If firms pay taxes and interest is tax-deductible, firm value rises as the use of debt financing rises. But this analysis implies that there are limits to the benefits of tax-deductible debt. For example, business risk leads to variations in EBIT over time, which can lead to uncertainty about the firm’s ability to fully use future interest deductions. If a firm has a negative or zero operating income, an interest deduction provides little help; it just makes the pretax losses larger. The advantage of tax-deductible interest also is reduced if the firm has taxloss carry forwards that reduce current and future years’ taxable incomes. Also, firms in lower tax brackets have less tax incentive to borrow than those in higher tax brackets. The present value of future interest tax shields becomes even more uncertain if EBIT is affected by nondebt tax shields. In practice, firms’ EBITs are reduced by various expenses, such as depreciation, depletion allowances, amortization, pension contributions, employee and retiree health-care costs, R&D, and advertising expenses. Foreign tax credits, granted by the US government to firms that pay taxes to foreign governments, also diminish the impact of the interest deduction. Thus, the tax deductibility of debt becomes less important to firms with large nondebt tax shields.