# Profit Before Tax (PBT): Definition and Calculation Guide

## What Is Profit Before Tax (PBT)?

Profit before tax (PBT) serves as a crucial indicator of a company's profitability before income taxes are applied. It is calculated from the operating profit after deducting interest expenses and adding any interest income. This measurement aids financial analysts and stakeholders in understanding a company's pre-tax financial health and can be found in the [income statement](https://www.investopedia.com/terms/i/incomestatement.asp).

### Key Takeaways

*   Profit before tax (PBT) is a company's earnings before income taxes are deducted, providing insight into its profitability and tax obligations.
*   PBT is also known as Earnings Before Tax (EBT) or pretax profit and is calculated by subtracting interest from operating profit.
*   While not a primary performance metric, PBT is useful for assessing tax impact and cost efficiency within companies.
*   Comparing PBT and net income highlights the effect of taxes, aiding in profitability analysis without tax distortions.
*   PBT differs from EBITDA, which includes noncash items like depreciation, offering a different view of operational efficiency.

![Profit Before Tax (PBT): The profit a company makes before any tax is paid.](https://www.investopedia.com/thmb/4uml5YZDZP86hsqM1HuPk6zzeN0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/profitbeforetax-FINAL-1-b855206de9af4e83bc4d92428668057b.png)

*— Investopedia / Joules Garcia*

## The Importance of Profit Before Tax

PBT may also be referred to as “[earnings before tax (EBT)](https://www.investopedia.com/terms/e/ebt.asp)” or “pretax profit.” The measure shows all of a company’s profits before tax. Reviewing the income statement reveals the expenses a company pays before calculating operating profit.

For example, gross profit deducts [cost of goods sold (COGS)](https://www.investopedia.com/terms/c/cogs.asp). Going further, “[earnings before interest and tax (EBIT)](https://www.investopedia.com/terms/e/ebit.asp),” which is also known as “operating profit,” “operating earnings,” and “profit before interest and taxes,” factors into both COGS and all operational expenses. After EBIT, only interest and taxes need to be deducted to find the net income.

## Calculating Profit Before Tax: A Step-by-Step Guide

Knowing the income statement helps analysts understand PBT, how to calculate it, and how to use it. The third section of the income statement focuses on interest and tax. These deductions are taken from the summation of the second section, which results in EBIT. Interest includes both earnings from investments and payments on debt, making it an important metric.

The Tax Cuts and Jobs Act (TCJA) of 2017 set the federal tax rate of [C corporations](https://www.investopedia.com/terms/c/c-corporation.asp) at 21%. All other companies are [pass-throughs](https://www.investopedia.com/terms/f/flow-through.asp), which means they are taxed at the individual taxpayer’s rate. Any kind of entity will also have to pay state taxes, whose rates can vary widely by state and entity type.

The basics of calculating PBT are simple. Take the operating profit from the income statement and subtract any interest payments, then add any interest earned. PBT is generally the first step in calculating net profit, but it excludes the subtraction of taxes. To reverse calculate, add the taxes paid to the [net income](https://www.investopedia.com/terms/n/netincome.asp).

1.  Start with the operating profit from the income statement.
2.  Subtract interest payments from the operating profit.
3.  Add any interest earned to arrive at the PBT.

As mentioned above, different types of companies will have different tax obligations at the federal and state level. Calculating the actual amount of taxes owed will come from the PBT.

## How Profit Before Tax Enhances Financial Understanding

PBT is usually not a key performance indicator on the income statement. These are usually focused on gross profit, operating profit, and net profit. However, as with interest, the isolation of a company’s tax payments can be an interesting and important metric for cost efficiency management.

Pretax profit determines how much tax a company will pay. Any tax credits would be deducted from the tax obligation rather than the pretax profit.

Excluding taxes offers managers and stakeholders another way to analyze margins. A PBT margin will be higher than the net income margin, because tax is not included. The difference in PBT margin vs. net margin will depend on the amount of taxes paid.

Also, excluding income tax isolates one variable that may have a substantial impact for a variety of reasons. For instance, C corporations pay a federal tax rate of 21%. However, different industries may receive certain tax breaks, often in the form of business tax credits, which can influence the tax impact overall. Renewable energy is one example. Wind, solar, and other renewables can be subject to an investment tax credit and a production tax credit. Comparing PBT in companies with [renewables](https://www.investopedia.com/terms/r/renewable_resource.asp) can give a more accurate view of profitability.

## Comparing EBIT, EBT, and EBITDA: Key Distinctions

Working down the income statement provides a view of profitability with different types of expenses involved. EBIT, which as noted above is operating profit, is a measure of a company’s full operational capabilities. This includes the direct COGS involved with manufacturing a product and the indirect operating expenses, which are associated with the core business but not directly tied to it.

PBT is a part of the final steps in calculating net profit. It deducts interest from EBIT. This arrives at the taxable net income for a company.

Interest itself is often an indicator of a company’s capitalization structure. If a company has been financed with a high amount of debt, it will have higher interest payments to make. EBIT is often the best measure of full operational capabilities, while the differences in a company’s EBIT and PBT [will show its debt sensitivity](https://www.investopedia.com/ask/answers/030915/how-ebit-breakeven-affected-leverage-and-financing-plans.asp).

[Earnings before interest, tax, depreciation, and amortization (EBITDA)](https://www.investopedia.com/terms/e/ebitda.asp) is an extension of the [usefulness of EBIT as an operational profitability and efficiency measure](https://www.investopedia.com/ask/answers/032715/what-difference-between-ebitda-margin-and-profit-margin.asp). EBITDA adds the noncash activities of depreciation and amortization to EBIT. Many analysts find EBITDA to be a very quick way to assess a company’s [cash flow and free cash flow](https://www.investopedia.com/ask/answers/111314/whats-difference-between-free-cash-flow-and-operating-cash-flow.asp) without going through detailed calculations. EBITDA, like EBIT, is before interest and tax, so it is readily comparable. Many types of [multiples comparisons](https://www.investopedia.com/terms/m/multiplesapproach.asp) will use EBITDA because of its [universal usefulness in valuing companies](https://www.investopedia.com/articles/fundamental-analysis/11/valuing-private-companies.asp). Comparing [enterprise value (EV)](https://www.investopedia.com/terms/e/enterprisevalue.asp) to EBITDA is one example. 

## Is EBT the Same As PBT?

Yes. EBT is often referred to as PBT. It is also called “pretax income.”

## What Is the Difference Between PBT and Taxable Income?

PBT is a company’s profits before considering tax obligations. It is found on the income statement as operating profit less interest. On the other hand, taxable income is the amount of income that is subject to taxes, depending on the tax laws in a company’s jurisdiction.

## What Is the Difference Between PBT and EBITDA?

While PBT shows a company’s profits before taking into account its tax costs, EBITDA includes noncash activities, such as depreciation and amortization. In this way EBITDA is used as a measure for profitability, but critics have said that it is less reflective of a company’s performance, as it leaves out important aspects. Showing EBITDA vs. net income can make a company look more attractive, but it may be less indicative of a company’s overall performance, as it ignores the company’s asset costs.

## The Bottom Line

Profit before tax (PBT) is derived by subtracting interest payments from operating profit and adding any interest earned, offering an essential step toward calculating net profit by isolating the influence of taxes. Although not a standard key performance indicator, PBT provides valuable insights into cost efficiency by highlighting the tax impact on company margins. Analyzing PBT alongside net margin enables stakeholders to understand how tax obligations affect profitability, empowering more informed financial decision-making.

> **Article Sources**
>
> 1.  Harvard Business School. "[How to Read and Understand an Income Statement](https://online.hbs.edu/blog/post/income-statement-analysis)."
>     
> 2.  Tax Policy Center. "[How Does the Corporate Income Tax Work?](https://www.taxpolicycenter.org/briefing-book/how-does-corporate-income-tax-work)"
>     
> 3.  Tax Policy Center. "[What Are Pass-Through Businesses?](https://www.taxpolicycenter.org/briefing-book/what-are-pass-through-businesses)"
>     
> 4.  Internal Revenue Service. "[Business Tax Credits](https://www.irs.gov/businesses/small-businesses-self-employed/business-tax-credits)."
>     
> 5.  Internal Revenue Service. "[Clean Energy Tax Incentives for Businesses](https://www.irs.gov/pub/irs-pdf/p5886.pdf)."