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.
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?
Also for a detailed video overview – see the video below.
Read More About EBITDA on WSO
- What Is Earnings Before Interest, Tax, Depreciation & Amortization (EBITDA)?
- P/E Vs. EV/EBITDA - Advantages/Disadvantages?
- EBITDA Vs. Operating Cash Flow Vs. Free Cash Flow
- EBITDA Ambiguity - If EBITDA Excludes Depreciation And Amortization, Why Do We Subtract D And A From It To Get EBIT?
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