Which Taxes Should I Add Back to EBITDA?

Noob intern here arguing with other noob interns.

So us noobs understand that you simply add interest, taxes, depr. and amor. back to net income to get EBITDA.

However, we're looking at a company's income statement and there's income tax along with payroll taxes under operating expenses.

My argument is that we only have to add back income tax because payroll taxes are operating expenses that have to be paid regardless. However, the other interns are suggesting that we add all types of taxes.

So WSO... which one is it?

Do I Subtract Income Taxes and Payroll Taxes from EBITDA?

Income taxes will not be removed from EBITDA; however, payroll taxes will be accounted for in the EBITDA and EBIT calculations.

EBITDA or Earnings Before Interest Tax Depreciation and Amortization will not include the impact of income taxes as that is the "taxes" referenced in the name. However, payroll taxes are part of wage expenses and must be paid regardless.

Khayembii - Private Equity Associate:
The point of EBITDA is to provide a means of determining its operational profitability, independent of the capital structure in place. Payroll taxes are part of operating expenses and therefore you don't add them back.

Payroll taxes will be paid regardless of capital structure choices so it is not relevant to the objective of finding EBITDA and EBIT.

What is EBITDA?

Want to learn more about EBITDA and EBIT? Check out our entries on the WSO finance dictionary.

Also for a detailed video overview – see the video below.

Read More About EBITDA on WSO

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Comments (18)

May 23, 2014 - 5:50pm

I favour your approach. EBITDA is trying to strip out the impact of financing structure decisions, which means getting earnings before interest and the tax shield of interest. Payroll tax will be incurred regardless of financing structure decisions.

Those who can, do. Those who can't, post threads about how to do it on WSO.
  • 1
May 23, 2014 - 9:06pm

Why not start at EBIT, then add D&A from the cash flow statement?

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.
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May 23, 2014 - 11:17pm

Payroll taxes are part of employee comp... basically just income taxes get added back.

I hate victims who respect their executioners
May 27, 2014 - 12:55pm

Should I add back amortization of deferred sales commissions when calculating EBITDA? (Originally Posted: 07/05/2014)

This is for asset management firms.

Also bonus question...do we always use adjusted EBITDA for multiples calculation?

Thanks!

When you look into the abyss, the abyss also gazes at you..
May 27, 2014 - 12:56pm

anyone?

When you look into the abyss, the abyss also gazes at you..
May 27, 2014 - 12:57pm

anyone?

When you look into the abyss, the abyss also gazes at you..
May 27, 2014 - 12:58pm

EBITDA quality - add-backs (Originally Posted: 07/28/2014)

Anyone know of a book or PDF'd article that lists, AND explains in detail, EBITDA add-backs?

"Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."
May 27, 2014 - 1:00pm

Usually if you are talking about an EBITDA number to work through to get to FCF, just add everything non-cash back (or take out, depending on the nature of the account) from the Operating section of your cash flow statement and that will give you a good proxy.

I think that is pretty much industry standard, without going into too much detail.

May 27, 2014 - 1:02pm
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