Earned Income Credit (EIC)

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Earnings Before Tax (EBT): Definition and How to Use It

What is EBT?

Earnings Before Tax (EBT), also called pretax income or income before income taxes, is a company’s profit after all operating and nonoperating expenses have been deducted from revenue but before tax expense is subtracted. Because it excludes taxes, EBT makes it easier to compare profitability among companies that operate in different tax jurisdictions.

Key points

  • EBT is derived from the income statement and uses only figures found there.
  • It reflects operating and nonoperating profits after costs such as cost of goods sold (COGS), interest, depreciation, and general and administrative expenses are deducted.
  • By removing taxes, EBT provides a clearer view of underlying business performance across jurisdictions with different tax rates.

How EBT is calculated

Common ways to calculate EBT:
* Revenue − all operating expenses (including COGS, SG&A, depreciation and amortization) = EBT
* EBIT − interest expense = EBT
* Net income + tax expense = EBT

Practical example

If a company sells 30 widgets at $1,000 each, total revenue is $30,000. If COGS are $100 per widget, COGS = $3,000 and gross profit = $27,000. Subtract operating costs (for example, salaries $10,000 and rent $1,000) and interest expense ($1,000): 27,000 − 11,000 − 1,000 = EBT of $15,000.

Why EBT matters

  • Removes tax effects: Federal and state tax rates vary; EBT strips out taxes to reveal operating performance.
  • Useful for comparisons: Investors and analysts use EBT to compare firms in different tax environments.
  • Basis for metrics: EBT is used to compute pretax profit margin and other performance ratios.

EBT vs. EBIT vs. EBITDA

  • EBT: Net income before tax.
  • EBIT (Earnings Before Interest and Taxes): Adds back interest to EBT, removing financing effects.
  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Further adds back depreciation and amortization, focusing on cash operating performance.

Bottom line

EBT is a straightforward, income-statement–based measure that helps isolate a company’s operational profitability by excluding tax effects. It’s a practical metric for comparing peers across different tax regimes and for calculating pretax performance ratios.