ETA Modeling: Incorporating Taxes, Should I and How?

December 20, 2024

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Mesa, AZ, USA

Hello again ETA amigos!

How should taxes be used in a ETA model? or should they be used at all?

I am building a model to use as gauge on deals. My model is structured as a pass through entity, 100% ownership and funded by an SBA loan. It's purpose is show me future cash flows in consideration of past discretionary earnings and the debt burden. Currently I have taxes deducted based on estimated taxable income and tax rate bases on that estimated income.
Should taxes even be considered in this way? I have many little dependents, so my actual tax owed is not as straight forward and applying a standard tax rate to an income. So, should taxes I might have to pay while owning a business be taken out of the equitation? Why and why not?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

You should definitely factor taxes into your analysis. However, most of these businesses are operated as S-Corps or LLC's, which mean the taxes pass through to the owner(s) individually. Because of that the amount of tax that will need to get paid will highly depend on each individual owner's income situation. Also, keep in mind you can adjust taxable profit using depreciation, amortization, and interest expense. So some of the cash flow will not be taxable at the end of the day. There is no 100% uniform way to do the analysis because it is based on each individuals own tax bracket.

The way SBA lenders typically look at taxes is they look at the historical tax bracket the owners have had and factor in what they expect they will pay in taxes after debt service going forward. They then be sure there is adequate cash flow globally, including cash flow from outside income, the business, any salary from the business, etc. to cover that expense.

Now if you have a C-Corp, you 100% have to factor the taxes in at the corporate level. Lenders will typically use the corporate tax return against projected profit after removing projected depreciation, amortization, and interest expense. The lender will likely need your or your accountants assistance in projecting what anticipated depreciation or amortization will be post-closing.

If you have additional questions you can reach me here or directly at redacted Good luck!

Reply by an investor
from Columbia University in Salt Lake City, UT, USA

For personal use, it makes sense to include taxes, but for wider distribution, you can stop at EBITDA. I’ve found that the best way to incorporate taxes is on my personal budget each year. A lot depends on your situation and tax bracket. For example, if you buy an investment property on the side and do a cost segregation study, your taxes for that year will be completely different. Overall, I’d come up with a simple percentage between 20 and 30% as an estimate for taxes.

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