What does borrowing cost your business?

After-Tax Cost of Debt Calculator

Calculate the actual cost of borrowing after considering the tax deductions

Pre-Tax vs After-Tax Cost of Debt

Debt Cost Summary

9.20%

Debt Cost (Pre-Tax)

20.00%

Marginal Tax Rate

1.84%

Tax Shield Benefit

7.36%

After-Tax Cost of Debt

How Debt Cost is calculated

After-tax cost of debt = Debt Cost x (1 - Marginal Tax Rate), where Marginal Tax Rate = 1 - (Net Income / Pre-Tax Income)

Your business nets $80 against $100 in pre-tax income, which works out to a marginal tax rate of 20.00%. At a stated debt cost of 9.20%, that tax rate shields 1.84% of it - leaving a true after-tax cost of debt of 7.36%. That's the number to use when comparing this loan against other financing or discounting future cash flows, not the 9.20% rate on the term sheet. At 7.36% after tax, this lands in the ordinary range for small-business term debt once the tax shield is applied.

Tax Rate

Net income

Pre-tax income

After-Tax Cost of Debt

What is the after-tax cost of debt?

Borrowing is expensive. When businesses borrow money, they pay interest expense. However, businesses can also deduct their interest expense from their taxable income, which reduces their tax bill.

To calculate the after-tax cost of just borrowing money, multiply the loan’s interest rate by (1- tax rate).

For example:

A $100,000 loan at 9% interest with a tax rate of 25%

= 9% x (1 –0.25) = 6.75% aftertax

So while the lender is receiving 9% interest, the business effectively pays an after-tax borrowing cost of 6.75%.

The interest rate alone may not fully encompass the total dollar amount a business must repay. Take Two different companies that have identical loan amounts yet have different tax rates will pay different borrowings costs based solely on their tax situations. The after-tax cost provides the most accurate amounts for comparison.
After-tax cost of debt calculator formula: after-tax cost equals interest rate times one minus tax rate, with a worked example

How to use this calculator?

Enter three inputs to get the result:

1. Debt cost

The annual interest rate on the loan. Use the APR, not the monthly rate. If there are multiple loans, calculate a weighted average based on outstanding balances.

2. Net income

Used to calculate the effective tax rate. Take this from the most recent full-year income statement.

3. Pre-tax income

Earnings before tax for the same period. The calculator uses this with taxes paid to find the effective tax rate and adjust the debt cost.

Do not use the marginal rate. It can make the after-tax cost look lower than it actually is.

Why the after-tax cost of debt matters for business decisions?

When a business takes a loan or compares funding options, the key question is the real cost. The after-tax cost gives that answer.

Interest on loans can be deducted from income, but payments to investors cannot. This makes debt cheaper than it looks if tax is considered. Ignoring this can lead to wrong decisions.

The after-tax cost is also used in WACC (Weighted Average Cost of Capital), which is the minimum return a business needs to justify its funding. If a return is lower than WACC, the business loses value.

For example, a 10% loan with a 30% tax rate actually costs 7%. This difference can change whether a decision makes sense.

Frequently asked questions

Multiply your debt's interest rate by (1 - your marginal tax rate). A business paying 9.2% interest with a 20% marginal tax rate has an after-tax cost of debt of 9.2% x 0.8 = 7.36% — the tax deduction on interest payments effectively lowers the real cost of borrowing.

After-Tax Cost of Debt = Interest Rate x (1 - Marginal Tax Rate). Marginal tax rate can be calculated as 1 - (Net Income ÷ Pre-Tax Income) when you don't already know your tax bracket directly.

Interest on business debt is usually tax-deductible, so the rate on the term sheet overstates what borrowing actually costs you. Using the after-tax figure gives an apples-to-apples comparison against other financing options and is the number that belongs in a discounted cash flow or weighted average cost of capital calculation.

The tax shield is the dollar value of the deduction — Interest Rate x Tax Rate. A higher tax rate means a bigger shield and a lower after-tax cost of debt, which is one reason debt tends to be cheaper than equity financing for profitable, tax-paying businesses.