How to Calculate a Depreciation Tax Shield

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A depreciation tax shield is the amount of money companies can save on income tax payments by using depreciation deductions. Higher savings are attained when the tax shield is high. The accelerated depreciation method depreciates an asset at a higher rate in the early stages of its life and slows down as the asset ages. In contrast, the straight-line depreciation method depreciates the asset in equal amounts over periods of its life. Hence, companies can save more money with the accelerated method.

Refer to the Internal Revenue Service depreciation deduction guidelines to determine what company's depreciation deduction amount.

Determine your company's tax rate using the Tax Foundation to find out what your corporate tax rate is, depending on the income bracket.

Multiply the depreciation deduction by the tax rate to figure your depreciation tax shield. For example, if your depreciation deduction amount is $4,500 and the tax rate is 40 percent, the tax shield is $1,800 ($4,500 x .40).

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About the Author

Shreya Mehta graduated from the University of Massachusetts with a Bachelors degree in business administration with a double concentration in finance and MIS. She attended Bentley College to obtain a MBA in finance and Masters in IT. She has been working for a financial software company for the past three years as an associate content manager.

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