Tax Shield

A tax shield refers to the reduction in taxable income that results from certain expenses, such as interest on debt or depreciation. When a company incurs these expenses, they lower its profit, which in turn reduces the amount of tax it has to pay. Essentially, the tax shield allows a business to keep more of its earnings by legally minimizing its tax liability. It can be a strategic tool for companies, making financing options like debt more attractive due to the tax benefits they provide.