Property taxes are included in EBITDA as an operating expense, not added back. The “T” in the formula refers only to income taxes on profits. Property taxes reduce the final EBITDA figure and stay there, sitting alongside rent, utilities, insurance, and other routine costs of running the business.
Why Property Taxes Stay Inside EBITDA
A property tax is a cost of occupying real estate, not a tax on earnings. The bill is based on the assessed value of the land and buildings a company owns, and it comes due whether the business turns a profit or posts a loss. That is why accounting treats property taxes as a routine operating expense rather than a profit-based tax.
On the income statement, property taxes are subtracted above the operating income line, together with other occupancy costs. By the time you get to net income and start building EBITDA back up, property taxes have already reduced the number. Adding them back would erase a real, recurring cash cost that any property-owning business must pay to keep operating.
The SEC has cautioned that stripping normal, recurring cash operating expenses out of a non-GAAP metric like EBITDA can make the measure misleading.1U.S. Securities and Exchange Commission. Non-GAAP Financial Measures Property taxes fit that description directly. They are predictable, mandatory, and tied to the physical space where the business generates revenue.
What the “T” in EBITDA Actually Covers
The “T” is income taxes only. That means the federal, state, and local taxes a business pays on its net profits. The federal corporate rate is a flat 21%, and state corporate income taxes generally run from about 1% to 10% in states that impose them. These taxes get added back in EBITDA because they measure what the government takes from profits, not how efficiently a business runs.
Income taxes swing with things that have nothing to do with operations: credits, loss carryforwards, changes in law, and differences among state tax codes. Stripping them out lets an analyst compare a business in a no-income-tax state with an identical competitor in a high-tax state. Property taxes work nothing like that. They are assessed on asset values by local authorities and owed on a fixed schedule regardless of profitability, so keeping them in EBITDA preserves the metric’s meaning as an operational measure.
A Worked Example
Take a manufacturer with this simplified income statement:
- Revenue: $5,000,000
- Cost of goods sold: $2,500,000
- Property taxes: $75,000
- Other operating expenses (rent, utilities, salaries): $1,200,000
- Depreciation: $150,000
- Amortization: $50,000
- Operating income: $1,025,000
- Interest expense: $100,000
- Income tax expense: $194,250
- Net income: $730,750
Start with net income and add back interest, income taxes, depreciation, and amortization:
$730,750 + $100,000 + $194,250 + $150,000 + $50,000 = $1,225,000
The $75,000 in property taxes never comes back. It reduced revenue on the way down to operating income and stays reduced in the final EBITDA figure. If you mistakenly added property taxes back, you would report $1,300,000, overstating operational performance by roughly 6%.
How GAAP Separates the Two Taxes
The accounting standards keep property taxes and income taxes in different codification topics, which is what puts them on different lines of the income statement. Real and personal property taxes fall under FASB ASC 720-30, which addresses when to record the liability and how to spread the cost across periods. Income taxes fall under FASB ASC 740, which governs taxes based on earnings.2Financial Accounting Standards Board. Improvements to Income Tax Disclosures (Completed Project Summary)
The practical result: property taxes sit above the operating income line with other business costs, while income tax expense sits below it. That placement is what keeps property taxes inside EBITDA and moves income taxes outside it.
Adjusted EBITDA and the SEC’s Guardrails
Companies often report “adjusted EBITDA” alongside the standard figure, adding back items they consider non-recurring or non-operational. The SEC allows this but sets limits. Under Regulation G and Item 10(e) of Regulation S-K, a non-GAAP performance measure that strips out normal, recurring, cash operating expenses can be considered misleading.1U.S. Securities and Exchange Commission. Non-GAAP Financial Measures
Property taxes are plainly normal and recurring for any business that owns real estate. Adding them back into adjusted EBITDA risks misrepresenting operational cash flow. Where property costs do show up as adjustments, it is usually in the context of below-market rent, such as when an owner-operator charges the business less rent than the property would command on the open market and the adjusted figure reflects what a buyer would actually pay.
The SEC also treats “earnings” in EBITDA as GAAP net income. Any calculation that departs from the standard four add-backs must be labeled something other than “EBITDA,” such as “Adjusted EBITDA.”1U.S. Securities and Exchange Commission. Non-GAAP Financial Measures
EBITDAR Is the Metric That Excludes Property Costs
If you are looking for a measure that removes property-related costs, that is EBITDAR, not EBITDA. EBITDAR stands for Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent (or Restructuring costs). It is common in retail, hospitality, airlines, and healthcare, where facility costs vary widely and companies want to compare owned versus leased operations on the same footing.
In many commercial leases, particularly Triple Net (NNN) leases, the tenant pays real estate taxes, building insurance, and maintenance on top of base rent. When property taxes are bundled into lease payments this way, adding rent back in EBITDAR effectively removes them. For a company that owns its property, an analyst using EBITDAR would separately add back property taxes and related occupancy costs to reach a comparable figure.
Outside of industries with heavy real estate exposure, standard EBITDA, with property taxes still included, remains the more widely used metric.
Business Personal Property Taxes Follow the Same Rule
Property taxes are not limited to land and buildings. Many states also tax tangible personal property used in a business: equipment, machinery, furniture, computers, and vehicles. These personal property taxes are assessed on asset values rather than on profits, and they get the same EBITDA treatment as real estate taxes. They reduce EBITDA and are never added back.
Rules vary widely by state. Roughly a dozen states impose personal property taxes with de minimis exemptions, with thresholds that range from as low as $1,000 to as high as $1,000,000 in taxable asset value. Many other states exempt tangible personal property from taxation entirely. Where the tax applies, businesses typically file an annual rendition listing their taxable assets and estimated values.
The takeaway for EBITDA is the same as with real estate taxes: personal property taxes are an operating cost tied to owning assets, not a tax on income. A capital-intensive business with significant equipment holdings may see personal property taxes meaningfully reduce its reported EBITDA compared with a competitor that leases the same equipment.