How do I know when Internal Revenue Code Section 382 comes into play? And how could it limit the net operating losses (NOLs) of my private company?
These two questions are not asked nearly enough. But they are questions that any private business experiencing a shift in ownership, gradual or sudden, should know the answer to.
Many companies operate as “loss corporations” and carry over NOLs to offset profits on future tax returns, which can be a great benefit down the road. However, what many aren’t aware of is when an entity undergoes a significant shift in equity ownership — whether from a large acquisition or as the end result of smaller changes in ownership made over time by new or existing shareholders — Section 382 is triggered and may limit NOL benefits for existing and potential “new ownership.”
The calculation to determine the amount of NOLs available going forward includes determining the 382 limitation and performing an analysis of unrealized built-in gains and net unrealized built-in losses. Most importantly, it provides critical information to a pending buyer or to the entity itself when cumulative stock changes have shifted the equity balance.
What’s a best practice to follow? Loss corporations should review carefully any ownership changes at least annually to know when Section 382 may apply and what its impact could be on NOLs.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.