Everything Start-up Entrepreneurs Need to Know About Tax Shield

Part of being a good financial manager in a start-up company requires you to identify opportunities that your firm can use to save money. Sometimes, these opportunities lie beyond your ability to negotiate for favourable prices when buying assets or signing contracts. You need to look at things such as a tax shield benefit. If you've just started out in business, here is a look at tax shield benefit to help you gain an understanding of what it is and how it helps your firm save money:

What is Tax Shield?

A tax shield refers to any deduction that your tax authorities allow so that a business firm can reduce its tax obligation. Tax shield reduces the taxable income that your firm generates, enabling you to remit a lesser amount of tax that you'd otherwise be required to pay. In most cases, tax shield will come in handy when you have expenditures that are tax deductible. For instance, you can go for a loan from a credible financial institution to finance some of your activities rather than using other sources' capital that will attract tax. The interests you pay with respect to that loan are tax-deductible. Another way you can take advantage of tax shield is to offer a discount to your client whenever you sell an asset for a significant amount of money.

Does Tax Shield Affect Cash Flow in Your Business?

Basically, cash flow refers to the rate at which money moves in and out of your business firm. A cash flow lays out all the expenses of the firm, which includes the taxes that your firm remits to the tax authorities. A tax shield lowers this tax expense effectively without affecting your income and making it look like you are evading tax. In this way, a tax shield benefit helps you to keep more liquid money in the firm, an indication that you are managing your financial affairs quite well.

Can You Use Tax Shied to Predict the Financial Position in the Future?

You can rely on an analysis of your tax shield benefits to forecast the performance of the firm in future. The essence is to keep tax as low as possible and improve the revenues accruing to your firm. For instance, if your firm relies heavily on tax shield benefits that it won't sustain for a long time, then it will inevitably end up paying high taxes in the future. For instance, over-reliance of tax shield benefits on loan interests is dangerous because your firm will eventually pay up that debt. The secret is to look for options that bring in long-term tax shield benefits such as regular sub-contracting of your work.