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The so-called Tax Cuts and Jobs Act (TCJA), enacted in December 2017, made major changes in the tax treatment of both domestic and foreign corporations. The TCJA did not make any changes directly to Section 382, which provides limitations on the use of corporate net operating losses (NOLs) and other tax attributes.
However, carryforwards of excess business interest were added to the list of tax attributes that potentially can be subject to Section 382. As a result, the TCJA dramatically expands the number of corporate taxpayers that will need to perform Section 382 calculations and understand the application of the rules. Previously, Section 382 generally only applied to unprofitable companies. Starting in 2018, Section 382 can apply to profitable companies with large interest deductions.
When Does 382 Apply?
Even disregarding the addition of excess business interest as a subject attribute, the rules are still ripe with pitfalls. And as planning continues around tax reform, ownership changes (or even multiple ownership changes) in corporations are bound to happen – making it vital to maintain an up-to-date and accurate understanding of the rules.
Section 382 was enacted to prevent corporations from trafficking in NOLs and sets forth limitations on the use of NOLs and other tax attributes when a corporation undergoes an “ownership change.” The definition of an ownership change is a change in stock ownership that results in a more than 50% increase in stock ownership (by value) by 5% shareholders (or shareholder groups) over a three-year period. An ownership change may occur through the sale or exchange of stock by a shareholder or through the issuance or redemption of stock by the company. An ownership change calculation can be very complicated and time consuming. Any corporation with an NOL or other tax attribute (no matter how small) is required by regulations to determine if an ownership change has occurred during a taxable year and report the conclusion on a Section 1.382-11(a) statement on the corporation’s tax return.
Authored by Lee G. Zimet
Discover more: Section 382 limitation now applies to excess business interest
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The TCJA dramatically expands the number of corporate taxpayers that will need to perform Section 382 limitation calculations and understand the application of the rules. This is due to the inclusion of carryforwards of excess business interest as an attribute that is subject to the carryforward limitation under Section 382. The Section 382 rules remain dense and complex. Corporate tax attributes can often have significant financial impacts, and, therefore, should be planned around carefully.