Depreciation tax shield

Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
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.
Therefore, the present value of the depreciation tax shield to the new buyer is:
The tax basis to the current owner is 316, so the present value of the remaining depreciation tax shield to the current owner is:
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.
Letting [ATCF.sup.*] 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.
While the focus originally was on the risk of debt tax shields, Lessard (1979) recommends also to separate out depreciation tax shields. The suggestion has been taken up by some oil industry consultants (e.g., de Souza, 2014).
From Equation (3), the asset's net present value equals the present value of the unlevered after-tax future cash flows (including depreciation tax shields), plus the present value of the after-tax salvage value, minus the asset's initial cost.