key word here is “reasonable” — if you pay your 15-year-old son $350,000 per year to shred documents on Saturday, the IRS won’t be happy.

Tax shields are essentially tools used to protect income from being taxable. They can take different forms, such as deductible expenses, tax credits, or depreciation allowances. By minimizing taxable income, individuals and businesses can increase their after-tax cash flow, allowing for reinvestment, debt reduction, or simply saving for future goals.

Child Care Expenses

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Due to the more significant deduction, there are greater tax savings. It is crucial to consider the impact of any short-term variations in depreciation and capital cost allowance. Taxpayers can recoup some losses related to the depreciation of qualified property by using the depreciation deduction. Both intangible assets like patents and tangible assets like buildings are eligible for the deduction.