Section 382 Loss Limitations Upon an Ownership Change

September 22, 2025

When a corporation with net operating losses (NOLs) or other tax attributes undergoes an “ownership change” as defined in Section 382 of the Internal Revenue Code, significant limitations are imposed on the use of those tax attributes. Below explains the restrictions under Section 382 of the Internal Revenue Code on a corporation’s ability to use NOLs and other tax attributes after an ownership change.

Definition of Ownership Change

An ownership change occurs when, within a rolling three-year period, one or more shareholders who own more than 5-percent ownership increase their ownership by more than 50 percentage points. Determining ownership involves direct, indirect, and constructive ownership rules.

Calculation of the Limitation

The Section 382 limitation restricts the annual use of pre-change NOLs to:

Fair market value of the loss corporation immediately before the ownership change × long-term tax-exempt rate.

The value must reflect adjustments for redemptions or contractions. The long-term tax-exempt rate is the highest adjusted federal rate in the relevant three-month window. If the tax year is short, the limitation is prorated. Unused limitation can carry forward to future years.

Losses and Credits Affected

The rules apply not only to NOL carryforwards, but also to disallowed interest carryforwards under Section 163(j), recognized built-in losses within five years of the change, and capital loss carryovers. Section 383 extends similar restrictions to credits such as the general business credit, minimum tax credit, and foreign tax credits.

Special Adjustments and Exceptions

• Redemptions/Contractions:

  Value is measured after such events, preventing artificial inflation of the limitation.

• Nonbusiness Assets:

  If one-third or more of the corporation’s assets are nonbusiness assets, the limitation is reduced to prevent sheltering income with passive assets.

• Built-in Gains/Losses:

  Net unrealized built-in gains can increase the limitation when recognized within five years, while net unrealized built-in losses are treated as pre-change losses.

• Continuity of Business:

  If the corporation discontinues its business within two years of the change, the limitation becomes zero.

  
  

Fluctuations in Stock Value

Ownership changes are not triggered by fluctuations in stock class values unless regulations provide otherwise.

Compliance Requirements

Corporations must carefully track changes in ownership, including 5-percent shareholders, and maintain support for their limitation calculations.

Example

A company with $10 million NOLs and $5 million stock value undergoes an ownership change. With a 2.4% long-term tax-exempt rate, its annual limitation is $120,000. It may apply that amount of NOLs against taxable income each year, with unused capacity carrying forward.

Summary Table:

Key Point	Description
Trigger	Ownership change (>50% shift among 5% shareholders in 3 years)
Limitation	Value of old loss corporation × long-term tax-exempt rate
Losses Affected	NOLs, disallowed interest, built-in losses, capital losses, certain credits
Special Adjustments	Redemptions, contractions, nonbusiness assets, built-in gains/losses
Reporting	Detailed tracking and substantiation required
Exceptions	Discontinuity of business or bankruptcy

Conclusion

Section 382 significantly restricts the use of NOLs and tax attributes following an ownership change. The limitation depends on corporate value and interest rates, subject to adjustments for redemptions, nonbusiness assets, and built-in gains or losses. Accurate valuation, ownership tracking, and compliance are critical to preserve tax benefits. Exceptions apply if the corporation discontinues its business.