EBITDA Calc --> Include Section 179 bonus depreciation?

January 28, 2022

by a searcher from University of Virginia in Red Bank, NJ, USA

I'm looking at a target's tax return and I'm trying to calculate the correct amount of depreciation to add back for EBITDA. While this is typically straight forward, I'm a little confused by whats deductible on the entity return (1120S) vs the K-1 and how it would impact SBA underwriting.

Scenario: Service based business; depreciate assets are exclusively trucks/autos
Entity: Single member S-Corp. Owner (seller) gets receives the only K-1.

I'm looking at tax returns and I'm seeing a depreciation amount on page 1 of the entity return (1120S). Pretty straight forward that this amount is added back to the Ordinary Business Income. However, I'm only seeing the additional Section 179 bonus deduction on the K-1.

Since this impacts taxes (thus owner Cash Flow), should I be adding this back to my EBITDA calculation?

Similarly, I'm seeing different amounts for "Officer Compensation" on the 1120 and "W-2 Wages" on Schedule A of the 199a and I'm not sure why or how to think about the two.

Trying to wrap my head around these and I'd welcome any thoughts. Thanks!

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

Warren Buffett says, “People who use EBITDA are either trying to con you or they’re conning themselves.” Charlie Munger, Buffett’s right-hand man, goes even further: “I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit’" Strong words from some of the most successful businessmen on the planet.

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

I'll start with the disclaimer -- I'm not a CPA and look forward to their comments/corrections.Section 179 expense deductions are not treated as an expense on page 1 of the 1120s.Therefore, since it isn't an expense that reduced the net income, it isn't added back to the net income to arrive at EBITDA.Similarly to how a charitable contribution that you may see on the internals is not added back when looking at an s-corp tax return (it isn't an expense that flows through the tax return's P&L in the first place).However, Section 179 expenses do inform about capex.On the comp question, the 1125-E shows what they were paid and should reconcile to the W-2.The 199a is for tax calculations and goes through several steps and criteria that impose limitations -- no need to try to compare the two.But, the owner's W-2 itself is a treasure trove of information.

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