Do you have difficulty understanding a financial term? Check unfamiliar terms by first letter in our glossary below.
Pretax income is the net sum of all revenues collected minus associated costs, such as operating expenses, interest expenditures and deductions. It determines how much a business earns prior to paying its taxes.
Pretax income also know as Earnings Before Taxes (EBT) is an important financial measure for businesses. It provides a more accurate insight into their profits since companies are subject to different tax rates depending on their industry and the state.
Pretax earnings are an attractive metric as they are not influenced by differences in corporate taxes across industries or regions. This helps to compare the intrinsic or actual profitability of companies accurately.
As an example, corporations in the U.S. pay the same federal taxes but different state taxes, depending on where they are located.
To find out the amount of pretax business income, you can utilize the following equation:
Pre-Tax Income = Revenue – Expenses (excluding Taxes)
How to Calculate Pretax Income?
First step: Revenue is an essential factor in any business and should be calculated first. This item captures the income generated by selling goods or services, as well as any other sources such as interest or commission. All of these incomes will be combined in this head for a complete total.
Second step: Next up, we have to take a look at the expenses. This encompasses all the costs that your company has to endure in order to keep running smoothly.
COGS (Cost of Goods sold): Cost of goods sold is an expense account that covers the cost of creating items for sale. It's made up of expenses such as materials, labour, and other production-related costs directly associated with making products for sale.
Operating expenses: Operating expenses cover all costs related to running the business which are not part of production. This includes, but is not limited to, administration costs, sales & distribution expenses and salaries. These are necessary to keep the business going and are separate from production costs.
Interest Cost: A business incurs finance costs for loan interest payments to banks or other lenders.