U.S. Corporate Profits Under Pressure Unveiling the Deep Secrets of Pre-Tax and Net Income

When American Companies Face Profit Challenges Uncovering the Secrets Behind Earnings Before Tax and Net Income

In recent years, global economic uncertainty has continued to intensify, particularly against the backdrop of high inflation, supply chain disruptions, and rising interest rates. American companies are generally facing unprecedented profit pressures. During the Q1 2025 earnings season, financial reports from many large listed companies revealed that while revenues have increased, profit margins have significantly declined. Behind this phenomenon lies the difference between earnings before tax EBT and net income-an essential key to analyzing a company's true profitability.

I. Basic Concepts of EBT and Net Income

Before understanding changes in corporate profits, it is important to clarify two core concepts Earnings Before Tax EBT and Net Income.

EBT refers to a company’s profitability after deducting all operating costs and interest expenses but before paying income taxes.

Net income, on the other hand, represents the final profit attributable to shareholders, calculated after all expenses and taxes have been deducted.

While closely related, these two metrics reflect a company’s performance at different stages. Especially amid fluctuating tax rates and frequent policy adjustments, the gap between them often reveals a company's tax planning capabilities and the overall tax burden within its industry.

II. Changes in Profit Structure in Recent Financial Reports

According to Bloomberg, in Q1 2025, the average EBT of SP 500 companies rose by approximately 3.1% year-over-year, while net income grew by only 0.8%. This contrast indicates that rising tax rates or one-time tax expenses have compressed companies’ distributable profits.

Take Apple as an example. Despite reporting over 6% year-over-year growth in global sales during its second fiscal quarter of 2025, its net income fell nearly 4% year-over-year-mainly due to heightened tax scrutiny and compliance costs across multiple countries. Similarly, Walmart noted that higher inventory costs and state-level corporate tax increases led to lower-than-expected after-tax profits. These cases illustrate that even with strong operational performance, increased tax burdens can erode bottom-line results.

III. Key Factors Affecting the Gap Between EBT and Net Income

Beyond direct tax rate fluctuations, several other factors influence the difference between EBT and net income

1. Non-recurring items

One-time gains or losses-such as asset sale proceeds or restructuring costs-are typically reflected in EBT but directly impact net income. For instance, Tesla recorded significant revenue from selling carbon credits in Q4 2025, which contributed to EBT but had limited impact on net income due to high tax rates.

2. Tax complexity from international operations

U.S. multinational corporations must comply with diverse tax regulations abroad. With the gradual implementation of the OECD-led global minimum tax agreement, companies are reallocating profits to low-tax jurisdictions but also facing stricter compliance requirements and potential double taxation risks.

3. Changes in deferred tax items

Deferred tax assets and liabilities reflect future tax payments or refunds. Changes in expected tax rates can alter their value, thereby affecting net income. At the start of 2025, General Electric experienced significant swings in net income due to the revaluation of deferred tax items following anticipated changes in U.S. federal corporate tax policy.

IV. How Companies Are Responding to Profit Pressures

Faced with growing profit challenges, more and more American companies are adopting strategies such as optimizing tax structures, improving operational efficiency, and adjusting capital expenditure plans.

On one hand, firms are enhancing tax planning and leveraging favorable tax policies. For example, manufacturing companies are accelerating investments in domestic factories to qualify for tax credits under the CHIPS and Science Act and the Inflation Reduction Act.

On the other hand, some companies are retaining profits for RD and technological upgrades rather than distributing all earnings via dividends or share buybacks, aiming to reduce taxable income. As AI and automation become more widespread, businesses are also using digital tools to improve cost control and reduce unnecessary expenses-helping boost EBT performance.

V. How Investors Should Interpret Profit Data

For investors, focusing solely on net income may obscure a company’s true operational health. When reviewing financial reports, it is crucial to consider EBT trends, tax rate changes, and the impact of non-recurring items.

From a financial analyst’s perspective

EBT better reflects a company’s core earning power.

Net income shows the influence of external factors like tax policy and regulatory conditions.

Only by combining both metrics can investors comprehensively assess a company’s financial health. For example, if EBT is steadily rising but net income is falling, it might be due to higher tax rates or one-off losses-not necessarily a deterioration in fundamentals. Conversely, a decline in EBT could signal operational issues.

Conclusion

In today’s rapidly evolving global economic landscape, the relationship between EBT and net income has become increasingly complex. For companies, accurately tracking trends in these two indicators is essential for strategic decision-making. For investors, understanding the composition of profits is key to making rational investment choices. Amid profit pressures, only by uncovering the logic behind the numbers can businesses and investors find clarity in uncertainty.