A tax shield is equal to the reduction in a firm's:
A) total tax liability resulting from a tax deductible expense.
B) taxable income resulting from depreciation.
C) taxable income resulting from a decrease in long-term debt.
D) net income caused by depreciation.

Question

Quizplus · Accepted Answer

A tax shield is the reduction in a firm's total tax liability resulting from a tax-deductible expense. When a firm incurs expenses that are deductible from its taxable income, its tax liability is reduced. This reduction in tax liability is known as a tax shield. Examples of tax-deductible expenses include depreciation, interest expenses, and expenses related to research and development. Therefore, option A is the correct choice as it defines the concept of a tax shield accurately.

A Tax Shield Is Equal to the Reduction in a Firm's