Interest tax shield

An interest tax shield arises where borrowing costs reduce taxable profit and the entity can use the deduction. A simple calculation multiplies deductible interest by the relevant tax rate, but relief can be restricted, delayed or unavailable because of tax losses, legal limits or jurisdictional rules. In WACC or adjusted present value, use the relevant cash-flow timing and avoid counting the same tax benefit twice. Tax relief applies to qualifying debt costs, not automatically to the cost of equity.