{
  "id": 45863,
  "date": "2021-08-18T10:46:27",
  "date_gmt": "2021-08-18T14:46:27",
  "guid": { "rendered": "https:\/\/finance-able.com\/?p=45863" },
  "modified": "2025-12-21T16:52:14",
  "modified_gmt": "2025-12-21T21:52:14",
  "slug": "depreciation-tax-shield",
  "status": "publish",
  "type": "post",
  "link": "https:\/\/finance-able.com\/depreciation-tax-shield\/",
  "title": {
    "rendered": "What is the Depreciation Tax Shield? \u2013 Ultimate Guide"
  },
  "content": {
    "rendered": "\n<p style=\"font-size:18.5px\">Master the <strong>Depreciation Tax Shield<\/strong> concept so you can use it on the job in <a href=\"https:\/\/finance-able.com\/world-of-finance-4-how-do-investment-banks-operate\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Investment Banking<\/span><\/strong><\/a>, <a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity<\/span><\/strong><\/a>, and <a href=\"https:\/\/finance-able.com\/hedge-fund-vs-mutual-fund\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Investment Management<\/span><\/strong><\/a>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In this article, you will learn:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Why the Depreciation Tax Shield matters<\/strong>.<\/li>\n\n\n\n<li>How to <strong>Calculate the Depreciation Tax Shield<\/strong>.<\/li>\n\n\n\n<li>The <strong>Cash Flow<\/strong> and <strong>Valuation Impact<\/strong>s of the Depreciation Tax Shield.<\/li>\n<\/ul>\n\n\n\n<p class=\"yoast-reading-time__wrapper\"><span class=\"yoast-reading-time__icon\"><svg aria-hidden=\"true\" focusable=\"false\" data-icon=\"clock\" width=\"20\" height=\"20\" fill=\"none\" stroke=\"currentColor\" style=\"display:inline-block;vertical-align:-0.1em\" role=\"img\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 24 24\"><path stroke-linecap=\"round\" stroke-linejoin=\"round\" stroke-width=\"2\" d=\"M12 8v4l3 3m6-3a9 9 0 11-18 0 9 9 0 0118 0z\"><\/path><\/svg><\/span><span class=\"yoast-reading-time__spacer\" style=\"display:inline-block;width:1em\"><\/span><span class=\"yoast-reading-time__descriptive-text\">Estimated reading time: <\/span><span class=\"yoast-reading-time__reading-time\">11<\/span><span class=\"yoast-reading-time__time-unit\"> minutes<\/span><\/p>\n\n\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-tl-dr\" style=\"font-size:35px\"><strong>TL;DR<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Any <strong>expense<\/strong> that <strong>lowers (i.e. \u2018Shields\u2019) taxes paid<\/strong>, is a <strong>Tax Shield<\/strong>.<\/li>\n\n\n\n<li>The <strong>Depreciation Tax Shield<\/strong> reflects the <strong>Tax Savings<\/strong> from the <strong><a href=\"https:\/\/www.investopedia.com\/terms\/d\/depreciation.asp\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Depreciation Expense<\/span><\/a><\/strong> deduction.<\/li>\n\n\n\n<li>The Depreciation Tax shield <strong>directly affects Income Taxes paid<\/strong> (i.e. Cash Flow) and thus <strong>directly impacts Valuation<\/strong>.<\/li>\n\n\n\n<li>The <strong>Interest Tax Shield<\/strong> is <strong>similar<\/strong> to the Depreciation Tax Shield, but the <strong>tax savings<\/strong> <strong>come from Interest Expense<\/strong> (vs Depreciation Expense).<\/li>\n<\/ul>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-columns containerwidth is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:100%\"><div class=\"kb-row-layout-wrap kb-row-layout-id45863_1450fd-25 alignnone wp-block-kadence-rowlayout\"><div class=\"kt-row-column-wrap kt-has-1-columns kt-row-layout-equal kt-tab-layout-inherit kt-mobile-layout-row kt-row-valign-top\">\n\n<div class=\"wp-block-kadence-column kadence-column45863_3ca4bf-c1\"><div class=\"kt-inside-inner-col\">\n<h2 class=\"wp-block-heading\" id=\"h-want-to-learn-more-about-finance\" style=\"font-size:35px\"><strong>Want To Learn More About Finance?<\/strong> <\/h2>\n\n\n\n<p style=\"font-size:18px\"><strong>Ramp up faster with all of our (free) deep-dive articles in our<\/strong> <a href=\"https:\/\/finance-able.com\/analyst-starter-kit\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Analyst Starter Kit<\/span><\/strong><\/a>:<\/p>\n\n\n<div class=\" wp-block-kadence-portfoliogrid kb-blocks-portfolio-loop-block alignnone kb-portfolio-loop45863_81c8a0-dc kb-portfolio-grid-layout-carousel kt-blocks-carousel \"><div class=\" kb-portfolio-grid-layout-carousel-wrap kt-post-grid-layout-carousel-wrap kt-carousel-arrowstyle-whiteondark kt-carousel-dotstyle-dark splide kb-blocks-portfolio-img-hover-zoomout kb-blocks-portfolio-content-hover-zoomin\" data-columns-xxl=\"3\" data-columns-xl=\"3\" data-columns-md=\"3\" data-columns-sm=\"2\" data-columns-xs=\"1\" data-columns-ss=\"1\" data-slider-center-mode=\"false\" data-slider-type=\"carousel\" data-slider-anim-speed=\"400\" data-slider-scroll=\"1\" data-slider-dots=\"true\" data-slider-arrows=\"true\" data-slider-hover-pause=\"false\" data-slider-auto=\"true\" data-slider-center-mode=\"false\" data-slider-speed=\"7000\" data-show-pause-button=\"false\" data-slider-gap=\"30\" data-slider-gap-tablet=\"30\" data-slider-gap-mobile=\"30\" data-slider-gap-unit=\"px\" data-item-selector=\".kb-portfolio-masonry-item\"><div class=\"kadence-splide-slider-init splide__track\"><ul><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"An image of a lightbulb with the text Unlevered Beta Formula\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/unlevered-beta-formula\/\" aria-label=\"Unlevered Beta Formula &#8211; Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Unlevered Beta Formula &#8211; Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"A lightbulb and the words Purchase Price Allocation\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/purchase-price-allocation\/\" aria-label=\"Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:45.138888888889%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"720\" height=\"325\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png\" class=\"attachment-large size-large wp-post-image\" alt=\": A stick figure answering an interview question with the title text &#039;Walk Me Through an LBO&#039; below\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png 720w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-300x135.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-400x181.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-624x282.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-50x23.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-100x45.png 100w\" sizes=\"auto, (max-width: 720px) 100vw, 720px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\" aria-label=\"Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><\/ul><\/div><div class=\"clearfix\" style=\"clear:both\"><\/div><\/div><\/div><\/div><\/div>\n\n<\/div><\/div><\/div>\n<\/div>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"why-does-the-depreciation-tax-shield-matter\" style=\"font-size:35px\"><strong>Why Does the Depreciation Tax Shield Matter?<\/strong><\/h2>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-1024x576.png\" alt=\"A stick figure sitting at a computer confused about various Depreciation Tax Shield concepts\" class=\"wp-image-45802\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-confused-about-tax-shield-concepts.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">The <strong>Depreciation Tax Shield<\/strong> is a <strong>core concept<\/strong> to master if you are <strong>aiming for (or working in) Finance<\/strong>.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>But how do we define \u2018<em>Tax Shield<\/em>?\u2019<\/strong><\/p>\n\n\n\n<p><\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, a <strong><u>Tax Shield<\/u><\/strong> is any item that <strong>lowers<\/strong> <a href=\"https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/what-is-taxable-and-nontaxable-income\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">taxable income<\/span><\/strong><\/a> and thus <strong>lowers the taxes<\/strong> you must<strong> pay<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-1024x576.png\" alt=\"A stick figure using Depreciation as a shield against a cartoon dragon that represents taxes.\" class=\"wp-image-45805\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">There are a <strong>variety<\/strong> <strong>of deductions<\/strong> that can <strong>shield<\/strong> a company (or Individual) from <strong>paying Taxes<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">This article will <strong>focus on<\/strong> the <strong>Tax Shield<\/strong> created by <a href=\"https:\/\/www.investopedia.com\/terms\/d\/depreciation.asp\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Depreciation<\/span><\/strong><\/a>, particularly the <strong>Cash Flow and Valuation impacts.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now let\u2019s <strong>look at<\/strong> how the <strong>Depreciation Tax Shield<\/strong> concept shows up in <strong>Interviews<\/strong>.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-depreciation-tax-shield-in-interviews\" style=\"font-size:26px\"><strong>Depreciation Tax Shield in Interviews<\/strong><\/h3>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-1024x576.png\" alt=\" An image of a stick figure in an interview asked about the Depreciation Tax Shield concept.\" class=\"wp-image-45816\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/a-stick-figure-in-interview-depreciation-tax-shield.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">If you\u2019re <strong>aiming<\/strong> to work in <strong>Finance<\/strong>, it is <strong>essential to pin down this concept<\/strong>. &nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Interview questions<\/strong> around the <strong>Depreciation Tax Shield<\/strong> are quite <strong>common<\/strong> because it <strong>ties directly<\/strong> into the <a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Discounted Cash Flow (DCF) analysis<\/span><\/strong><\/a> process.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">A few common interview questions are:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>What is the Depreciation Tax Shield?<\/em><\/li>\n\n\n\n<li><em>How do you calculate the Depreciation Tax Shield?<\/em><\/li>\n\n\n\n<li><em>How does the Depreciation Tax Shield impact Cash Flow and Valuation?<\/em><\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">To answer these questions, you will <strong>need to understand:<\/strong><\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li>The underlying <strong>meaning of \u2018Tax Shield\u2019<\/strong> (<strong><a href=\"#why-does-the-depreciation-tax-shield-matter\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">covered<\/span> <span class=\"has-inline-color has-vivid-cyan-blue-color\">above<\/span><\/a><\/strong>).<\/li>\n\n\n\n<li>The <strong>Depreciation Tax Shield Calculation<\/strong> (<strong><a href=\"#how-to-calculate-the-depreciation-tax-shield-in-2-steps\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">next section<\/span><\/a><\/strong>).<\/li>\n\n\n\n<li>The impact of Tax Shields on <strong>Cash Flow and Valuation <\/strong>(<strong><a href=\"#taxes-paid-with-and-without-depreciation\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">go to section<\/span><\/a><\/strong>)<strong>.<\/strong><\/li>\n<\/ol>\n\n\n\n<p style=\"font-size:18.5px\"><strong>After reading this article, you will be able to nail all of the Interview Questions above.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Let\u2019s dive in!<\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-to-calculate-the-depreciation-tax-shield-in-2-steps\" style=\"font-size:35px\"><strong>The Depreciation Tax Shield in 2 Steps<\/strong><\/h2>\n\n\n<!-- This site is converting visitors into subscribers and customers with OptinMonster - https:\/\/optinmonster.com :: Campaign Title: Depreciation Tax Shield - Obfuscation -->\n<div id=\"om-fc7fd7wqkd5cauoswpw1-holder\"><\/div>\n<script>(function(d,u,ac){var s=d.createElement('script');s.type='text\/javascript';s.src='https:\/\/a.omappapi.com\/app\/js\/api.min.js';s.async=true;s.dataset.user=u;s.dataset.campaign=ac;d.getElementsByTagName('head')[0].appendChild(s);})(document,130718,'fc7fd7wqkd5cauoswpw1');<\/script>\n<!-- \/ OptinMonster -->\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-1024x576.png\" alt=\"An image showing the two steps of the Depreciation Tax Shield Calculation \" class=\"wp-image-45814\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-depreciation-tax-shield.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">We\u2019ll begin our discussion with <strong>Depreciation Tax Shield Formula<\/strong>, which breaks just <strong>two steps<\/strong>:<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-how-to-calculate-the-depreciation-tax-shield\" style=\"font-size:26px\"><strong>How to Calculate the Depreciation Tax Shield<\/strong><\/h3>\n\n\n\n<div class=\"schema-how-to wp-block-yoast-how-to-block\"><p class=\"schema-how-to-description\"><\/p> <ol class=\"schema-how-to-steps\"><li class=\"schema-how-to-step\" id=\"how-to-step-1629276051836\"><strong class=\"schema-how-to-step-name\"><strong><em>Find Depreciation Expense<\/em><\/strong><\/strong> <p class=\"schema-how-to-step-text\">Find Depreciation Expense in the Company&#8217;s financial filings (<a href=\"https:\/\/www.sec.gov\/edgar\/searchedgar\/companysearch.html\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">SEC Edgar Search<\/span><\/strong><\/a>).<br\/>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.<\/p> <\/li><li class=\"schema-how-to-step\" id=\"how-to-step-1629276223089\"><strong class=\"schema-how-to-step-name\"><strong><em>Multiply Depreciation by the Income Tax Rate<\/em><\/strong><\/strong> <p class=\"schema-how-to-step-text\">Find the Company\u2019s Income Tax Rate either in the SEC Filings or use <a href=\"https:\/\/en.wikipedia.org\/wiki\/Earnings_guidance\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Management Guidance<\/span><\/strong><\/a> from the latest Quarterly Earnings call (if provided).<br\/><br\/>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.<br\/><br\/>By multiplying Depreciation Expense by the Income Tax Rate, you calculate the taxes saved (i.e. \u2018Shielded\u2019).<\/p> <\/li><\/ol><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">As you can see from the <strong>above calculation<\/strong>, the <strong>Depreciation Tax Savings<\/strong> as the <strong>expense increases<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Also, at <strong>higher tax rates<\/strong>, Depreciation is going to <strong>provide additional savings<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Let\u2019s now look<\/strong> at the <strong>Depreciation Tax Shield<\/strong> impact on <a href=\"https:\/\/www.thebalancesmb.com\/cash-flow-how-it-works-to-keep-your-business-afloat-398180\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Cash Flow<\/span><\/strong><\/a><strong> and Valuation<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"taxes-paid-with-and-without-depreciation\" style=\"font-size:35px\"><strong>The Tax Impact of Depreciation<\/strong><\/h2>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s <strong>begin<\/strong> with the <strong>Cash Flow impact<\/strong> of the <strong>Depreciation Tax Shield<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Below<\/strong>, we show a <strong>simple example<\/strong> of a Company <strong>with and without Depreciation Expense<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-1024x576.png\" alt=\"A table comparing the taxes paid with and without the depreciation tax deduction\" class=\"wp-image-45990\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-depreciation-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">As you can see above, <strong>taxes are $20 without Depreciation<\/strong> vs. <strong>$16 with a Depreciation deduction<\/strong>, for a total <strong>cash savings of $4<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>dollars saved <\/strong>represent the <strong>&#8216;Tax Shield&#8217; created by Depreciation<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Below<\/strong>, we take a look at an <strong>example<\/strong> of how a <strong>change in the Depreciation method<\/strong> can have an <strong>impact on<\/strong> <strong>Cash Flow (and thus Valuation)<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-example-depreciation-method-tax-impacts\" style=\"font-size:35px\"><strong>Example: Depreciation Method Tax Impacts<\/strong><\/h2>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Companies<\/strong> can often <strong>choose<\/strong> different <strong>Depreciation methods<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In the <strong>section below<\/strong>, we cover <strong>two<\/strong> of the <strong>most common methods <\/strong>and their<strong> Cash Flow<\/strong> and <strong>Valuation impacts<\/strong>.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-straight-line-vs-accelerated-depreciation-approaches\" style=\"font-size:26px\"><strong>Straight-Line vs. Accelerated Depreciation Approaches<\/strong><\/h3>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-1024x576.png\" alt=\"An image contrasting straight-line depreciation vs accelerated Depreciation\" class=\"wp-image-45807\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><strong>Let&#8217;s take a look at how we would calculate Depreciation with each approach.<\/strong><\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-straight-line-approach\" style=\"font-size:22px\"><strong>Straight-Line Approach:<\/strong><\/h4>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li>Calculate the \u2018<strong>Depreciable Base<\/strong>:\u2019 <strong>Acquisition Cost \u2013 <a href=\"https:\/\/www.educba.com\/salvage-value-formula\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>Salvage Value<\/strong><\/a><\/strong>.<\/li>\n\n\n\n<li>Each year, we would <strong>divide the Depreciable Base<\/strong> by the <strong>Asset\u2019s Useful Life<\/strong> to arrive at <strong>Depreciation Expense<\/strong>.<\/li>\n<\/ol>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">As an <strong>alternative<\/strong> to the Straight-Line approach, we can use an \u2018<a href=\"https:\/\/www.accountingtools.com\/articles\/what-is-accelerated-depreciation.html\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Accelerated Depreciation<\/span><\/strong><\/a>\u2019 method like the <a href=\"https:\/\/www.accountingcoach.com\/blog\/sum-of-the-years-digits-depreciation\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Sum of Year\u2019s Digits<\/span><\/strong><\/a><strong> (\u2018SYD\u2019)<\/strong>.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-sum-of-years-digits-approach\" style=\"font-size:22px\"><strong>Sum-of-Years-Digits Approach:<\/strong><\/h4>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li>Calculate the <strong>Depreciable Base<\/strong>: <strong>Acquisition Cost \u2013 <\/strong><a href=\"https:\/\/www.educba.com\/salvage-value-formula\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Salvage Value<\/span><\/strong><\/a><strong>.<\/strong><\/li>\n\n\n\n<li>Next, we <strong>Sum<\/strong> up the total <strong>value of the digits<\/strong> of the <strong>Useful Life<\/strong> of the Assets (e.g. 5-year Life would be (1 + 2 + 3 + 4 +5) = 15.<\/li>\n\n\n\n<li>We then <strong>work in reverse order down the years<\/strong> to calculate the <strong>percentage<\/strong> of the asset to <strong>Depreciate in each year<\/strong> (.e.g. Year 1: 5 \/ 15 = 33%, Year 2: 4 \/ 15 = 27%, etc.)<\/li>\n\n\n\n<li>In each year, we would <strong>multiply<\/strong> the <strong>Depreciable Base<\/strong> by the <strong>Depreciation percentage<\/strong> in <strong>Step #3<\/strong> above to calculate <strong>the expense in each year<\/strong>.<\/li>\n<\/ol>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">As you can see, the <strong>SYD method<\/strong> offers far <strong>more Depreciation Expense<\/strong> in the <strong>early years<\/strong> than the <strong>Straight-Line<\/strong> method.<\/p>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>With the two methods clarified, let&#8217;s look at the Cash Flow impact of each approach.<\/strong><\/p>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-straight-line-vs-accelerated-depreciation-cash-flow-impact\" style=\"font-size:26px\"><strong>Straight-Line vs. Accelerated Depreciation \u2013 Cash Flow Impact<\/strong><\/h3>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>In the examples below, we assume the following:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Useful Life: 5 Years<\/li>\n\n\n\n<li>Purchase Price: $500<\/li>\n\n\n\n<li>Salvage Value: $0<\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">Below are the <strong>Depreciation Tax Shield calculations <\/strong>using the <strong>Straight-Line approach<\/strong>.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-1024x576.png\" alt=\"A table showing the five-year impact of straight-line Depreciation on taxes paid.\" class=\"wp-image-45999\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-straight-line-depreciation-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Now, let&#8217;s look at the <strong>alternative approach<\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below we have also laid out the <strong>Depreciation Tax Shield calculations <\/strong>using the <strong>Sum of Years Digits approach<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-1024x576.png\" alt=\"A table showing the fiver year impact of Accelerated Depreciation (Sum of Years Digits Method) on taxes paid.\" class=\"wp-image-45997\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-using-accelerated-depreciation-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">As you can see, the <strong>Taxes paid<\/strong> in the <strong>early years<\/strong> are far <strong>lower <\/strong>with the <strong>Accelerated Depreciation approach<\/strong> (vs. Straight-Line).<\/p>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-straight-line-vs-accelerated-depreciation-valuation-impact\" style=\"font-size:26px\"><strong>Straight-Line vs Accelerated Depreciation \u2013 Valuation Impact<\/strong><\/h3>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Cash Flow differences<\/strong> illustrated above <strong>directly affect the <\/strong><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Discounted Cash Flow<\/span><\/strong><\/a><strong> value of the Business<\/strong>.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below we <strong>use a 10% <\/strong><a href=\"https:\/\/www.fool.com\/knowledge-center\/discount-rate.aspx\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Discount Rate<\/span><\/strong><\/a> to value the <strong>Tax Cash Flows<\/strong> that we <strong>calculated in the prior section<\/strong>.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-1024x576.png\" alt=\"a table comparing the net present value (and thus valuation impact) of the Depreciation Tax Shield using Straight-Line vs Accelerated Depreciation.\" class=\"wp-image-46027\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/straight-line-vs-accelerated-depreciation-impact-detailed-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">In short, the <strong>Net Present Value<\/strong> of the <strong>Depreciation Tax Shield<\/strong> is <strong>$5 <\/strong>lower with the <strong>Sum-of-Years-Digits approach<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s <strong>imagine<\/strong> that the entire <strong>Business<\/strong> is <strong>worth $1,000<\/strong> (<a href=\"https:\/\/finance-able.com\/enterprise-value-vs-equity-value\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Enterprise Value<\/span><\/strong><\/a>) before the <strong>Tax Shield<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, the <strong>Business could be worth $5 more (or less)<\/strong>, depending on the <strong>approach it chooses<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">While <strong>$5 is not an enormous number<\/strong> here, the <strong><u>key takeawa<\/u><span style=\"text-decoration: underline;\">y<\/span><\/strong> is <strong>Depreciation can change the underlying Cash Flow of a Business and thus change its Valuation<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-are-there-other-tax-shields\" style=\"font-size:35px\"><strong>Are There Other Tax Shields?<\/strong><\/h2>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Beyond <\/strong>Depreciation Expense, <strong>any tax-deductible expense<\/strong> creates a <strong>tax shield<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">One of the other <strong>commonly discussed<\/strong> <strong>Tax Shields<\/strong> is the <strong>Interest Tax Shield<\/strong>.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-the-interest-tax-shield\" style=\"font-size:26px\"><strong>The Interest Tax Shield<\/strong><\/h3>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-1024x576.png\" alt=\"a stick figured using interest expense as a shield against a cartoon dragon that represents taxes.\" class=\"wp-image-45806\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-defending-against-tax-dragon-interest-expense.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">The <strong>Interest Tax Shield<\/strong> is the same as the <strong>Depreciation Tax Shield<\/strong> in concept.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In contrast though, with the <strong>Interest Tax Shield<\/strong>, it is <strong>Interest Expense<\/strong> that <strong>shields<\/strong> a Company from <strong>taxes paid<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Interest Tax Shield<\/strong> concept is <strong>highly relevant<\/strong> for <a href=\"https:\/\/finance-able.com\/walk-me-through-an-lbo\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Leveraged Buyout (\u2018LBO&#8217;)<\/span><\/strong><\/a> acquisitions executed by <a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity<\/span><\/strong><\/a> firms.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Private Equity Funds typically<\/strong> use large amounts of <strong>Debt<\/strong> <strong>to fund<\/strong> acquisitions. The <strong>Debt <\/strong>used in the purchase <strong>creates Interest Expense<\/strong> that <strong>reduces<\/strong> the acquired Company&#8217;s <strong>Tax bill<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Let&#8217;s take a quick look at how this works. <\/strong><strong><\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-quick-note-what-is-debt\" style=\"font-size:26px\"><strong>Quick Note: What is Debt?<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">We\u2019ll begin by <strong>quickly clarifying<\/strong> how a company creates <strong>Interest Expense<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/stick-figure-borrowing-paying-interest-principal.gif\" alt=\"An animation showing a stick figure first borrowing, then repaying Interest and principal.\" class=\"wp-image-45818\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">First, when a <strong>Company borrows<\/strong> money (or \u2018<a href=\"https:\/\/www.thebalancesmb.com\/loan-principal-questions-and-answers-398400\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Principal<\/span><\/strong><\/a>\u2019) from a <strong>Lender<\/strong>, they typically <strong>agree<\/strong> to <strong>repay<\/strong> the borrowed dollars <strong>in the future<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As a cost of borrowing, the <strong>borrower<\/strong> must <strong>make<\/strong> <strong>Interest payments<\/strong> for the benefit of borrowing.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Interest Payments<\/strong> are <strong>typically tax-deductible<\/strong>, which <strong>lowers<\/strong> the Company\u2019s <strong>tax bill<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Below<\/strong> is a <strong>simple example<\/strong> of the <strong>impact of Interest on taxes paid<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-debt-interest-tax-shield-example\" style=\"font-size:26px\"><strong>Debt (Interest) Tax Shield Example<\/strong><\/h4>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-1024x576.png\" alt=\"A table comparing the taxes paid with and without the interest expense deduction.\" class=\"wp-image-46015\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/taxes-paid-with-and-without-interest-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">The <strong>taxes saved<\/strong> due to the <strong>Interest Expense<\/strong> deductions are the <strong>Interest Tax Shield<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As you will see below, the <strong>Interest Tax Shield formula<\/strong> is <strong>nearly the same <\/strong>as with the<strong> Depreciation Tax Shield<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To <strong>calculate the Interest Tax Shield<\/strong>, you simply <strong>multiply the Interest Expense<\/strong> by the <a href=\"https:\/\/www.thebalance.com\/corporate-income-tax-definition-history-effective-rate-3306024\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Tax Rate<\/span><\/strong><\/a>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-1024x576.png\" alt=\"An image showing the two steps of the Interest Tax Shield formula. \" class=\"wp-image-45815\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-50x28.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield-100x56.png 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/08\/two-steps-to-calculate-interest-tax-shield.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-wrap-up-depreciation-tax-shield\" style=\"font-size:35px\"><strong>Wrap-Up: Depreciation Tax Shield<\/strong><\/h2>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">To wrap this up, we hope you now have a <strong>much better understanding of<\/strong> the <strong>Depreciation Tax Shield Calculation<\/strong> as well as the <strong>underlying concept.<\/strong> <\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, the <strong>Depreciation Tax Shield<\/strong> (and other <strong>Tax Shields<\/strong>) are <strong>important<\/strong> because they <strong>impact Cash Flow<\/strong> and thus <strong>Valuation<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Let us know if you have any questions in the comments below. We\u2019d love to hear from you!<\/strong><strong><\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-depreciation-tax-shield-deep-dive-video\" style=\"font-size:35px\"><strong>Depreciation Tax Shield &#8211; Deep Dive Video<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong>If you enjoyed this article<\/strong>, definitely <strong>check out<\/strong> our video on the <a href=\"https:\/\/youtu.be\/BsgrLh9jQzc\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Depreciation Tax Shield<\/span><\/strong><\/a>. <\/p>\n\n\n\n<p class=\"has-text-align-center\" style=\"font-size:25px\">Find more videos just like this on our <strong><a href=\"https:\/\/www.youtube.com\/c\/FinanceableTraining\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">YouTube Channel<\/span><\/a><\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-about-the-author\" style=\"font-size:35px\"><strong>About the Author <\/strong><\/h2>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"alignleft size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"500\" height=\"500\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo.jpg\" alt=\"Picture of Mike Kimpel, Founder of Finance|able\" class=\"wp-image-26350\" style=\"width:266px;height:266px\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo.jpg 500w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-300x300.jpg 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-100x100.jpg 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-150x150.jpg 150w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-50x50.jpg 50w\" sizes=\"auto, (max-width: 500px) 100vw, 500px\" \/><\/figure>\n<\/div>\n\n\n<p class=\"has-normal-font-size\"><a href=\"https:\/\/finance-able.com\/about\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Mike Kimpel<\/span><\/strong><\/a> is the <strong>Founder and CEO<\/strong> of <strong>Finance|able<\/strong>, a next-generation Finance Career Training platform. Mike has worked in Investment Banking, Private Equity, Hedge Fund, and Mutual Fund roles during his career.<\/p>\n\n\n\n<p class=\"has-normal-font-size\">He is an <strong>Adjunct Professor<\/strong> in <strong>Columbia Business School&#8217;s <a href=\"https:\/\/www8.gsb.columbia.edu\/valueinvesting\/coursesfaculty\/valueinvestingprogram\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Value Investing Program<\/span><\/a><\/strong> and leads the Finance track at <a href=\"https:\/\/www.accessdistributed.org\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Access Distributed<\/strong><\/span><\/a>, a non-profit that creates access to top-tier Finance jobs for students at non-target schools from underrepresented backgrounds.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-frequently-asked-questions\" style=\"font-size:35px\"><strong>Frequently Asked Questions<\/strong><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1629278059056\"><strong class=\"schema-faq-question\"><strong><em>What is Tax Shield?<\/em><\/strong><\/strong> <p class=\"schema-faq-answer\">A Tax Shield is any expense that lowers Taxable Income and thus shields a Business (or Person) from paying more Income Tax.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1629278126409\"><strong class=\"schema-faq-question\"><strong><em>How to calculate Tax Shield?<\/em><\/strong><\/strong> <p class=\"schema-faq-answer\">To calculate the Tax shield, you multiply the Deductible Expense by the Income Tax Rate.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1629278175075\"><strong class=\"schema-faq-question\"><strong>What best defines the Depreciation Tax Shield?<\/strong><\/strong> <p class=\"schema-faq-answer\">The Depreciation Tax Shield reflects the Income Tax savings created by Depreciation Expense.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1629278230623\"><strong class=\"schema-faq-question\"><strong><em>What is Depreciation Tax Benefit?<\/em><\/strong><\/strong> <p class=\"schema-faq-answer\">The Depreciation Tax Benefit reflects the money saved on Income Taxes due to Depreciation Expense.<\/p> <\/div> <\/div>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-related-links\" style=\"font-size:35px\"><strong>Related Links<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-yoast-seo-related-links yoast-seo-related-links\">\n<li><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\">Walk Me Through a DCF<\/a><\/strong><\/mark><\/li>\n\n\n\n<li><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong><a href=\"https:\/\/finance-able.com\/investment-banking-career-path\/\">Investment Banking Career Path<\/a><\/strong><\/mark><\/li>\n\n\n\n<li><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong><a href=\"https:\/\/finance-able.com\/treasury-stock-method\/\">Treasury Stock Method<\/a><\/strong><\/mark><\/li>\n<\/ul>\n\n\n<div class=\"yoast-breadcrumbs\"><span><span><a href=\"https:\/\/finance-able.com\/\">Home<\/a><\/span> \u00bb <span class=\"breadcrumb_last\" aria-current=\"page\">What is the Depreciation Tax Shield? \u2013 Ultimate Guide<\/span><\/span><\/div><style class=\"advgb-styles-renderer\">.kb-table-of-content-nav.kb-table-of-content-id45863_1c17ab-9d .kb-table-of-content-wrap{padding-top:var(--global-kb-spacing-sm, 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