What is tax exhaustion?

Standard models of investment usually incorporate various tax factors but often overlook "tax exhaustion," the case when a firm has negative taxable income and cannot claim immediately its tax deductions or credits. However, tax exhausted firms face a higher cost of capital, and evidence shows that tax exhaustion is not uncommon. This paper incorporates tax exhaustion into a "Q" model of investment to see whether its performance is improved. In addition, leased investment is fully incorporated into the model, in part because tax exhaustion creates incentives to lease investment products and because investment models explain decisions to use equipment, not the decision about how to finance them. The results show that accounting for leasing improves significantly the performance of the Q model, whereas accounting for tax exhaustion does not affect the results meaningfully.

When tax reaches its epic, no more room left for collection/levy.

When a company put limits on its gearing level is what is known as tax exhaustion, when a company has incearsed its gearing to such a level that there is no sufficient tax liability, or in other words has negative taxable income and consequently it cannot benefit from ‘all’ the tax relief.

It is the situation when an entity could not benefit from the tax relief that are available to it.

For example,

When a company has increased its gearing to such a level that there is no sufficient tax liability, or in other words, has negative taxable income, and, consequently, it cannot benefit from ‘all’ the tax relief. 

Using debt capital in capital structure of a company, gives an over all low cost of capital (inluding debt capital, shareholders funds and preferred stock). Reason is that expenses on debt capital are tax deductible.

But this tax benefit can be had only, if company has to pay tax on income, and this benefit can be deducted from that taxes. Therefore, if a company does not have taxable income from operations it cannot claim this tax relief (shield). So the situation at which we cannot have tax shield is called tax exhaustion.

Its a situation when a you has negative taxable income and cannot claim immediately your tax deductions or credits

Tax exhaustion refers to the state where a taxpayer feels overwhelmed due to the complexities of tax laws and procedures. Here's a relatable story. A friend of mine, a startup founder, was grappling with tax exhaustion. The labyrinth of tax regulations was draining his energy and focus from his business. Then, he found PrepTaxSmart. The experts there took over his tax worries, allowing him to concentrate on his business growth. Visit https://preptaxsmart.com/ . It's not an ad, just a story that might resonate with many entrepreneurs out there.