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On-Demand: IRC 382 & NOL Tax Planning

Dec 8, 2020

We discussed the benefits of a Section 382 tax study and the latest net operating loss (NOL) tax planning strategies.


Jeffrey Kelson:Good afternoon everybody. Today we're going to cover net operating losses, section 382 and some tax planning to consider with all the tax changes that have occurred, occurring, or will occur. So the agenda today, we're going to have an overview or just what Internal Revenue Code, Section 32, it's one of those dark mysteries that until you deal with it, you don't realize how complex it is, how you calculate an ownership change under section 382, the impact on net operating losses that it causes, but also tax credits and the new net operating loss environment brought about by TCJA, the KAZ act in the future. And then if we have time, hopefully we'll get to some questions and answers. I'm going to turn it over to Michael Grant, and he'll take you through the basics of section 382.

Michael Grant:Thank you, Jeff. Good afternoon, everybody. A little brief history on section 382, and what it was in place for, was basically to curtail trafficking of net operating losses from other companies. So the basics of 382, is that it limits a loss corporation that goes through an ownership change during a three-year testing period. Pre-change losses or other tax attributes against post change. So a loss corporation is any corporation that has one of the NOL carry over, general business credit carry over, minimum tax credit, excess foreign tax, capital loss carry over, and then also a 163 J carryforward, and that's your business interest expense that’s allowed. So most people think that a loss corporation is just a company that has an unwell, but it could have any one of these other attributes that make it a loss corporation.

And then if it undergoes ownership change under 382, and that has a greater than 50% cumulative change. A cumulative change is different from time transaction where obviously we have a hundred percent change in ownership when a company is acquired. The cumulative change you see a lot and it could be a consequence of just having a lot of equity raises, you see that a lot in a life science and technology realm, as companies need the capital, so they're issuing stock left and right. And an unintended consequence of that could be that they trigger a greater than 50% change they could have if they're on a Wells limited.

Jeffrey Kelson:So right Michael is saying that during a three-year period, I think one of them is knower about 382 is that you just think you look back three years and that's it, but it's a moving three years.

So everything is predicated on what occurred before. So you can't just take a snapshot on such and such a date, what's today? December 8th and look back three years ago, am fine, because you might've had to change a year ago based on a three-year cumulative change up to that point. So it's constantly a moving target, it's not a period in time that you can just go back. And you start to look at it from the first day you have losses, or you have credit card referrals. And obviously with 382, if you do have a change, it limits your pre changed losses, or other tax attributes including tax credits, and as Michael pointed out 163J is the newest member of the team to get caught up in the 382 limitations it would limit how much you can use of those losses and attributes in the future against post change income. So that's the basics of section 382.

This is what's considered equity because you only look at equity as common stock, it's also convertible preferred stock, also voting preferred stock is considered equity, and in some cases, convertible debt can be viewed as equity although obviously if it has all characteristics of the debt, it you would not until it is converted into equity, but it is a possibility that that could be considered equity. But basically mostly of you be seeing common stock and all the series A, B of convertible preferred and devoting preferred. What is not counted as pure preferred, that is not treated as stock for purposes.

So, here's plain vanilla preferred stock as defined under section 1504(a)(4), so that would confer no voting rights, would not be convertible, it does not participate in corporate growth, and it does not have any redemption or liquidation rights that exceed the issue price. So if you have what is coined as pure preferred, you do not count that in determining equity changes for purposes of section 382.

Now, stock options and warrants, you only include when it's exercise for the most part, you'll see an exception. So if you have outstanding stock options, are they or not included for purposes of equity changes until the date of exercise. And debt similar, as I pointed out before, and that would include most convertible debt. So these are your non-equity components that you do not test or except until of course converted or exercised in situations. 

Michael Grant:Okay. Sorry about that, the joys of working remotely. So Jeff just touched on the option, what is non-equity and he said that most stock options and warrants, you only include them when exercise. There is something called the principle purpose standard which, if a principle purpose of the issuance of the option is to avoid or ameliorate the impact of an ownership change, so a principal purpose, not the principal purpose, so if that is the case, then there's three tests that can be used to determine if the option should be treated as exercise when issued, as opposed to when ultimately exercised. Those three tests, and we only need to meet one of the tests, but those three tests are ownership tests, and that looks at if the option gives the holder attributes of stock ownership, such as voting rights, or rights to dividends.

Then we look at the control test, does the option gives the holder control, direct or indirect 50%? And then the income test is the option issuance connected to the use of pre changed losses. I'm getting messages that I'm breaking up.

Jeffrey Kelson:I think that the takeaway here is that, if a principle purpose of the issuance of the option was not to avoid the ownership change, then you will not go through these three tests. You would be okay. But if a principal purpose of the issuance was to avoid it, and you have one of these three criteria met, then you would count the options as issued on the date of grant. And you would start to calculate any changes from that point on and you would measure.

Michael Grant:So now that we discussed what is equity and what we need to look at as far as what we're tracking with 382, now we have to come up with determining who the 5% shareholders are. So, the basis of 382 we have to track the ownership of 5% shareholders. So that is anybody who owns 5% or more of the value of the stock. For a public company, we can rely on SCC documents, such as Schedule 13D or 13G, and those report a beneficial ownership of 5% shareholders in a public company. Now, the key distinction here to make is the difference between economic ownership and beneficial ownership.

Economic ownership is the holder has the right to dividends, the rights to the proceeds from the sale of the stock, and beneficial ownership is simply just voting power. So those SCC documents are based on beneficial ownership and, for 382 purposes, we need to look at who the ultimate economic owner is. For instance, one of the problems with relying on the SCC documents is they're not always filled out uniformly or correctly by everybody, and they're a little bit ambiguous. So we have to do a duty to inquire if it's ambiguous, to figure out who the ultimate 5% shareholder is. We need to also get to the ultimate individual who owns the shares.

So, if an entity owns 5%, we have to look through that entity to try and determine who the ultimate individual owners are. So on here we have a little chart, we have a loss company, X owns 80% of loss company, B owns 20%, and then A owns 30% of X. A is an indirect 5% shareholder of loss company because they own 30% of 80%, and then if they sold 30% to C, loss company would have an indirect change in ownership, even though X, the shareholder of loss company didn't change, there was an indirect change in ownership. So those are some of the things we have to look through to determine if there's any changes that hire two entities.

Also determining 5% shareholders, family attribution comes into play. So if there's multiple members of a family who own stock, those are going to be attributed together, aggregated together, based on lineal descendancy. So parents, grandparents, children, are going to be attributed together. Siblings are not attributed together, so we can ignore that ownership.

Now, those are all the individual 5% shareholders. But we have to account for all of the stock and all of the ownership of the shares of the company. So any shareholder who owns less than 5%, are aggregated together in what's called a public group. Now the public groups are created as a rule of administrative convenience. Meaning they don't expect everybody to track a trading, track the stock changing hands from all these small shareholders, so they allow you to group everybody together that owns less than 5% and those will be tracked separately and considered a 5% shareholder.

Now, what that does is, if there's a large issuance and a new public group is to come into play, the 5% shareholder...

Jeffrey Kelson: I agree. Lost you, Michael. I think there's two rules here that help out on 382 changes, that's why they're called exceptions. The small issuance exception where there's an issuance of less than 10% of the standing stock at the beginning of the year. They're not going to treat that as an issuance to a new shareholder. They can allocate that to all the outstanding shareholders, and that helps that helps avoid a change in ownership and the whole principle there, those small issuances probably have no material affect that somebody getting those shares would not be looking at the tax attributes, and the year by year tracking of the limitation. So that's a small issuance exception that you get each year.

There's also a cash issue. You can have, Michael. Yeah, you can take it.

Michael Grant:Cash issuance exception is, you basically take the existing public ownership and whatever that ownership is. So let's say the public groups altogether own 40%, and there is an issuance of stocks solely for cash. It has to be solely for cash. So if it's stock issued for services, that does not qualify. So again, if the public group owns 40%, we're allowed to take half of that public ownership, which would be 20% and allocate that to the existing public groups.

And what that does is that allows you to, instead of creating a brand new public group and starting ownership from zero, you can allocate it to the existing public groups where you can dilute the cumulative ownership change.

Jeffrey Kelson:Right. And the reason for that is when you issue share, creating a new public group, you're diluting the other public groups. So the new issuance that you get the positive changes is bad, you don't want positive changes, but if you can allocate some to the preexisting public groups you help diminish the amount of the overall change in ownership. So both of these small issuance and cash issuances are meant to help companies avoid 382 changes or, where in the case of small issuances, obviously, because it's a solution, or if it's a cash issuance they give you a 50% break on allocating to a new public group, but both are very tax payer favor.

Michael Grant:So, now that we've gone through identifying what the stock is of the company, what the equity is, and then also identifying who the 5% shareholders are, now we have to measure and calculate if there are any ownership changes. So the determination of the percentage stock owned by a shareholder shall be made on the basis of fair market value of the stock compared to the total value of the outstanding stock. So that goes to figuring out the 5% shareholders.

What we do is, on any date in which there is a change in the stock holding of a 5% shareholder, and remember that includes public groups, so really, any date in which there's a change in stock ownership, we have to calculate on that testing date, what each shareholder's ownership percentage is, and then we compare that to their lowest ownership percentage within the three-year testing period.

So, whatever ownership we calculate on that date, we would look back three years and whatever the lowest ownership is within that three years, that is going to be their cumulative change, and then you would add up all of the cumulative changes on that date. And if that cumulative percentage is 50% or greater, you're going to trigger a limitation. And the three-year period, it makes timing key. Meaning when you start off, everybody's starting. You have your initial shareholders, and your founding shareholders, they're going to be starting from whatever ownership percentage they come in at, and any new shareholders that come in within the three-year period, they're going to be coming in and their lowest percentage is going to be zero until their initial three-year period is up.

So whenever we're comparing somebody's ownership to their lowest and their lowest percentage is zero that's going to give rise to a greater change in ownership.

So you could have a situation where an ownership change could be triggered greater than 50%, but if it had waited maybe two months, three months down the road, and that transaction happened, the ownership change could have been avoided because somebody's lowest ownership percentage could have gone from zero to 10%, and that would have knocked 10% off of the change. So timing becomes key. And again, a lot of times it can't be avoided. Going forward you can plan around it, but looking back historically, just raising equity, it's hard to avoid.

Jeffrey Kelson:That's why they have those options of warrants rules, because there's an obvious play there to say, "Hey, I won't issue shares for three months, I'll issue an option. And then when the ownership to previous ownership gets old and cold, and it fells at three years old, then I'll exercise." And that's why there's those option rules there, which we covered before in situations like this. That would be a principle purpose of avoiding 382.

Michael Grant:A lot of people think you can just look at today and then look back three years, and that's your 382 study for the last three years. You really have to start from the first year in which the loss company generated in NOL or had an unused credit. You have to start from that point in time and move forward, because if you trigger an ownership change, that changes the calculations going forward. So whatever happens has an impact. So you can't just pick a random date in time and say, "Let's calculate from here." Now you can, if you know, "Okay. On March 1st of 2018, the company was acquired a hundred percent." Well, you know on that date, obviously there was an ownership change. So you can start moving forward from that point. But you don't know prior to that date, if there was any previous ownership changes.

So it's really important to make sure that you have a full study in place and it starts from the correct time, which is the first year in which the company generated an NOL or a credit carryover. Many times it's going to be the inception of the company, but not always.

Jeffrey Kelson:All right. So what happened? So Michael just went through all the mechanics of how you calculate a change and it's quite complicated. But, with all the three-year moving targets, sometimes it's pretty easy. Somebody buys 55% of your stock, you don't really have much to consider there, right? So what happens when you have a greater than 50% change?

Well, I've always used the analogy that all your NOLs and your attributes, incurred up to the date of change or thrown it in jail. Because you don't technically lose them, they become restricted, and then they can get released over time according to some formula, which we'll get to in a minute, but basically they're still there, there're just restricted.

Some might not ever get out, you'll see that later too, of jail, because at the time, although I know the rules keep changing on that with NOL carryforward, so bear with me. And then when you do have a change, you got to start calculating the next change. Meaning just because you had one change, doesn't mean that's the only change you can possibly have because you could have NOL's incurred afterwards. I like to call it resetting the pins, so if you had a change and you broke the camel's back with 70%, everybody starts fresh with the ownership outstanding on the date of that change, and you go back to zero and you cumulative change analogize to resetting the pins in the bowling alley, and you go forward from there, start to calculate your next change, if you have one, as long as you keep generating tax attribute carryforwards.

So the annual limitation that I referred to, again, represents the amount of the trapped on NOLs and attributes that become available for you.

So how do they come out of jail? Well, used to come out at a pretty good rate back about maybe 10 years ago. And now they come out very slowly. Why? Because it hinges off the long-term tax exempt rate. So, what you do, is you take the value immediately before, and that I mean before, very carefully thought out, because they don't want you to artificially increase the value of a company, by, say, pumping funds into a company. So you look at it just before that occurred, you look at the value immediately before a change in ownership, and you multiply by the long-term tax exempt rate, which once upon a time was pretty good number, maybe 7%, maybe 6%. Well the drafters of the section never considered the environment we're in.

If you were to ever imagine that the long-term tax-exempt rate, as of December, 2020 is 0.99%. So even if you had a hundred million dollar valuation and you think, "Wow, I should be freeing up lots of NOLs and tax attributes, really, you can only forget $990,000 a year. That doesn't get you much, if for instance, you had $70 million of NOLs trapped. But one day, if long-term tax-exempt rate was 6%, you got six times more freed up a year. They never imagined putting a floor on that number, but here we are 0.99% for long-term tax-exempt rate. So that makes it even more important to track changes because you can really get hurt on a change. Really get limited in the NOLs if you have.

And not only that, there's other possible adjustments of value, there's some provisions where they reduce it, significant non-business assets. So they takes a value and they would reduce it if you have too much cash. And it's pretty much upper 30% of the value of the company, but just know that's out there. There's also another rule about anti-stuffing, where if you put a lot of money in you have six months before the change, or in some cases two years, they can knock that out in certain circumstances there can be a reduction for corporate contraction, for instance, a bootstrap acquisition, where you loaded up the company with debt, or you push down debt to the company, or you use a company's assets to pay debt, that might be another way that you might lose value, immediately before value could be even diminished more.

It can be increased in certain cases where in the money options. So if you look at all of the outstanding stock, you can value in the money portion of the options that are outstanding. That’s the one good guy in this adjustments to value, things to consider.

The annual limitation accrues, even if unused. What do we mean by that? My case, we had the hundred million dollars at the 0.99%, the 990, the next year you have NOL, you can't use it, that carries forward. And then the year after that, you free up another 990. So cumulatively, you might've freed up almost $2 million in the second year, and that's in the second year, you do have taxable income. You at least have $2 million, in that example.

And if you have a change in ownership coupled with a change in historic business where a significant portion of the assets are not used, or the historic business is not carryforward and the assets are no longer there, if that historic business is not maintained for two years the limitation would become zero. So it's a continuity of business, role there. So, the change coupled with a discontinuation of the business and the sale of the assets, but could end up costing you all of your NOLs and this is obviously to event buying companies solely for their NOL especially if they're a burnt out company, or just got nothing left by the NOLs.

So this is the calculation I just went over. Yeah. You send me one set of a hundred million, but you see, one thing I'd like to point out here is back when you can carryforward 20 years, now if you know the net operating loss as a carryforward? Definitely. Sometimes we would carryforward what the most you can use.

So back to my jail example, if you had 5,000,000 of NOLs in jail, and doing this, the most you can possibly free up in this lifetime with a 1,000,980, you would probably have to write off that $3,020,000 of NOL that you probably wouldn't have utilized. But again, it's different. Now, if you have a change now and you can carryforward indefinitely, you would have to have a different thought calculation to determine if you're going to ride off anything, but that changes the minefield.

Now, we're going to have Michael take us through section 383 for credits.

Michael Grant:So 383, falls behind 382, but it also follows 382. So if there's an ownership change under 382, 382 limits the NOLs, section 383 limits all your credits and other attributes. And the ordering rules that are provided in the code are our bills, which is recognized built-in losses, capital loss carry overs, then your NOLs and then your unused credits.

So as you can see, the credits are behind the NOL's, so what happens, how do we utilize those credits if we have the 382 change? So, you have your 382 limitation with which Jeff just went through, your 383 limitation is the marginal tax on the unused 382 limitation for that year. So I have an example on the next slide that we can go through.

So ABC Corp had an ownership change on 1231, 19, their cumulative NOL carry overs were 60,000, they had an R&D credit carry over of 10,000 and their annual limitation for 382 purposes is a hundred thousand. So, that change happened 12/31/19. Now for the current year, 12/31/20, they had taxable income of 80,000. So because their annual limitation is a hundred thousand and their NOL carry over is only 60, they have an unused limitation of 40,000. So we take that unused 382 limitation, and we multiply it by the tax rate, which right now is 21%.

So our 383 credit limitation is 8,400. So the company had 10,000 of an R&D credit carry over, based on the limitation, they would only be able to use 8,400. So they would still have 1600 that gets carried forward to the next year. But, just make sure you understand that the credits fall behind the NOLs, so, if you're not going to be able to utilize all your NOLs, then you're not going to be able to utilize the credits going forward either.

Jeffrey Kelson:Any credit?

Michael Grant:Any credit. So, a question come through on the, on the Q and A section asking about multiple changes. So what happens if, as Jeff said, you have an ownership change and then you reset the pins and you calculate going forward and you go forward, let's say three years down the road, and you calculate another ownership change of 50%. So you have to go through the same mechanics and calculate your second limitation. And one of two scenarios is going to occur. Either the second limitation is going to be less than the first, and if that happens, all the NOL's will follow the lower limitation.

So it as if the first limitation goes away and all the NOLs incurred up to the second limitation, follow that lower amount. The second scenario is if the second limitation is greater than the first, and this is where you have to divide your NOLs into different buckets, meaning you have all the NOLs that were trapped by the first change. Those continued it to free up that first limitation amount, and then you have all the NOLs that were incurred between the two changes. So, those will free up at a rate for the difference between the two limitations. So the second limitation is higher.

Let's say the first limitation is a hundred thousand and the second limitation is 300,000. So you have all your own NOLs up to the first limitation, they're going to free up at a rate of a hundred thousand a year, while all the NOLs that are trapped between they're going to free up at 200,000 to get you to the total limitation of 300,000.

The IRS doesn't want you to increase your limitation. So you can't increase the overall limitation on that first NOL bucket, but you can decrease it. Heads they win, tails you lose. So, when you have multiple ownership changes depending on, and again, it depends on the rate right now, which is very low and also the overall value of the company.

You could have a scenario where the value increased, but because the rate is so low, now the limitation might be lower. So that might cause to you to-

Jeffrey Kelson:Heads they win, tails you lose. So whichever limitation is going to get them let you to free up the lowest amount. That's what they're forcing you.

So, if you had a stock that was worth a million dollars and your base is at zero, and you sell within the first five years, that can go dollar for dollar to increase your limitation because if you'd filled it prior to the change, you wouldn't have had any restrictions. That's the concept behind New Big, it's also the flip side, new bill which has exact same thing to flip. So, it would hurt you, if you reduce your limitations.

But if notice 2003-65 spoke to the situation where they gave you two methods to view your built-in gains. One of them with 1374 approach, which was not as beneficial, you would actually have probably sell something, to the 338 approach, which allowed you to do this fictitious 338 analysis to create goodwill or some other asset that you can amortize over 15 years.

So if the New Big exceeded 15% of the fair market value of the assets or 10 million, you can increase artificially your limitation for five years, basically if the new bill, you created a goodwill of $15 million, each year you would have a million dollar fictitious amortization deck can increase your limitation. With the limitation so low now, with this 0.99%, it's very important to recognize New Big. And this gives you a way to recognize it without selling the assets. But selling the asset would, of course, give you that as well, but a lot of times, you're not going to sell the business to recognize your goodwill.

So this allows you, it's a very, very tax favorable IRS notice. But as soon as TCJA came down and they noticed that there was a hundred percent expensing of the 168K, the 382 branch and the IRS issued saying, "Hey, when you do the 382 analysis and you set up your basis for your appreciable assets, we are not going to allow you to take a one-year benefit for New Big under this full expensing is still going to be under the old rules on that.

So they were trying to limit the impact of that full expensing on freeing up New Big, but nevertheless, this is still in place, we're going to get to something that is threatening that. But right now this is very tax beneficial because it allows you to increase your limitation each year based on this 338 approach. Mike, you want to take the second example? Yep.

Michael Grant:So here's an example of the calculating the New Big, and what we have here is a tax bases balance sheet. And, normally you would have booked to tax differences for PPNE intangibles, maybe some accrued liabilities. Right now we just kept it simple. So we have our tax bases, they have total tax bases in their assets of 4,050,000, they have total liabilities of 7,050,000, and then the value of the equity or the purchase price of the company was 27,000,000, under a 338 method that you would say that the acquiring entity would assume all the liabilities. So you would add the liabilities to the purchase price to come up with the total fair market value of the assets of 34,050,000. So you take that fair market value and we're allocating it across the various assets. And in this scenario, it's allocated based on book bases which is the tax bases. But so then we're left over with 30 million, which is our net on realized built-in gain.

So you would take that amount and you would fictitiously amortize that or hypothetically amortize that as goodwill over 15 years, so your annual amortization is $2 million on that. So the built-in gain recognition period, as Jeff said, is five years. So for the first five years after an ownership change, you would get to increase that annual limitation by $2 million per year.

Jeffrey Kelson:It's very worthwhile to most taxpayers. It's very favorable. We've got to speed up a little because we have 10 minutes. I want to talk about the forgotten section 384, called the upside down 382. That's the upside down from stranger things, I guess. So, this is the reverse, right? S0, loss code by the gain code. Because we've been talking so much about the loss code being acquired, what happens if loss code is the acquirer and they acquire gain code? Well, what they do here in the upside down 382, 384, is they limit the use of NOLs by the loss corporation to offset gains up in a quiet gain corporation. And here the term built-in gains is a negative. So any built-in gains in that gain code that are recognized again, within that five-year built-in gain period, cannot be offset by the NOLs of the acquiring loss code.

So it just reverses it, so people don't get around 382 by saying, "Hey, loss code acquired gain code, I can shelter that gain code becomes more valuable to me. And they had this five-year period where gain code recognizes any of the built-in gains, which you would have to value. It's no 338, no 2003-65, nothing like that. You just value the assets at that time and at that moment, and if you recognize any of those gains within five years, they cannot be offset by the pre-change losses, any post-change losses of loss code acquisition, yes, that could, but not the pre-change before the date of acquisition.

And the gain corporation, is any corporation that has a net unrealized build-in gain at the time it was acquired. So, the upside down 382 often overlooked. I tell ya', often overlooked.

All right. So I'd be remiss if I didn't mention the bankruptcy exception. If a change occurs during bankruptcy, they try to give you a benefit, the annual limitations based on the value of the corporation, meet the value immediately after, rather than before. But that normally results in a high limitation because of post-debt relief that send a 382 offset. So they try to give a benefit to the bankrupt company. There's also a bankruptcy exception on the 383(l)(5) when ownership change occurs in chapter 11, and 50% of the stock is owned at the time by existing shareholders and creditors that held for at least 18 months, or ordinary business creditors. Then you could avoid the 382 limitation.

So that's good for the same book, if it's really pretty much this group of shareholders and creditors that are hanging on, "Hey, you know what bankrupt company, no change. But I have a proviso, if you have another change within two years, guess what? It goes to zero." Those offsets at that moment go to zero. So you got to be careful, if you go this route.

Also they give you a one-time reduction in NOL for interest deductions taken on the debt exchanged for stock because  that's really constituted as equity and they're saying, "Hey, I'm going to reverse those interest expense deductions that gave you since you converted that into stock and you never really had to pay it." I'm not saying you don't want to go to 382(l)(5) route, or you can't go to 382(l)(5) route because you don't have 50% ownership by existing shareholders of creditors, then you can either elect that if you meet it, or if you don't meet it, but this is the rule. You're under the regular rules for 382, but for purposes of the annual limitation calculation, the value of the stock, the lesser of your pre-change growth asset value, or your post-change stock value. Post change stock value are pretty easy, but they also want to give a limitation on the pre-change asset value, since you didn't really have any assets that were worth it. Then you would use the lower amount.

Somebody asked a question about the loss corporation, quiet an LLC as profitable. That's fine not because you're not acquiring stock and doing multitasking here, which code section you want to take it back?

Michael Grant:So now we're on to NOL updates. We're just going to touch on what the old law used to be. So pre-tax cuts and jobs act, and a NOLs could be carried back two years and it could be carried forward 20 years. And then the AMT NOL could offset 80% post tax cuts and jobs act, which is, for years, beginning after 12/31/17, you could no longer carry back NOLs. And then any NOLs incurred starting 1/1/18, have an indefinite carryforward. So we have two separate rules.

Your NOL's up to 2017 still have the 20-year expiration and anything incurred after 2017 has an indefinite carryforward, but you can only offset 80% of taxable income. You could no longer offset your full amount of taxable income. That was post-tax cuts and jobs act.

Jeffrey Kelson:Then the CARES Act came and changed the TCJA for three years retroactively, mind you, back to 1/1/18. Now you can carry back losses in the three years, 1/1/18 to 12/31/20, back five years. And the carryforward, by the way, is indefinite for that three-year period of time. Though you have the pre-TCJA, you have it as if TCJA never existed, and then you have 1/1/21, which is just what, 20 something days away where you're back to the no carryback again, back to the indefinite carryforward and limited to 80% of taxable income offset. So it's like a roller coaster of NOL. You have the pre, you have the CARES, and then you have TCJA finally taking effect on 1/1/21, subject to change, of course. So just bear that in mind, that there's a three-year period of time, five years back, and then now indefinite carryforward consequences.

We had a lot of companies examining sales contracts because they might've closed the deal on 18 and said, "Well, who's eligible for the refund. The seller, or the purchaser." And sometimes they flip the baby by election on the one point 1502-21, we can flip the carry back where the purchasing and carry back their other losses back five years, but not the target, maybe to avoid litigation between the seller and the buyer. You have to have caution of what bucket is the best because you might be carrying back to 35% year and if you carryforward, you might be carrying forward to 21. There's a lot that went into this.

I'm just saying that, this came up because it wasn't contemplated, it can ferry back five years. A lot of times these deals went down in 18 and 19 and it also allows you a carry back of an NOL that might've been restricted by 382 carrying forward, but now opens up the door to carry it back, unrestricted, mind you, you want to carry back. CARES Act was very beneficial to companies in loss positions especially ones that were purchased.

You also had to reassess a deferred tax asset to see what it's worth now, if I can carryforward forever it's different than carrying forward 20 years, or I have to carry it back. Also, you had to take into account full expensing, you could have expense fully to increase in 18, 19 and 20 to increase your NOL that can be carried back or carried forward.

Not talking about the 2003-365 thing where they limited. I'm just saying, just your general full expensing it, because you bought a company and you fully expensed it, and that allows you to have a great NOL and the AMT credit refund without limitation to 382 was an interesting consequence of the CARES Act. So a lot of consequences with the CARES Act and net operating losses. Last slide.

So what does the future behold? Well, we've heard a lot about increasing the corporate tax rate to 28%, which is going to make the NOL and other attributes, NOL at least, worth 33% more perhaps in the future. So the importance of carrying them forward and maintaining them unrestricted is paramount. And that means, careful monitoring of the 382 limitations. The proposed regs under 382(h).

So just before the pandemic hit, the IRS came out with proposed regs into 382(h) to say, "Hey, we think 2000 to 365 to 338 method was too nice. It was too much of a gift. And we want to look to eliminate it. We just want you to go on with the build-in given to 1374, which was a lot less beneficial." So they put this out very poorly timed because it came out just before the CARES Act. It didn't have a fact because that was proposed.

Then I thought it got mothballed because there was no talk about that as they were bestowing five-year carry backs and all these other great things to NOLs. Well, it just so happened, about a month ago, there was some word on this gentleman, Brian Laws, that is his name, Brian Laws from the two section of the Internal Revenue Code says, they're still exploring this. And maybe they won't be as severe as a proposal regs suggested, and they're listening to practitioners and listening to other commentators.

So the bad news was that they're still considering these regulations to perhaps take effect, but the good news is it may not be as draconian as they came out just before the pandemic. So, that was just a conversation he had, I believe, with the AICPA. So just remember the CARES Act sunsets beginning 1/1/21, no more carrybacks allowed for losses incurred after 1/1/21 and only in-depth bot, not so bad, but indefinite carryforward, every member subject to the 80% limitation. And I believe that will be all we have. I'm going to see if there's any questions.

Michael Grant:So, does the multiple ownership rule change the ordering of NOL usage? So no. You would still use the earliest NOL first.

Jeffrey Kelson:Mm-hmm (affirmative)

Michael Grant:Assuming the earliest ones expire, because they are in the bucket that expire you'd want to use those-

Jeffrey Kelson:It gets a little complicated as they free up, but yes, patiently. That's right. Will section 382 apply to LFS are elected to be treated corporation? Yes. But if you like to be treated as a corporation, you no longer treated as a partnership and you will be subject to 382, because you'll be taxed as a corporation unless you make an election. But of course, it's corp. that's why it applies to. I think that's all the questions we've got that we haven't answered.

Michael Grant:Mm-hmm (affirmative)

Jeffrey Kelson:Yeah, I think we covered a lot. You can understand this is a very complicated section of the code especially with its neighboring code section 383, and 384, and the changes that are looking to occur with it. So I would just say that what we always suggest is that you do a 382 study back to the first day of loss, it's the only real way to learn it, to understand what your limitations are if you had any changes, a lot of companies come to us either when they start to generate taxable income to see if they really have losses that can offset it or where they're being acquired, and the purchaser wants to know if there's been any previous changes in ownership that would impact the NOL that they're inheriting, of course, the purchase itself might encourage change.

And, I think that's what we have. One minute ahead of time. Thank you everybody for your patience and staying with us on this.

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