Depreciation Tax Shield

Описание: The Depreciation Tax Shield is a core concept to master if you are aiming for (or working in) Finance.

But how do we define ‘Tax Shield?’

In short, a Tax Shield is any item that lowers taxable income and thus lowers the taxes you must pay.

How to Calculate the Depreciation Tax Shield

Find Depreciation Expense
Find Depreciation Expense in the Company’s financial filings (SEC Edgar Search).
If you are doing this for your Company or Privately held Client, you will need to ask the Accounting department or the Client, respectively, for the Depreciation numbers.

Multiply Depreciation by the Income Tax Rate
Find the Company’s Income Tax Rate either in the SEC Filings or use Management Guidance from the latest Quarterly Earnings call (if provided).

If you are doing this for your Company or a Privately held Client, you will have to ask the Accounting or Tax department or the Client, respectively, for the current Income Tax Rate.

By multiplying Depreciation Expense by the Income Tax Rate, you calculate the taxes saved (i.e. ‘Shielded’).
As you can see from the above calculation, the Depreciation Tax Savings as the expense increases.

Also, at higher tax rates, Depreciation is going to provide additional savings.