Thursday, December 8, 2022

What’s After Tax Operating Income: The Ultimate Guide

What is After Tax operating Income

During his book Profit From the Surface, Jim Rohn offered the following definition of profit: “Making a profit means that after you do all the work, you’re still ahead.” Rohn’s story illustrates that one must reinvest the gains into the business to further grow.

In order to grow profit, a company needs a solid operating model, a comprehensive strategy, and excellent talent. However, these elements alone do not enable you to achieve the level of profit that you want to achieve. In order to make a profit, your assets must bring income, or else they are just sitting on your balance sheet. Let’s take a look at some elements of profitability:

Losses are What Determine Profits

If you have losses, you are not making money.

What does it need to be reported as?

1. The Standard Deduction

The standard deduction is the only deduction a taxpayer can claim, regardless of income, that’s lower than the itemized deductions they choose. The standard deduction is currently set to $6,350 for single filers and $12,700 for married couples filing jointly. It’s the largest tax deduction available to taxpayers.

2. The Personal Exemption

The personal exemption is a tax break that many people ignore because it’s too easy to exceed and overpay. The personal exemption reduces the amount of taxable income, so people who fall short of the standard deduction must itemize to claim the personal exemption. The personal exemption is only $4,050 for single taxpayers and $9,550 for married couples filing jointly in 2018.

How to calculate after tax operating income

Here’s what your operating income after tax should be based on:

A CapEx budget of about 10% of sales.

An average of 5% for R&D and marketing spending.

A good way to calculate after tax operating income is to look at your average annual sales to get to 10%. Then calculate your sales tax rate. Divide that by the sales tax you paid the year before. You’ll get that sum of sales taxes paid over the last year. Divide that sum of taxes by your sales to get your average after tax sales figure.

Or you can do this using dollar amounts instead of sales. Make that amount of money the average sales for your company over the last 12 months.

Get a feel for your local tax rate using this table from Tax Foundation:

One important point is that sales tax is only an expense in certain states.

Earnings per share

This is usually the number that investors care about. Some people like earnings per share, and they are critical of companies that have fallen short. Some investors like earnings growth, and others are concerned about their companies failing to grow earnings. For more on that, see “Is Earnings Growth Worth Worrying About?”

I am concerned about earnings growth. I worry about it because I think it’s possible that the economic expansion might go on for longer than most people expect. In recent years, growth of nominal GDP (gross domestic product) has been very low. This is the problem. Real GDP (which takes inflation into account) hasn’t grown at all.

I’m also concerned about the most important fundamental measure of the health of the economy, the unemployment rate.

What is the difference between EBIT and EBITDA?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization, adjusted for certain items.

equals net income before income taxes, plus depreciation and amortization, but only with respect to continuing operations.

EBITDA, on the other hand, represents the income from continuing operations before interest, taxes, depreciation, and amortization, plus certain other items.

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