What is Earnings Before Tax (EBT) vs Pretax Income?
Actually, there is no difference between earnings before tax (EBT) vs pretax income. Both terms denote the same concept and can be used interchangeably.
Essentially, EBT or pretax income is a measure of the company’s profitability. EBT indicates the amount of money that a company retains after deducting all operating expenses but prior to the deduction of tax expenses.
Pretax income is commonly disclosed on the company’s income statement. On an income statement, the pretax income can be commonly referred to as an income before provision for income taxes. In addition, all variables required to calculate the pretax income (revenue, COGS, interest expenses, etc.) can also be found on the income statement.
How to Calculate Pretax Income?
As mentioned above, pretax income is calculated as the difference between a company’s revenue and all operating expenses, including depreciation and interest expenses, while excluding income taxes. Mathematically, it can be expressed using the following formula:
Pretax Income = Revenue – (Depreciation + COGS + Interest Expenses + SG&A)
Alternatively, pretax income can be calculated from the company’s net income. You just need to add back taxes to the net income:
Pretax Income = Net Income + Taxes
In addition, pretax income can be deduced from other profitability measures such as EBIT or EBITDA. The following formulas can be applied to calculate pretax income:
Pretax Income = EBIT – Interest Expenses
Pretax Income = EBITDA – (Interest Expenses + Depreciation & Amortization)
Why Do We Use EBT?
There are several measures of a company’s profitability including, but not limited to, EBITDA, EBIT, EBT, and net income. Each of the profitability measures comes with its own meaning and applications.
For example, pretax income is commonly used to compare the company’s financial performance with the performance of its peers, as well as to compare the company’s performance across different time periods.
Generally, it is viewed that pretax income is a better indicator of a financial performance rather than net income for companies with a significant amount of tax considerations, including tax credits, carryforwards, and carrybacks. In such a scenario, the net income of such a company is distorted by tax considerations. Thus, the metric does not depict the accurate company’s financial performance from its operations.
On the other hand, pretax income (EBT) excludes the company’s tax expenses and could be a better indicator of performance.
Pretax Income vs. Taxable Income
The concept of pretax income (EBT) must not be confused with the concept of taxable income. Pretax income is a book value that is used on the company’s financial statements. Calculations of pretax income are driven by accounting principles rather than existing tax legislation. Essentially, pretax income provides a basis to calculate an estimate of tax expense. The appropriate tax rate is applied to the pretax income figure to calculate the tax expenses for a period.
Conversely, taxable income is a figure that is calculated under the guidance of tax legislation in a given jurisdiction. In other words, using the taxable income in its tax filings, a company determines the actual amount of money it must pay in taxes for a given period.
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