I view cash flow net of tax as the amount of cash spent minus the income tax savings when the amount is deductible on the corporation’s income tax return.
To illustrate this, let’s assume that a U.S. corporation pays a combined federal and state income tax rate of 40% on its last increment of income. If this corporation spends an additional $10,000 for a tax deductible business expense, its taxable income will decrease by $10,000. This means that the corporation will save paying $4,000 in income taxes ($10,000 less of taxable income being taxed at 40%).
In this situation, the cash flow net of tax is $6,000 consisting of the $10,000 paid for the business expense minus the $4,000 of income taxes that will not have to be paid.
