Articles · Advanced · Corporate Tax and Form 1120
Section 382: NOL Limits After an Ownership Change
Section 382 limits how much of a corporation's pre-change NOLs can be used after a significant change in ownership. It aims to stop trafficking in tax losses.
What triggers it
An ownership change occurs when the percentage held by 5-percent shareholders increases by more than 50 percentage points over a testing period, generally three years. Attribution and aggregation rules can group small shareholders into public groups. Capital raises can cause a change even if no shareholder sells.
The annual limit
The limit generally equals the value of the loss corporation's stock just before the change, multiplied by the long-term tax-exempt rate published by the IRS. For example, a $10 million value and a 3% rate gives a $300,000 annual limit. Unused limit carries forward.
Value can be reduced for capital contributions under anti-stuffing rules and for certain non-business assets.
Built-in gains and related rules
A company with a net unrealized built-in gain may increase its limit as gains are recognized during a five-year period. A net unrealized built-in loss can have the opposite effect.
If the business does not continue for two years, the limit can fall to zero. Section 383 applies similar rules to credits, and related rules can restrict certain acquisitions of loss companies.
Key takeaways
- Test for a change above 50 percentage points over three years.
- The limit is stock value multiplied by the long-term tax-exempt rate.
- Built-in items can change the annual limit.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.