Tax Shields

A tax shield is defining any reduction in a corporation's tax bill which can be brought about by management. Depreciation, for example create a tax shield because depreciation is a non- cash expense which is deductible for income tax purposes.  As similarly the managers can reduce their taxable income by the use of debt because interest expense is deductible for income tax purposes (dividends, however, are not). Other kinds of tax shields are periodically available like investment tax credits.