Question

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?
A. interest tax shield.
B. interest credit.
C. Homemade Leverage shield
D. current tax yieldE. tax-loss interest

Answer 1

Answer: interest tax shield

Explanation: A tax shield is a reduction in taxable income for an individual or corporation achieved through claiming allowable deductions such as mortgage interest, medical expenses, charitable donations, amortization, and depreciation .

The term “interest tax shield” refers to the reduced income taxes brought about by deductions to taxable income from a company’s interest expense. For instance, there are cases where mortgages may have an interest tax shield for buyers since the mortgage interest is deductible against income. One of the main objectives of companies is to reduce their tax liability as much as possible. Interest tax shields encourage firms to finance projects with debt, since the dividends paid to equity investors are not deductible.