Depreciation tax shield

Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.

Depreciation Tax Shield

A tax deduction that comes from the depreciation of an asset. For example, if one spends $1,000 on an asset and its book value is reduced to $800 the following year, the depreciation tax shield is $200.
References in periodicals archive ?
The cost of debt financing for new plant, depreciation and depreciation tax shield are calculated next.
Total cost differential between old and new systems will also include depreciation tax shield allowed for the new equipment.
0% $285,000 Depreciation Tax Shield (35% Corp Tax Rate) 35.
When accounting for its debt tax benefit, the depreciation tax shield can also be valued standalone.
Every additional dollar of step-up induced depreciation tax shield increases the after-tax cash flow of a firm by one dollar, as it reduces the tax burden by one dollar.
Case 2 refers to a standalone valuation of the step-up induced depreciation tax shield.
While the derivations in this article can be modified to reflect that approach, the author's experience is that actual buyers and sellers of assets include the depreciation tax shield in cash flows that are discounted at a risk-adjusted rate.
Thus the extra tax shields due to lower capital gains rate made the firm elect to recognize the gain because the firm paid the capital gains tax on the $35 and got a $35 depreciation tax shield in the future.
represent those first four terms in equation 10 except the depreciation tax shield, the following is obtained:
Thus, there is no increased depreciation tax shield, but also no capital gains tax is levied on the target firm.
Under this tax structure, there is an increase in the depreciation tax shield as well as the interest tax shield, but there will be a large ordinary gain and a capital gain assessed on the target firm.
Thus, TRA '86 (no step-up) has the smallest reduction in taxes on operating income because the leveraged buyout creates no additional depreciation tax shield under this tax structure.