Tax amortization benefit (TAB), also known as tax amortization shield, refers to the tax savings generated by the amortization of intangible assets for tax purposes. It is a concept used in business valuations to account for the tax advantages resulting from the amortization of certain intangible assets.
Intangible assets, such as patents, trademarks, copyrights, and goodwill, are typically amortized over their useful life for financial reporting purposes. This means that their value is gradually expensed over time, reducing the company’s reported earnings.
However, for tax purposes, certain intangible assets may be eligible for more favorable treatment. In some jurisdictions, businesses are allowed to deduct the amortization expense of intangible assets for tax purposes, resulting in a tax deduction and reducing the company’s taxable income. This deduction creates a tax benefit or tax shield, known as the tax amortization benefit.
When valuing a business, the tax amortization benefit is taken into consideration as it can have a significant impact on the company’s cash flows and overall value. The valuation analyst estimates the present value of the expected tax savings resulting from the tax amortization benefit and incorporates it into the valuation model. By considering the tax amortization benefit, the valuation reflects the potential tax advantages the business may enjoy, resulting in a higher estimated value.
It’s worth noting that the availability and extent of tax amortization benefits vary across jurisdictions and depend on specific tax laws and regulations. Therefore, it is important to consult with tax professionals or valuation experts familiar with the applicable tax laws in the relevant jurisdiction when assessing the tax amortization benefit in a valuation.
TAB Calculation
To calculate the tax amortization benefit (TAB) in a specific example, we need the following information:
Intangible asset: Let’s assume we have a patent with a value of $1,000,000.
Amortization period: The patent has an amortization period of 10 years.
Tax rate: The applicable tax rate is 30%.
To calculate the TAB, we need to determine the annual tax deduction resulting from the amortization of the intangible asset. In this case, the annual deduction would be $1,000,000 divided by 10 years, which equals $100,000 per year.
Next, we calculate the tax savings by multiplying the annual deduction by the tax rate. Using the tax rate of 30%, the tax savings per year would be $100,000 multiplied by 30%, which equals $30,000 per year.
Finally, to determine the present value of the tax savings over the entire amortization period, we discount the annual tax savings using an appropriate discount rate. Let’s assume a discount rate of 8%.
Using a present value calculator or formula, we can calculate the present value of the tax savings. Here’s the calculation for the 10-year period:
PV = $30,000 / (1 + 0.08)^1 + $30,000 / (1 + 0.08)^2 + … + $30,000 / (1 + 0.08)^10
PV = $27,777.78 + $25,694.44 + … + $11,359.15
Summing up all the present values of the tax savings over the 10-year period would give us the total tax amortization benefit.
It’s important to note that this is a simplified example, and in practice, other factors and considerations may come into play when calculating the tax amortization benefit, such as any limitations or adjustments imposed by tax laws and regulations. Consulting with a tax professional or valuation expert would provide more accurate and detailed calculations based on the specific circumstances.
