Which taxes do you add back and which do you not for EBITDA?

June 28, 2023

by a searcher from Purdue University in Mason, OH, USA

While looking through CIMs, I see EBITDA calculated a few different ways with respect to taxes and wondered how you all approach it and what's appropriate?

I've seen payroll tax added back to EBITDA, for example, which feels inappropriate to me. Payroll tax is essentially a required cost for any employee so I'd think of it more as COGS or OpEx. What do you think?

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

I would concur with most of what has been said. As for income taxes, it depends on the type of company. If it is a C-Corp, then you would need to factor something in for on-going taxes based on future projected profits. But in general, most small businesses are not C-Corps. Because the taxes are then taken personally in the case of an S-Corp or LLC, you need to think about potential taxes going forward but typically they do not get weighed into the cash flow.

If there are local income or franchise taxes the business has to pay, and you are not moving that business, then you cannot add back those taxes. You have to assume you will still need to pay those taxes. If you are moving the business to a state that does not have those taxes, then you can add them back.

If it is real estate taxes and you are not buying the property, then you can add back real estate taxes so long as the new lease is not triple-net and does not require you to pay the real estate taxes going forward. But even if the lease is not triple-net, you would need to adjust the rent expense to take into account the new rent, which would have you adding back the old rent and removing the new proposed rent.

Payroll taxes can be added back if you are adding back seller's salaries and related family member salaries. However, you would then need to adjust payroll taxes for any new salaries you need to add for either replacement employees or for your own salary for running the business.

Hopefully this helps. If you have other specific questions, we are happy to answer those. You can reach me here or directly at redacted Good luck.

Reply by a searcher
from University of Maryland at College Park in Frederick, MD, USA

In general, expenses are added back to income when the expense is a discretionary expense for the benefit of the owner and is not ordinary or necessary in the industry. For instance season tickets to an NFL team is generally not ordinary or necessary in business. Often this is a way for the owner to indulge in a personal passion and enabling a write off for some of the expense. Similarly, I would only allow a tax addback if the tax were the owners personal income taxes paid by the business or were property taxes for real property that is not being purchased in the deal or NNN rented by the new owner. Hope this helps.

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