Month: September 2022

These are uncertain times for stock market investors. All three major stock market indices are in the midst of a correction. Adding more risk to the global economy is the ongoing coronavirus pandemic.

In fact, Wall Street’s fear index hit its apex of 83 during March. This was even higher than the peak during the Great Recession in 2008. With so much uncertainty on Wall Street, it is more important than ever to review a company’s fundamentals.

One of the best indicators of corporate strength is earnings before interest and taxes, also called EBIT. Read on to learn how to calculate this earnings metric. Explore related topics like its definition and why this metric is so important.

What Is the Definition of EBIT?

Earnings before interest and taxes are a means to determine a company’s profitability. More specifically, the metric places emphasis on the company’s operating profit.

It achieves this focus by removing non-operating expenses. These include interest charges and taxes assessed by federal and state governments.

How to Calculate EBIT

The calculation is fairly simple to understand. There are two different ways to calculate earnings before interest and taxes.

For the first method, the starting point is quarterly or annual revenue. You can find this figure on a revenue statement. Next, subtract the cost of goods sold and any operating expenses.

The second method begins with net income. This figure can be found on an income statement. Then you simply add interest charges and taxes assessed.

Why Is EBIT Valuable?

The earnings before interest and taxes metric are a valuable tool in the business community. Ease of calculation is one of the primary reasons that experts use it. You can quickly assess a company’s operating profitability using addition or subtraction.

All you need is a few reporting figures that are readily available on basic financial documents. Another reason for its popularity is that it allows for apples-to-apples comparison. The financial data is normalized by focusing only on the business’s operations.

For investors and entrepreneurs, they can now compare different companies against each other. Tax policy can change depending on the political party winning elections. A politician may increase taxes only to be replaced years later by a tax-friendly administration.

Therefore, taxes may cloud the results of your financial assessment. A low tax rate could mask operational issues if you do not perform an EBIT calculation.

The bottom line is that earnings before interest and taxes allow you to assess a company’s profitability. Does the company earn enough money to be profitable? Can they continue to fund their business?

What Is an Example of Using EBIT for Comparative Purposes?

Now we will help you understand the value of comparing companies using earnings before interest and taxes. This metric normalizes data for companies with a high proportion of debt. Many people think of debt in a negative light.

However, in the business world, debt is a necessary evil, especially in certain industries. Some industries, such as energy, depend on debt in order to succeed. They finance large facilities and equipment such as processing facilities or oil rigs.

These items cannot easily be purchased with cash assets. Instead, they are financed, and the price of these fixed assets is spread out over a loan term. The result is high-interest expenses.

The interest is pivotal to the long-term survival of the business. These energy companies purchase new equipment and physical property as their output grows. Comparing the net income of ExxonMobil to an entertainment company is not a good analysis. Instead, you can remove interest expenses and focus on operating earnings.

What Is EBITDA?

There is a variation of the EBIT calculation that goes one step further. Known as EBITDA, this equation makes an adjustment for depreciation and amortization. Continue reading on for a brief explanation of these two adjustments:

Depreciation

Depreciation is a reduction in asset value over time. Capital equipment is subjected to wear and tear, which results in a reduced appraisal value. Like interest expenses and taxes, depreciation is easy to find. It is reported on a company’s income statement.

Because no cash is transferred when an asset depreciates, it is listed as a non-cash expense. As discussed earlier with energy companies, many industries rely on capital equipment to operate. They incur significant expense to purchase it.

However, physical property and equipment retain residual value. They are assets to the company and can be resold at the depreciated price.

It would not portray an accurate representation of the company’s earnings to fully expense physical property and equipment. Instead, companies spread the expense out over several years and consider it depreciation.

Amortization

The next adjustment is referred to as amortization. This is another non-cash expense like depreciation. Amortization is an accounting technique that is used to write down the value of a loan or physical asset.

Here, you amortize the expense over the life of the asset. This is another technique that increases profitability. Adjusting for amortization gives financial experts an even closer look at operating profit.

Amortization sounds very similar to depreciation and is calculated the same way. One difference is that amortization is used on more items than just physical property or equipment. It can be used on items like a patent or copyright.

Are There Any Concerns with Using These Metrics for Calculating EBIT?

It would be ill-advised to solely using one of these financial metrics. First off, neither metric is recognized as a Generally Acceptable Accounting Principles (GAAP).

Next, each one is subject to manipulation. This is not intended to dissuade you from using earnings before interest and taxes. Instead, you should use it in conjunction with other metrics like free cash flow and net income.

What Comes Next?

EBIT is a valuable calculation used to review businesses of any size. It allows for laser focus on a company’s operating profit. It makes adjustments for items that can skew a financial analysis, like interest and taxes.

If you have any questions about EBIT, contact us today for additional guidance.

As an employer, you have to deal with a lot of different taxes, from income tax to Social Security, and Medicare. Now, you probably already know the basics of those tax rates.

But you shouldn’t forget about the FUTA tax rate, especially if you have multiple employees. FUTA tax is just as important as other taxes, but it can be confusing.

So, keep reading to learn about the FUTA tax rate and other essential facts.

What is FUTA Tax?

FUTA tax comes from the Federal Unemployment Tax Act (FUTA), which determines where the money goes to cover the cost of unemployment insurance.

As an act, FUTA requires employers to pay taxes on employee earnings. Employees don’t have to pay the tax, but employers will use employee paychecks to determine how much money to pay towards their FUTA tax.

Businesses can expect to pay a tax at the federal level, and some states also tax businesses to cover unemployment.

What Does FUTA Tax Do?

The FUTA tax helps the country and individual states fund unemployment accounts. Whenever an employee files for unemployment, the money has to come from somewhere.

By taxing businesses on their employees, the government can have more money to pay out to people who qualify for unemployment. Without the FUTA tax, states would have to find other ways to pay unemployed workers.

Some states may need to raise income taxes or sales taxes to cover the cost. But the benefit of the FUTA tax is that it doesn’t affect just anyone. Since businesses pay the tax on their employees, it can save consumers money while still funding unemployment benefits.

What is the FUTA Tax Rate?

If you own a business with employees, you most likely need to pay the FUTA tax. But even if you don’t have to pay it, you may want to know the FUTA tax rate. As of 2020, the rate is 6 percent on the first $7,000 that a single employee earns. After that point, the employer won’t have to pay more in taxes.

Keep in mind that the FUTA tax rate is per individual employee. So, a business with 100 employees would have to pay the tax for those 100 people. And if all 100 earned at least $7,000, the business would have to pay the full amount for the tax on each worker.

However, employers can take a credit against the FUTA tax, which is 6.4 percent. The credit will then reduce the out-of-pocket cost to 0.6 percent.

Who Pays the FUTA Tax?

The majority of employers have to pay FUTA tax, but you have to meet certain conditions. Because of this, some smaller employers may not need to pay the tax. If you paid at least $1,500 in payroll wages during a single quarter during 2018 or 2019, you need to pay the FUTA tax.

You also need to pay the tax if at least one employee worked for a small part of the week for at least 20 weeks in 2018 or 2019. It doesn’t matter if the employee was permanent or temporary, and/or it doesn’t matter if they were full-time or part-time. If you have household workers or farm employees, you may also need to pay the FUTA tax.

How Do You Pay the FUTA Tax?

If you find that you need to pay the FUTA tax rate, you will need to fill out Form 940. The form asks for information about wages that you paid and the wages that you don’t have to pay the tax on. You only need to make a payment once the amount reaches $500, and you can pay the tax quarterly.

If you have to pay $300 each quarter, you will roll over from the first quarter to the second quarter. The second quarter would exceed the $500 threshold, so you would need to pay the tax then.

You can make the payments through the Electronic Federal Tax Payment System (EFTPS), and you can connect a business account so that the IRS can automatically debit the payment amount.

When Do You Pay FUTA Tax?

You can pay the FUTA tax rate as soon as you reach the $500 threshold. If you don’t reach that amount during the year, you can pay at the end of the year. In most cases, you should make the payment before you file your taxes. But if you only need to make one payment, you may be able to wait.

You also want to make sure to file Form 940 by January 31st. If you pay the taxes early, you will have until February 10th. Whenever you need to pay, you can do so on a business day or a weekend or holiday. If you pay on a weekend or holiday, make sure that you do so before the last business day for the quarterly payment.

Who Benefits from the FUTA Tax Rate?

The FUTA tax benefits anyone who ever needs to collect unemployment. It also benefits states that wouldn’t otherwise have the money to pay for unemployment. If a worker loses their job and qualifies for unemployment, they can get the benefits without the state having to worry.

Even if an employee never needs the payments, it can give people more peace of mind to know the money is there. Now, the FUTA tax rate does NOT benefit workers who leave their jobs voluntarily. It only applies to people who qualify for unemployment.

What Exemptions Are There?

While a lot of employers will have to pay the FUTA tax, some may qualify for an exemption. For one, if you hire local employees and they work abroad, you won’t have to pay the tax. The same is true for non-resident employees who work out of the country, even if the company is from the United States.

If a local employee or a non-resident employee work in the home or on a farm, the employer won’t have to pay the FUTA tax. Religious and other tax-exempt organizations are also exempt from this tax.

Need Help with More Than the FUTA Tax Rate?

Paying the FUTA tax can add up, especially if you have a lot of employees. Whether you employ 10 people or 1,000 people, you should know the FUTA tax rate. If you realize that you can’t afford to pay it, you should find help.

You can also apply for a loan to cover FUTA taxes. You can learn more about it and see how our funding works to get help today!