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Depreciation Tax Shield

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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.


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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.
In this class, the relative after tax cost for both countries is slightly less since the present value of the depreciation tax shield is greater.
Since ownership entails tax benefits, primarily in the form of depreciation tax shields, leasing rather than purchasing an asset can be a means to transfer the tax benefits of ownership to an investor who will derive greater value from them than the company using the asset.
 
 
 
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