How does your company classify franchise taxes and gross receipts taxes on the income statement (other expenses included in EBITDA or below the line in income taxes? Our auditors want us to reclassify these into EBITDA but GAAP does not require it. We would like examples of what other companies do. Thanks!
How does your company classify franchise/gross receipts tax
Answers
I have placed franchise taxes below the line, it is an income
Other fees paid to governments are above the line (like building fees, etc.), which also provide income for the state, but are called "fees", not "tax".
We list franchise and gross receipts tax in EBITDA since it operates like a sales tax, in the fact that you pay it whether you make money in the period or not. I have never seen a company carve sales tax out of their operating expenses.
1
It seems different states use Franchise taxes differently.
In addition, if a tax was on Gross Sales (and the company did not collect tax from their clients to pay said tax) I would deem it Income Tax.
Thank you for your answer. I appreciate it.
One correction: GAAP helps with financial reporting structure. EBITDA is really outside GAAP. I'm curious about the circumstances under which your auditors are driven to worry about EBITDA. Do you have loan covenants that require you to report EBITDA, thus making them a concern for the auditors?
If that's the case, your best bet, it seems to me, is to go to the lender and find out where they want to see franchise tax. If their expectation is that it be included in EBITDA, that's how I'd report it. If not, I'd leave it out.
We treat it similarly to Wayne, as an income tax. We also have EBITDA defined with the users of our statements so they know what is included. Since it's not a GAAP measure, there can be variances to what is included or excluded.
Filed Under:
Accounting