October 5, 2020

Section 382 May Now Apply to Profitable Corporations

By Tracee Handy, Senior Manager, Tax & Business Services

Section 382 May Now Apply to Profitable Corporations Coronavirus Resource Center

IRC Section 382 limits the utilization of net operating loss carryforwards (“NOLs”) generated by a loss corporation following an “ownership change.” An ownership change occurs when there is an increase of more than 50 percentage points in the stock of a loss corporation held by 5%-or-more shareholders. The increase is determined by comparing the stock ownership at the end of the testing period to any time during such period.

If an ownership change has occurred, the limitation on the utilization of NOLs is equal to the product of the value of the corporation immediately before the ownership change and the federal long-term, tax exempt rate in effect on the date of change.

A loss corporation is any corporation entitled to use a net operating loss carryover or generating a net operating loss in the year in which the ownership change occurs. In addition, a loss corporation includes a corporation entitled to use the following tax attributes:

  1. a capital loss carryover,
  2. a carryover of excess foreign taxes,
  3. a carryforward of a general business credit,
  4. a carryover of a minimum tax credit,
  5. a net unrealized built-in loss.

The Tax Cuts and Jobs Act (“TCJA”), passed in December 2017, expanded this definition to include interest expense disallowed under IRC Section 163(j) to the tax attributes that may be limited.

The TCJA amended IRC Section 163(j) to limit the deduction for business interest expense. The deduction for business interest expense is generally limited to 30% of the adjusted taxable income of the business (increased to 50% for 2019 and 2020 under the Coronavirus Aid, Relief and Economic Security (CARES) Act). Disallowed business interest may be carried forward indefinitely and is treated as an attribute subject to limitation under IRC Section 382.

As a result, profitable corporations may now be subject to the 382 rules if they have disallowed interest expense carryovers and undergo an ownership change. This could have an impact on cash flow and financial statement presentation. Careful tax planning is, therefore, crucial to avoid unintended consequences.

For questions about how the 382 provisions may impact your business, please contact your Marcum tax professional for assistance.