Section 382

What losses are allowed as deductions against taxable income​

What is the Internal Revenue Code IRC Section 382?

Under Section 382 of the IRC, a C corporation is required to have a limit to offset historic losses. As a summary, C corporations are those under US law that are taxed separately from their owners. A loss corporation is a firm that can use tax attributes such as net operating loss (NOL) to deduct their taxable income. For example, T Corporation is a successful company that wants to acquire 100% of the stocks of another company, Z Corporation.

To understand the basics of section 382, we have the following details about Z Corporation: it is a private company that has been suffering a net operating loss since its inception. It is then considered a loss corporation. Once the acquisition is made by T Corporation, under Section 382, the NOLs available to offset future taxable income of the acquiring company are limited.

There are two main components of this section, which are limitation and ownership change. Ownership occurs when there is a shift in the owners or in the equity structure exceeding ownership rights of 50%. Stock includes the following: convertible preferred stock, certain convertible debt instruments, common stock, and stock options/warrants.

section 382 tax loss carry forward

Limitations of Section 382

After the acquisition, the new company may deduct its losses in its taxable income subject to the Section 382 limitations.  There is a formula used in calculating the base limitation amount (BLA). It is calculated as follows:

BLA = Fair Market Value of the Stock of the Loss Corporation x Federal Long Term Tax Exempt Rate

To maximize the available net operating loss and minimize taxes paid, the company would have to calculate the largest base limitation amount it can get.

However, when calculating the amount, keep in mind that the fair market value depends on potential adjustments as set forth in the said regulations. The Internal Revenue Service publishes the monthly federal long-term tax-exempt rate.

Learn more by reading a helpful guide on Section 382 from Cornell Law School.

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