Gross profit, operating profit, and net profit are different measures of a company's profitability. Gross profit is what a company makes after deducting the direct costs (cost of goods sold, or COGS) associated with producing goods or services, such as raw materials, direct labour, and manufacturing overhead. Operating profit is what a company makes after deducting both COGS and operating expenses such as rent, salaries, marketing, research and development (R&D), and depreciation. Net profit is what a company makes after deducting all expenses including COGS, operating expenses, interest payments, and sometimes taxes.
Profit margin, which expresses profit as a percentage of revenue rather than as a dollar amount, works similarly. Because profit margin is calculated by dividing profit by revenue, whether tax is factored in depends on which margin you're looking at. Gross margin and operating margin are both calculated before tax, while net margin is calculated after tax.
Net profit represents a company's "bottom line" and it's the most important measure of profitability. It shows how much money is left over for shareholders after the company has met all of its obligations. Below, we'll explain the differences between net profit before tax (PBT) and net profit after tax (NPAT).
What's in this article?
- Types of measures of a company's profitability
- What is net profit before tax?
- How to calculate net profit before tax
- What is net profit after tax?
- Net profit vs. net income
- Net operating profit after tax (NOPAT) vs. net income
- How to calculate net profit after tax
- How to manage taxes to maximise net profit
- How Stripe Tax can help
Types of measures of a company's profitability
Gross profit, operating profit, and net profit are distinct financial metrics. Here's what to know about each.
|
Profit measure
|
What's deducted
|
What it shows
|
|---|---|---|
| Gross profit | Direct costs of producing goods or service or COGS (e.g., raw materials, direct labour, manufacturing overhead) | How efficiently a company produces its goods or services, before accounting for overhead |
| Operating profit | COGS, plus operating expenses (e.g., rent, salaries, marketing, R&D, depreciation) | How profitable a company's core business operations are, before financing costs and taxes |
| Net profit | COGS, operating expenses, interest payments, and (depending on the measure) taxes | The company's bottom line or how much is left over for shareholders after all obligations are met |
What is net profit before tax?
Net profit before tax – also known as earnings before tax (EBT) or pretax profit – is a measure of a company's profitability that shows how much profit it's generated before income taxes are deducted.
PBT is an important metric for several reasons:
Comparison: It removes the impact of varying tax rates and enables comparison of a company's profitability across different tax jurisdictions.
Performance analysis: PBT assesses a company's core operational performance before the influence of tax policies (tax rates, credits, and one-time tax events can vary widely from period to period). Isolating profit this way makes it easier to compare operating performance across periods or against other companies and ensures tax-related swings don't conceal how the underlying business is actually doing.
Tax impact: When PBT is compared with NPAT, it can show how much tax a company pays and its impact on overall profitability.
How to calculate net profit before tax
To calculate PBT, subtract all expenses except for income taxes from a company's revenue, including:
COGS: The direct costs of producing goods or services
Operating expenses: Costs not directly tied to production, such as rent, salaries, and marketing
Interest expenses: The cost of borrowing money
Here's one way to calculate PBT:
PBT = Operating Profit - Interest Expenses
And here's another way:
PBT = Total Revenue - COGS - Operating Expenses - Interest Expenses
Sample calculation
If a company has US$100,000 in total revenue, US$50,000 in COGS, US$20,000 in operating expenses, and US$5,000 in interest expenses, here's how to find its PBT:
PBT = US$100,000 - US$50,000 - US$20,000 - US$5,000 = US$25,000
What is net profit after tax?
Net profit after tax, also known as net income or the bottom line, is the final measure of a company's profitability after all expenses have been deducted from revenue – including taxes.
NPAT is the most important measure of a company’s financial performance because it shows how much profit is available to be distributed to shareholders or reinvested in the business. A high NPAT indicates that a company is profitable and financially healthy.
Investors and analysts use NPAT to evaluate a company's financial performance and make investment decisions. Lenders also use NPAT to assess a company's credit.
Net profit vs. net income
In practice, "net profit" and "net income" are generally used interchangeably. That said, the two terms aren't always applied with perfect consistency: net income almost always refers to the after-tax figure, while net profit is sometimes used more loosely to mean the before-tax figure. This is exactly why the more precise terms "net profit before tax" and "net profit after tax" exist; they remove any ambiguity about which figure is being discussed.
Net operating profit after tax (NOPAT) vs. net income
NPAT is sometimes confused with a related but distinct metric: NOPAT. NOPAT excludes the impact of a company's capital structure, showing what its profit would look like if it carried no debt. This is useful for evaluating core operating efficiency independent of financing decisions.
NPAT, by contrast, includes interest expenses along with every other cost of doing business, reflecting the actual profit available to shareholders once all obligations are paid. As a result, analysts often use NOPAT to compare operating efficiency across companies with different debt loads, while relying on NPAT for a true picture of overall profitability.
How to calculate net profit after tax
To calculate NPAT, subtract all expenses from revenue including tax. This is the formula for calculating NPAT:
NPAT = Total Revenue - COGS - Operating Expenses - Interest Expenses - Taxes
Sample calculation
If a company has US$100,000 in total revenue, US$50,000 in COGS, US$20,000 in operating expenses, US$5,000 in interest expenses, and US$5,000 in taxes, here's how to find its NPAT:
NPAT = US$100,000 - US$50,000 - US$20,000 - US$5,000 - US$5,000 = US$20,000
How to manage taxes to maximize net profit
Companies can use the following strategies to reduce their tax obligations and maximise net profit.
Intentional entity structuring
Choice of entity: The legal structure of your business – for example, sole proprietorship, partnership, limited liability company (LLC), S corporation (S corp), C corporation (C corp) – has important tax implications.
Multiple entities: Consider using multiple entities for different business activities. This can help isolate risk and improve tax benefits based on the nature of each activity.
Hybrid entities: Explore hybrid structures that combine elements of different entities, such as an LLC that's taxed as an S corp. This can offer the liability protection of an LLC with the tax advantages of an S corp.
Tax-advantaged investments
Retirement accounts: Maximise contributions to US tax-advantaged retirement accounts such as 401(k)s, individual retirement accounts (IRAs), and Simplified Employee Pension IRAs (SEP-IRAs) to defer income taxes and potentially lower your tax bracket.
Health savings accounts (HSAs): If eligible, contribute to a US HSA for tax-deductible healthcare expenses, with potential for tax-free growth and withdrawals for qualified medical costs.
Municipal bonds: Consider investing in municipal bonds, which offer tax-exempt interest income.
Deduction strategies
Accelerated depreciation: Use methods such as Section 179 deductions and bonus depreciation to write off the cost of assets more quickly, reducing taxable income in the short term
R&D tax credit: If your business engages in qualifying R&D activities, take advantage of any available R&D tax credits at the federal and state levels
Cost segregation: With real estate investments, use cost segregation studies to reclassify property components for faster depreciation and potential tax savings
International tax planning
Foreign tax credits: If your business operates internationally, use foreign tax credits to offset US taxes on income earned abroad
Transfer pricing: For multinational companies, establish appropriate transfer pricing policies to allocate income and expenses among different entities in different tax jurisdictions
Estate and gift tax planning
Trusts: Use trusts to transfer assets and reduce estate and gift taxes. Different types of trusts offer varying tax benefits and amounts of control over assets.
Annual gifts: Employ annual gift tax exclusions to transfer funds to family members tax-free during your lifetime.
Tax loss harvesting
- Capital losses: Sell investments that have incurred losses to offset capital gains, reducing your overall tax liability.
How Stripe Tax can help
Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).
Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the Dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, value-added tax (VAT), and goods and services tax (GST) on:
Digital goods and services in all US states and over 100 countries
Physical goods in all US states and 42 countries
Stripe Tax can help you:
Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.
Register to pay tax: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You'll benefit from a simplified process that prefills application details – saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.
Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.
Simplify filing: Stripe Tax automates US filings in the Dashboard, powered by TaxJar. For global filings, Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.
Learn more about Stripe Tax or get started today.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.