The Depreciation Tax Shield is a key component of financial and accounting industry strategies. Many people that are working or looking for work in these two industries should master this method to further benefit themselves and their clients.
What is a Tax Shield?
The shortened definition of a Tax Shield is any item that can lower taxable income while also lowering the taxes a person must pay. There are several deductions in the tax field that can shield a company or individual from paying taxes with the most common examples of a shield including mortgage interest, charitable donations, amortization, and depreciation. The goals of the shields are to prevent someone from paying tax on their full income, while also allowing people to offset any other losses they may have accrued such as debt.
Benefits of Tax Shields
Certain shields can benefit many taxpayers in multiple ways. People that use their home mortgage as a tax shield seek to benefit, as these are mostly people who are middle-class citizens whose homes are a major component of their overall net worth. Student loan interest can also act as a tax shield because the interest accrued is deductible. Charitable giving is also another shield that can lower a taxpayer’s obligations to the IRS. Itemized deductions must be used by the taxpayer, and the deductible amount can reach as high as 60 percent of the taxpayer’s adjusted gross income. These are all a few common shields that can be implemented.
Calculating Depreciation
There are two simple steps to calculate the Depreciation Tax Shield of a company or individual. It is important to have the depreciation numbers along with the income tax rate of the entity being calculated. Once these numbers are found you multiply depreciation by the income tax rate. The product of the depreciation and income tax numbers is the total amount of tax saved, (or shielded).