Definition
Section 382 limits the taxable income a loss corporation may offset with pre-change losses after an ownership change. An ownership change occurs when, after an owner shift or equity structure shift, the ownership of 5-percent shareholders has increased by more than 50 percentage points over the lowest percentage held during the testing period, generally three years. The annual limit is the value of the old loss corporation's stock immediately before the change times the long-term tax-exempt rate. Unused limit carries to the next year. If the business is not continued for two years after the change, the limit is zero.
Why it matters in an audit or review
Financing rounds, buyouts and share transfers can trigger an ownership change that strands part of a deferred tax asset. Auditors ask for the ownership study, evaluate whether the asset is still realizable, and consider the valuation allowance.
Example
Illustrative: a loss corporation is worth $4,000,000 before a change and the applicable rate is 3%. The annual limit is $4,000,000 x 3% = $120,000. Against $1,500,000 of pre-change NOLs, full use would take $1,500,000 / $120,000 = 12.5 years, apart from other planning.
Common mistakes
- Missing small, cumulative transfers that add up inside the testing period.
- Not updating the study after a new funding round.
Sources
- Internal Revenue Code section 382, subsections (b), (c), (e), (f), (g) and (i): https://www.law.cornell.edu/uscode/text/26/382
- Treasury Regulations sections 1.382-1 through 1.382-11
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error