C Corporation NOL After an Ownership Change With Interest Limitation
Redwood Components Inc. is a calendar-year C corporation with a $2,000,000 net operating loss carryforward, all arising in post-2017 tax years. On July 1, 2024, a private equity group acquires 60% of Redwood’s stock, causing an ownership change under §382. Immediately before the change, Redwood’s stock was worth $3,000,000, and the applicable long-term tax-exempt rate is 3.5%. For 2024, Redwood has operating income before interest and NOL of $1,600,000 and business interest expense of $400,000. Its adjusted taxable income for §163(j) is $1,200,000. Redwood has no capital gains, no built-in gains recognized during the §382 review period, and no other deductions. It wants to know how much of its NOL and interest it can deduct in 2024 and what carries forward.
1. Compute Redwood’s §382 annual limitation.
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The §382 limitation is the value of the loss corporation immediately before the ownership change multiplied by the applicable long-term tax-exempt rate:
- Stock value: $3,000,000
- Long-term tax-exempt rate: 3.5%
- §382 limitation: $3,000,000 × 3.5% = $105,000
This is the maximum pre-change NOL Redwood can use in 2024, before considering the 80% taxable income limitation. The limitation is not the amount of NOL that expires; unused NOL carries forward and is subject to the same annual §382 limitation in later years.
2. Compute Redwood’s 2024 taxable income and carryforwards, showing the ordering of §163(j), the 80% NOL limit, and §382.
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Step 1 - §163(j) interest limitation.
- Adjusted taxable income: $1,200,000
- 30% limit: $360,000
- Business interest expense: $400,000
- Deductible interest: $360,000
- Disallowed interest carryforward: $40,000
Step 2 - Taxable income before NOL.
$1,600,000 operating income − $360,000 deductible interest = $1,240,000.
Step 3 - 80% NOL limitation.
80% × $1,240,000 = $992,000. This is the maximum NOL deduction before §382.
Step 4 - §382 limitation.
The §382 limitation is $105,000, which is lower than $992,000. Redwood deducts $105,000 of NOL.
Step 5 - Results.
- 2024 taxable income: $1,240,000 − $105,000 = $1,135,000
- NOL carryforward: $2,000,000 − $105,000 = $1,895,000
- Disallowed interest carryforward: $40,000
The §382 limitation is applied after the 80% computation; the smaller amount controls.
3. Explain whether the §382 limitation applies to the entire $2,000,000 NOL or only to 2024, and what happens to unused amounts.
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The §382 limitation is an annual limitation on the use of pre-change losses. It does not permanently disallow the entire $2,000,000 NOL. Instead:
- Redwood can use up to $105,000 of pre-change NOL in 2024.
- The unused $1,895,000 carries forward.
- In 2025 and later, the carryforward is again subject to the §382 limitation for that year, as increased for any recognized built-in gains or other adjustments.
- The 80% taxable income limitation also applies each year before the §382 limitation.
The disallowed $40,000 of business interest is a separate carryforward under §163(j) and is not subject to §382, although it affects taxable income and therefore the amount of NOL that can be used.