Are you considering purchasing or selling your interest in a corporation? Does this corporation have net operating losses or tax credit carryovers? If so, those losses and credits may be limited under Section 382.
Section 382 limits the use of net operating losses (“NOLs”) and tax credits that can be used by an acquiring corporation. The limitation was enacted to prevent the acquisition of loss corporations solely for their tax attributes.
Section 382 is triggered by a change in the ownership of a loss corporation. While the triggering event would obviously be the sale of the entire entity, it can also include partial changes in ownership, including transfers of ownership that occur over a period of time. Some types of transfers that could potentially trigger the Section 382 loss limitation include:
- Purchases of stock, either from the corporation or from other shareholders
- Transfers of property for stock
- Stock redemptions or stock issuances
- Equity structure shifts that impact the percentage of loss stock owned
An ownership change occurs if there is a greater than 50% change in the value of the stock owned by 5% or more shareholders during a 3 year period.
Example: A profitable corporation purchases 100% of the outstanding stock of a loss corporation, triggering the Section 382 loss limitation. Immediately prior to the merger, the value of the loss corporation is $300,000, the total accumulated NOLs is $150,000, and the IRS tax exempt rate is 2%. Section 382 limits the NOLs (carried over from the loss corporation) that the purchasing company may use to $6,000 (2% of $300,000) annually.
If you have questions about this topic, or would like help with any other tax matter, please contact your L&B professional at (858) 558-9200.