The IRC 382 lays down the guidelines for the amount of taxable income that can be offset by historical losses, known as a Tax Loss Carry Foward. This takes place after a company has undergone a shift in ownership. There are limitations set forth in the guidelines and the rule is basically that the limitation for the post-change year is equal to the value of the old loss company multiplied by the long-term exempt rate. Always consult a professional tax advisor before making any decisions.
Under IRC 382, if the post-change year is greater than the taxable income of the new loss company, offset by pre-change losses, the next year will be increased by the excess amount. There is also a special rule when it comes to the post-change year with change date. For one, the limitation is not applicable to taxable income prior to the change. The second one is the limitation for the period after the change.
What is the Long Term Tax Exempt Rate?
In calculating the base rate for the limitation amount, it is important to know about the long-term tax-exempt rate. It should be adjusted to Federal long-term rates for any month in the three-month period. The term adjusts long-term rate only means that it is the Federal rate determined.
Ownership Change Definition Under IRC 382
When there is an ownership change, the corporation is now considered to be a new loss corporation and it is subject to the section 382 limitations. Ownership change happens when it’s a loss corporation and after the end of the testing date, the stock percentage of the business owned by 1 or 5% shareholders has increased by 50% points.
In general, the IRC 382 or the Internal Revenue Code 382 limits the ability of a corporation to use NOL or net operating loss carryovers once the corporation has undergone an ownership change. Although corporations are allowed to utilize pre-change NOLs, there is a limit to how much they can use to offset tax liability. There is the federal long-term tax-exempt rate for a particular month that is used in the calculation of the amount. The rate is determined by the Internal Revenue Service. However, it is essential to note that there are other rules and limitations like, for instance, the provisions pertaining to the built-in gains and losses that need to be followed.
Thank you for reading this guide IRC Section 382 and its application to Tax Loss Carry Forwards. Always consult a professional tax advisor before making any significant tax-related decisions. To keep learning and advancing your career, these CFI resources will be helpful:
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!