Usually refers to depreciation deductions (and similar deductions that are non-cash expenses when deducted) that protects that amount of income from taxation. However, all allowable expenses, both cash and non-cash items, are tax shields because they reduce income and thereby reduce income taxes.
Tax shield is the amount of taxes you may save from a tax deduction or tax credit that you would otherwise pay without the deduction or credit. To calculate tax savings from a deduction, multiply the amount of the deduction by your marginal income tax rate. At a marginal income tax rate of 25%, a $2,000 qualified contribution to a company retirement plan may save you $500 in taxes. And if you paid $10,000 in home mortgage interest, you may save up to $2,500 in income taxes if you are in the same tax bracket. Your deduction for interest expense on mortgage and home equity debt may be limited. You may wish to consult a financial or tax adviser. For businesses, tax savings are realized on such deductible expenses as lease payments, interest on loan payments, and depreciation expense.