How to calculate pre-tax profit

Pre-tax profit is calculated by subtracting a company’s expenses from its income without the consideration of corporate income taxes. Fixed expenses, such as rent, repayments of long-term debt and insurance, variable expenses, such as wages, advertising and office expenses, as well as non-cash expenses such as depreciation and amortisation are all included in the calculation of pre-tax profit. Business owners often use pre-tax profit to determine if monies are available for additional officer’s compensation and shareholder distributions.

Calculate gross profit by subtracting the cost of goods sold from income. Cost of goods sold consists of expenses such as materials, subcontractors, direct labour and other job costs directly related to the end product. Cost of goods sold is not relevant in professional or service-related businesses.

Subtract the company’s selling, general and administrative expenses from the calculated gross profit. Selling, general and administrative expenses include rent, utilities, office expenses, officer and office payroll and related payroll taxes. The resulting value represents EBITDA, or earnings before interest expense, taxes, depreciation and amortisation.

Subtract interest expense, depreciation and amortisation from EBITDA previously calculated to arrive at earnings before taxes, or pre-tax profit.

Tip

Gross profit and pre-tax profit can be represented as a percentage of revenue and compared to industry benchmarks to gauge a company’s performance.

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Things Needed

  • Revenue
  • Expenses

About the Author

Jessica Kent started writing professionally in 2002. Her articles have appeared in publications including the New York State Bar Association's "Family Law Review," "Valuation Strategies" and "Metropolitan Corporate Counsel." Through her writing, she strives to assist people in making informed financial decisions. She is a Certified Public Accountant in New York. Kent holds a Bachelor of Science in accounting from Binghamton University.

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