From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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Income taxes: The value of the depreciation tax shield

Income taxes: The value of the depreciation tax shield

From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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Income taxes: The value of the depreciation tax shield

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- Depreciation is a non-cash expense but the appreciation does reduce taxable income thus reporting depreciation expense on your income tax form generates an income tax savings. For example, let's say that you report a $1,000 depreciation deduction on your income tax form, tax rate is 40%. How much does this depreciation deduction save you in taxes? Well, the depreciation tax savings are equal to the depreciation deduction multiplied by the tax rate, the depreciation tax savings, in this example, $1,000 times 40% the tax rate, so the depreciation tax savings, $400. This represents the fact that because of the depreciation deduction of $1,000 cash paid for income taxes will be less by $400. Landlords with rental properties are very aware of the benefit of the depreciation tax deduction, even when the rental income received from a rental property exceeds the cash costs associated with that property, the depreciation tax…

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