Pretax Income

Pretax income sits near the bottom of the income statement. It is calculated by starting with revenue, subtracting cost of sales and operating expenses to reach operating income, then adding or subtracting non-operating items such as interest income, interest expense and investment gains or losses.

For example, a company with operating income of 2 million, interest expense of 300,000 and interest income of 50,000 has pretax income of 1.75 million.

Income tax expense is then deducted from pretax income to arrive at net income.

Pretax income is useful for comparing companies that face different tax rates, because it removes the effect of tax differences. It is also the starting point for calculating a company's effective tax rate: income tax expense divided by pretax income.

Pretax income differs from EBIT because it is calculated after interest. A company with a lot of debt will have a larger gap between EBIT and pretax income than a similar company with little debt.