Net operating income (NOI) is the difference between total income produced from operations, including interest, taxes, depreciation, and so forth, and total expenses incurred. In accounting and financial management, income before taxes and interest is a measure of the profit generated by a company that includes both income and expenses excluding income tax and interest expenses. In a corporation, income before taxes and interest is often referred to as the profit for tax purposes.
The first step to understanding this term is recognizing that there are two types of income. First, interest income is not income at all. Interest income is income received from carrying the debt of a bank or other lending institution, whether that debt is negotiable in its original form or not. Interest income is different from income because interest payments are not made on money assets, like stock or property. Therefore, when an individual pays a loan or credit card balance, interest income is earned and reported as such.
Second, income earned from tangible assets is called gross income. When a person or organization purchases tangible personal assets like real estate, equipment, computers, machinery, etc., and produces revenue, that income is referred to as gross income. When an individual pays taxes on any property, income generated from that property is called gross income.
The amount of interest expense is subtracted from gross income. Interest income is subject to tax, of course, and can be determined by subtracting the tax payment from gross income. When the tax liability is greater than the gross income, taxes are usually paid. For example, when a bank receives a check with a balance due, it deducts the tax due from the check. The amount of interest paid is the amount of the tax due plus any penalty and interest charges.
The income tax on corporate loans is calculated differently. Generally, an individual or an organization has a specific business purpose that will result in tax deductions, and they pay income tax on that income. If they also make investment choices that provide future capital gains, those will be taken into account.
Net operating income is different from gross income because it takes into account the difference between operating expenses, which are the difference between sales made and expenses incurred, and selling prices, which are the difference between purchase price and selling price. There may be miscellaneous items such as advertising, but this is beyond the scope of this article.
Net operating income is sometimes referred to as gross income because, in general, a corporation or other entity is not required to pay tax on interest expense. This is usually called an itemized statement of the tax liability.
Net operating income is very important because of its ability to calculate future financial statements. It can be used to establish an organization’s cash flow. It is also a basis for establishing an allowance to offset tax liability.
The use of net operating income is particularly important for businesses in which cash-flow projections are critical to decision-making. The difference between gross income and net income is a critical factor in determining the amount of tax liability to be offset against profits.
Net income is important to the budget planning of an organization because it can show the profitability of investment options. It is a reliable guide in the selection of investments. It can help determine the amount of capital needed for the operation of a business. It can be used to plan the financial activities of an organization.
It is a good measure of the extent of risk involved in making investments. It provides information on the profitability of an organization’s capital structure and ability to earn interest. Net operating income is not available if the interest expense is subtracted from gross income. It is a reliable guide in the selection of investments.