Depreciation Tax Shield
A means of reducing income tax payments by deducting depreciation from the taxable income. Depreciation tax shield is computed as the amount of depreciation multiplied by the tax rate. This is not cash amount but we commence tax deduction from our taxable income. This will become our primary source of cash inflow which was saved by not giving tax on depreciation amount. For instance, if the annual depreciation is $2000 and the tax rate is 20% therefore the corresponding tax shield will be $200. The amount of depreciation will depend on the depreciation method, using accelerated depreciation permits for faster depreciation during the early life of the asset and slows down as the asset ages, hence, it renders for higher tax savings during its early stages of the asset's life.
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