Business, Legal & Accounting Glossary
A tax shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. For example, because interest on debt is a tax-deductible expense, taking on debt creates a tax shield. Since a tax shield is a way to save cash flows, it is an important aspect of business valuation.
A tax shield is a legal means of reducing income in order to protect it from taxation.
In that sense, a tax shield is the same as a tax deduction, except that a tax shield can also encompass deferments of income to future years. Any individual or business is eligible to use a tax shield. Donations to charity can be used as a tax shield, as can medical expenses, mortgage interest, interest on many business loans, business losses, and amortization and depreciation. Interest from a car loan or credit cards might be usable as a tax shield if the principle expense was incurred doing business. Child care and child education expenses are tax-deductible in some states and therefore usable as a tax shield. Some states also offer a tax shield to renters in the form of renter’s credits, but these are often much smaller than the deduction for mortgage expense. Interest from a personal loan may not be used as a tax shield.
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This glossary post was last updated: 25th April, 2020 | 0 Views.