Section 382: NOL Limitations After an Ownership Change

When a corporation goes through an ownership change, IRC Section 382 caps the annual NOL deduction after the ownership change at the fair market value of the corporation’s stock immediately before the change multiplied by the IRS-published long-term tax-exempt rate, which was 3.58% as of early 2026.¹ The rule exists to stop profitable companies from buying loss-laden targets purely to shelter their own income. Get the calculation wrong and you can overstate tax benefits by millions, then face penalties on audit.

What Counts as an Ownership Change

An ownership change happens when one or more 5-percent shareholders collectively increase their ownership by more than 50 percentage points over a rolling testing period, usually the three years ending on the date being tested.² The test is cumulative. Every increase by every 5-percent shareholder during the window counts toward the threshold, and the moment the running total crosses 50 points, the change date is fixed and Section 382 applies immediately.

A 5-percent shareholder is anyone who owns, or comes to own, at least 5 percent of the stock. Everyone else gets lumped into a single “public group” that is treated as one 5-percent shareholder for testing. Stock purchases, new equity issuances, redemptions, and even secondary-market trades by large holders can all count.

Ownership isn’t measured just by who holds shares directly. The constructive ownership rules of IRC Section 318 apply with modifications, so stock held by family members, partnerships, trusts, and tiered entities can be attributed to a shareholder.³ Options to acquire stock are often treated as already exercised when doing so would push the cumulative shift past 50 points. Certain non-voting, non-convertible, limited, non-participating preferred stock is generally excluded from the definition of “stock” for these purposes, so the analysis stays focused on real equity interests.

Most companies get surprised by the cumulative nature of the test. A series of modest, unrelated transactions across three years can quietly stack up past the threshold. Every issuance or transfer needs to be tracked, and the complexity through tiered entities usually calls for specialized software and counsel.

How the Annual Limitation Is Calculated

Once an ownership change occurs, pre-change NOL usage is capped each year by a simple formula: fair market value of the loss corporation’s stock immediately before the change, multiplied by the long-term tax-exempt rate.⁴ The IRS publishes that rate monthly, equal to the highest adjusted federal long-term rate for the current month or the two preceding months.⁵ The rate on your change date locks in permanently for all future years.

Say the pre-change stock is worth $100 million and the rate is 3.58%. Your annual cap is $3.58 million. You can deduct only that much in pre-change NOLs each year, no matter how large the loss carryforward is.

First-Year Proration

In the tax year that contains the ownership change, the limit is prorated by the number of days remaining after the change date. A change on September 30 in a calendar-year corporation gives you about one-quarter of the annual limit for that year.⁶

Unused Limitation Rolls Forward

If taxable income in a post-change year is below the Section 382 limit, the unused portion carries forward and lifts the next year’s cap.⁶ A $5 million annual limit with only $2 million of taxable income in Year 1 becomes an $8 million ceiling in Year 2. The rollover keeps lean years from wasting the allowance.

Adjustments That Raise or Lower the Limit

Several rules push the stock value used in the formula down, sometimes sharply. Capital contributions made within two years of the ownership change are presumed to be part of a plan to inflate the limitation, and are disregarded unless you prove a business purpose unrelated to tax avoidance. If at least one-third of the corporation’s total asset value is investment assets rather than active-business assets, the stock value is reduced by the net value of those investment assets. And if stock is redeemed immediately before the change, the stock value is reduced by the redemption proceeds so the limitation doesn’t reflect value already paid out to shareholders.⁴

Built-In Gains Can Increase the Limit

Assets on hand at the change date usually don’t sit exactly at their tax basis. Section 382 accounts for the gap through net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL). The NUBIG or NUBIL only matters if it exceeds a de minimis threshold: the lesser of 15 percent of the fair market value of the corporation’s assets immediately before the change, or $10 million.⁴ Cash, cash equivalents, and marketable securities trading near basis are excluded when testing the threshold. Under the threshold, the NUBIG or NUBIL is treated as zero.

When aggregate asset fair market value exceeds aggregate tax basis by more than the threshold, you have a NUBIG. During the five-year recognition period starting on the change date, any recognized built-in gain increases that year’s Section 382 limit dollar for dollar.⁷ A $4 million standard limit combined with a $6 million recognized built-in gain gives you a $10 million ceiling that year. Cumulative increases from recognized built-in gains cannot exceed the original NUBIG measured on the change date.

Built-In Losses Get Trapped Under the Cap

When aggregate tax basis exceeds aggregate fair market value by more than the threshold, you have a NUBIL. Any loss recognized on those depreciated assets during the five-year recognition period, or any deduction attributable to the pre-change basis differential (such as excess depreciation), is treated as a pre-change loss subject to the annual Section 382 cap.⁷ That reclassification applies even though the loss is technically recognized after the ownership change, because the economic decline happened before it. The total amount pulled into pre-change status is capped at the initial NUBIL, and the five-year window is a hard cutoff.

If a Section 338 election is made in connection with the ownership change, gain recognized under that election can increase the Section 382 limit even when the NUBIG would otherwise fall below the de minimis threshold.⁸ Valuation is where the IRS looks hardest on examination, so an asset-by-asset appraisal by a third party is usually worth the cost.

Which Losses and Credits the Cap Applies To

The Section 382 limit reaches NOL carryforwards from tax years ending before the ownership change, plus the portion of any change-year NOL allocable to the period up through the change date.⁴ Post-change losses are not limited and can offset income freely. Meticulous vintage tracking is what keeps that separation intact.

The 80% Taxable Income Cap Also Applies

For NOLs arising in tax years after December 31, 2017, a separate rule caps the deduction at 80% of taxable income computed without regard to the NOL itself.⁹ Both limits apply at once, and you hit whichever ceiling is lower. Pre-2018 NOLs escape the 80% cap but carry only 20 years, so they can expire unused. Post-2017 NOLs carry forward indefinitely but face both constraints. Missing either is a common audit finding.

Section 383 Extends the Cap to Other Attributes

Section 383 layers similar restrictions on other pre-change attributes.¹⁰ Pre-change capital losses can offset post-change capital gains only up to the Section 382 ceiling. General business credits and minimum tax credits are governed by a credit-limitation framework that translates the remaining Section 382 room into a cap on tax liability those credits can offset.¹¹ Ordering matters: NOLs absorb the annual limit first, and only what’s left funds pre-change credits.

Expiration Risk

Limited losses keep their original expiration dates. If a pre-2018 NOL is subject to a low annual cap and expires before the corporation generates enough income to use it, the unused portion is gone permanently. The annual ceiling doesn’t extend the carryforward window, and this is where real value gets destroyed for corporations sitting on large, aging pre-2018 losses.

The Two-Year Continuity of Business Requirement

The annual limitation drops to zero if the new loss corporation does not continue the old corporation’s business enterprise at all times during the two-year period beginning on the change date.⁶ A zero limit freezes every pre-change NOL permanently. The rule stops an acquirer from buying a loss company, liquidating the business, and running the losses against unrelated income.

One narrow exception: even when continuity fails, the limitation for any post-change year is at least the sum of recognized built-in gains and any Section 338 gain for that year.⁶ Those gains were embedded before the deal, so letting NOLs offset them doesn’t abuse the rule.

Bankruptcy: Two Alternative Frameworks

Corporations emerging from bankruptcy often have stock worth close to nothing, which would produce a limitation close to zero under the standard formula. Congress built two alternatives.

Section 382(l)(5) waives the annual limitation entirely if the loss corporation is under court jurisdiction in a Title 11 case and former shareholders and creditors end up owning at least 50 percent of the reorganized corporation’s stock.⁶ Creditor stock counts toward that threshold only if the debt was held at least 18 months before the bankruptcy filing, or arose in the ordinary course of business and was held by the original beneficial owner throughout. The trade-offs: pre-change NOLs must be reduced by interest deducted on debt that converted into stock during the three tax years before the ownership change plus the change year up through the change date, and if a second ownership change occurs within two years of the first, the limitation for that second change drops to zero. Corporations can elect out when the math works better under the standard approach.

Section 382(l)(6) is the alternative. It lets the stock value used in the standard formula reflect the increase in equity from the cancellation of creditor claims.⁶ Measuring value after debt discharge produces a limitation that tracks post-restructuring economic value. This path doesn’t require reducing NOLs for prior interest and doesn’t carry the two-year second-change penalty.

Successive Ownership Changes

A corporation can go through more than one ownership change before its pre-change NOLs are used up. When that happens, losses from before the earlier change become subject to both the old and the new limits. The later limit can reduce usable amounts further but never raise them above what the first limit already allowed.¹² In practice, the annual deduction for the oldest losses equals the lower of the two limits. Losses generated between the two changes are subject only to the second. A company with three ownership changes over a decade may be juggling three or four overlapping caps, each tracking a different vintage of losses, which is where spreadsheet-level tracking breaks down.

Reporting the Limitation

The loss corporation attaches a statement to its income tax return for the year of the ownership change. It must show the change date, the stock value used in the formula, the long-term tax-exempt rate applied, the resulting annual limitation, and any adjustments for capital contributions, non-business assets, or built-in gains and losses.¹³ The reporting continues in each post-change year, showing the current annual limit, the amount of pre-change losses used, and any carryforward of unused limitation.

The burden of proof sits entirely on the taxpayer. You must be able to show either that no ownership change occurred or that the limit was calculated and applied correctly. Failure to file the required statement can forfeit the NOLs even when the underlying calculation is right. For companies with complex ownership, detailed records of every testing date and every 5-percent shareholder’s cumulative shift across the three-year window aren’t optional; they’re the compliance file.

1
Internal Revenue Service. Rev. Rul. 2026-6
2
eCFR. 26 CFR 1.382-2 – General Rules for Ownership Change
3
Office of the Law Revision Counsel. 26 USC 318 – Constructive Ownership of Stock
4
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
5
eCFR. 26 CFR 1.382-12 – Determination of the Long-Term Tax-Exempt Rate
6
Office of the Law Revision Counsel. 26 U.S. Code 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
7
Federal Register. Regulations Under Section 382(h) Related to Built-In Gain and Loss
8
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
9
Internal Revenue Service. Instructions for Form 172
10
Office of the Law Revision Counsel. 26 USC 383 – Special Limitations on Certain Excess Credits, Etc.
11
eCFR. 26 CFR 1.383-1 – Special Limitations on Certain Capital Losses and Excess Credits
12
eCFR. 26 CFR 1.382-5 – Section 382 Limitation
13
eCFR. 26 CFR 1.382-11 – Reporting Requirements