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, 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 amortization are all included in the calculation of pre-tax profit. Business owners often use that figure to determine if funds are available for additional officer's compensation and shareholder distributions.


Step 1

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


Video of the Day

Step 2

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 amortization.


Step 3

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


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.



Report an Issue

screenshot of the current page

Screenshot loading...