Corporate Tax Accounting, M&A Tax Structuring & US IRC Section 382
IRC Section 382 NOL Annual Limitation & Built-In Gain Formula
Calculate US IRC Section 382 Post-Acquisition Base Annual NOL Limitation (Pre-Change Equity * Long-Term Tax-Exempt Rate), Recognized Built-In Gain (RBIG) Augmented Cap, TCJA 80%-Taxable-Income-Bound Deduction, and 21% Cash Tax Shield.
Avoid overvaluing acquired Net Operating Losses after a >50-percentage-point ownership change!
Acquiring a loss-making biotech or software target with $60M of federal Net Operating Loss (NOL) carryforwards does NOT let the acquirer shelter $60M of profit in Year 1! Under US Internal Revenue Code Section 382, a >50-percentage-point 3-year ownership change caps annual utilization of pre-change NOLs at Base_382_Limit = PreChange_Fair_Market_Equity_Value * IRS_LongTerm_TaxExempt_Rate, augmented during the 5-year recognition window by Recognized Built-In Gains (RBIG, for targets in a Net Unrealized Built-In Gain position at closing)! Furthermore, for post-2017 TCJA NOL vintages, actual Year-1 NOL Utilization cannot exceed 80% of Pre-NOL Taxable Income: Usable_NOL = MIN(Total_PreChange_NOL, Base_382_Limit + RBIG, 0.80 * Taxable_Income)!
Verify on a $250M Stock Acquisition—PreChange_Equity_Value = $250.00M (B2), IRS_LongTerm_TaxExempt_Rate = 0.035 (3.50%, B3 -> Base Annual Section 382 Limit = 250 * 0.035 = $8.75M in E2), Year1_Recognized_BuiltIn_Gain RBIG = $4.00M (B4 -> Augmented Section 382 Cap = $8.75M + $4.00M = $12.75M in E3), Acquired_Post2017_NOL_Balance = $60.00M (B5), and Year1_Taxable_Income = $20.00M (B6, so 80% TCJA cap = $16.00M): Usable Year-1 NOL Deduction is MIN(60.00, 12.75, 16.00) = $12.75M (E4), generating a 21% federal Cash Tax Shield of 12.75 * 0.21 = $2.6775M (E5)!
| IRC Section 382 Tax Metric ($250M Equity, 3.5% Rate, $4M RBIG, $60M NOL, $20M TI) | Formula | Verified Output |
|---|---|---|
| Base Annual Section 382 Limit ($M) | PreChange_Equity * LT_TaxExempt_Rate | $8.75M/yr |
| RBIG-Augmented 382 Ceiling ($M) | Base_382_Limit + Recognized_BIG | $12.75M |
| Usable Year-1 Post-TCJA NOL ($M) | MIN(NOL_Pool, Aug_382_Cap, 0.80*TI) | $12.75M ($8.00M @ $10M TI) |
| Year-1 Federal Tax Shield @ 21% | Usable_Year1_NOL * 0.21 | $2.6775M ($1.6800M @ $10M TI) |
Section 382 & Post-TCJA 80% Taxable-Income NOL Utilization Formula
Validate PreChange_Equity > 0, 0 < TaxExempt_Rate < 0.20, non-negative RBIG, NOL_Balance, and Taxable_Income!
=LET(eq_v, B2, lt_r, B3, rb_g, B4, nl_p, B5, tx_i, B6, IF(OR(eq_v <= 0, lt_r <= 0, lt_r >= 0.2, rb_g < 0, nl_p < 0, tx_i < 0), "Invalid Section 382 Input", LET(bs_l, eq_v * lt_r, ag_l, bs_l + rb_g, ROUND(MIN(nl_p, ag_l, 0.8 * tx_i), 2))))TCJA 80%-Taxable-Income Binding Cap Check (Set Year-1 Taxable Income = $10.00M)
Lower Year-1 Taxable_Income B6 to $10.00M: 80% * $10.00M = $8.00M undercuts the $12.75M Section 382 ceiling, capping Usable NOL E4 at $8.00M and Cash Tax Shield E5 at $1.6800M!
=IF(ISTEXT(E4), E4, ROUND(E4 * 0.21, 4))Try the example
Use the original values or change them to test your understanding.