Glossary - Tax Shield
A tax shield refers to the use of allowable deductions from taxable income, thus reducing the overall taxes owed to the government. These deductions can arise from various sources, such as interest payments, depreciation, and investments in certain qualifying assets or expenses. The primary benefit of a tax shield is its ability to decrease a company's or individual's tax liability, effectively increasing cash flow and enhancing the value of business investments by making them more tax-efficient.
Also known as
- Tax Deduction
- Tax Benefit
Use cases examples
- Loan Agreement: The interest expense on the borrowed amount serves as a tax shield, reducing the company’s taxable income and thereby its tax obligations.
- Depreciation Schedule: Depreciation of capital assets provides a tax shield, allowing the company to shield a portion of its income from taxes over the assets' useful life.
Considerations for investors
- Investors should evaluate the tax shield benefits of their investments, as they can impact the after-tax return on investment.
- Venture capital firms and family offices need to consider the jurisdiction’s tax policy changes that might affect the efficacy of tax shields.
Considerations for founders
- Understanding the types of expenses and investments that qualify for tax shields can significantly enhance financial planning and business strategy.
- Founders should consult with tax professionals to ensure they are maximizing the benefits of tax shields without violating tax laws.
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