What is an IRC section 382 limitation?

When an ownership change, as defined in IRC Section 382, occurs, it results in an IRC Section 382 limitation that applies to all NOLs and credits generated prior to the ownership change date that can be used to offset taxable income incurred after the ownership change date. The annual limitation is based on the corporation’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate. This amount may be decreased by items, such as redemptions or other corporate contractions, such as debt pushed down, that occurred in conjunction with the ownership change. It can also be increased by recognized built-in gains for a five-year period after the ownership change.

What is an IRC section 382 study?

An IRC Section 382 study usually includes two components: Detailed analysis of all issuances, transfers, repurchases, or other movements in the company’s stock to determine when or if ownership changes have occurred Calculation of IRC Section 382 limitations and any impact of net-unrealized, built-in gains, or losses for any ownership changes that occurred

Why perform an IRC section 382 study?

There are several reasons a company may consider performing an IRC Section 382 study. The most common reasons include: Financial statements disclosures. A study could support the amount of deferred tax assets from NOLs or credits being disclosed on audited financial statements. Tax returns. A study may be needed to support the amount of NOLs or credits being used to offset taxable income. Transactions. A study can help the company obtain additional value from a sale of its stock by determining the potential value of the NOLs or credits to a buyer and support that value during due diligence.

What is net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL)?

Many companies ignore the calculation of net unrealized built-in gain (NUBIG) or net unrealized built-in loss (NUBIL), which are calculated by comparing the value of the company’s assets to its tax basis in those assets. If your company has a NUBIG, any recognized built-in gains (RBIG) could substantially raise the limitation for five years after the ownership change, allowing you to utilize more NOLs or credits. On the other hand, if your company has a NUBIL, recognized built-in losses (RBIL) for those five years are treated similarly to the pre-change NOLs and are limited by the annual IRC Section 382 limitation.

How are IRC section 382 limitations calculated?

Generally, there are two components of the IRC Section 382 limitation that companies must calculate: Base limitation Increases to the base limitation for recognized built-in gains

Article

Use NOLs and credits when you need to: Keep an eye on IRC section 382

June 10, 2021 · Updated Sept. 21, 2023 · Authored by Jennifer Menendez

It can take years of R&D investments for technology companies to create a successful product. During this time, they accumulate tax net operating losses (NOLs) and credits — but when the time comes to use those credits, some technology companies discover they can’t. The Internal revenue code (IRC) section 382 limitation is often to blame.

Whether you’ve never heard of IRC Section 382 or know just enough to associate it with the terms ownership change or 5% shareholder, the complex rules of this code section make it difficult to know how or why additional work may be required. This includes an IRC Section 382 study, which examines the availability of credits and NOLs.

The bottom line is, if your company is accumulating NOLs and credits, you need to consider IRC Section 382 — whether or not your company has undergone a clear ownership change.

This article addresses the following questions and topics:

What is an IRC section 382 limitation?
What is an IRC section 382 study?
Why perform an IRC section 382 study?
Understanding an ownership change under IRC section 382
NOL and credit limitations
What is net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL)?
How are IRC section 382 limitations calculated?
IRC section 174 amortization considerations

Jennifer Menendez

Managing Director

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Use NOLs and credits when you need to: Keep an eye on IRC section 382

Jennifer Menendez

2026 retirement plan contribution limits

What is an IRC section 382 limitation?

What is an IRC section 382 study?

Why perform an IRC section 382 study?

Understanding an ownership change under IRC section 382

NOL and credit limitations

What is net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL)?

How are IRC section 382 limitations calculated?

Base limitation

Recognized built-in gains

IRC section 338 approach

IRC section 174 amortization considerations

Have questions? Baker Tilly can help.