Section 382 of the Internal Revenue Code limits how much of a corporation’s pre-change net operating losses can offset taxable income each year after a significant shift in ownership. The annual cap equals the fair market value of the company’s stock immediately before the ownership change multiplied by the IRS long-term tax-exempt rate, which stood at 3.58% as of March 2026. The rule exists to stop buyers from acquiring money-losing companies purely to harvest their accumulated tax losses.1Office of the Law Revision Counsel. 26 USC 382: Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
What Section 382 Actually Limits
A net operating loss occurs when a corporation’s deductible expenses exceed its taxable income. For losses arising in tax years after 2017, a corporation can carry them forward indefinitely; older losses could only be carried forward 20 years.2Office of the Law Revision Counsel. 26 USC 172: Net Operating Loss Deduction
Even without Section 382, a separate rule already caps NOL usage. For tax years beginning after 2020, post-2017 NOLs can only offset up to 80% of taxable income in any single year. Pre-2018 NOLs, if any remain, are not subject to this 80% cap.3Internal Revenue Service. Instructions for Form 172
Section 382 layers on top of that. Once triggered, it independently limits how much of the pre-change NOL a corporation can use each year, regardless of what the 80% rule would otherwise allow. Only losses generated before the ownership change are subject to the cap. NOLs the corporation earns after the change stay outside Section 382 entirely.
When Section 382 Is Triggered
Section 382 kicks in when an “ownership change” occurs. The test is specific: one or more 5-percent shareholders must collectively increase their ownership by more than 50 percentage points compared to the lowest ownership level any of those same shareholders held during the testing period. The testing period is generally the three years leading up to the change.1Office of the Law Revision Counsel. 26 USC 382: Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
A 5-percent shareholder is anyone who holds 5% or more of the corporation’s stock at any point during the testing period. The shift can happen through stock purchases, mergers, redemptions, recapitalizations, new stock issuances, or reorganizations. If a private equity firm goes from owning 0% to 55% of a loss corporation within three years, that 55-point jump crosses the threshold and triggers Section 382.
A corporation doesn’t run the test once a year. It must re-evaluate its shareholder percentages on every “testing date,” which is triggered by any owner shift, equity structure shift, or option transaction involving a 5-percent shareholder.4eCFR. 26 CFR 1.382-2T – Definition of Ownership Change Under Section 382
Small shareholders present a tracking issue. Individuals who each own less than 5% are lumped together into a “public group” that is itself treated as a single 5-percent shareholder. Shifts in that public group’s percentage can contribute to the 50-point calculation. Stock trades between non-5-percent shareholders are ignored because they don’t change the overall public group’s percentage.
How the Annual Limitation Is Calculated
The formula is straightforward: multiply the fair market value of the old loss corporation’s stock, measured immediately before the ownership change, by the IRS long-term tax-exempt rate. The result is the maximum pre-change NOL the corporation can use against taxable income in any single post-change year.
The long-term tax-exempt rate is published monthly by the IRS and equals the highest adjusted federal long-term rate from the current month and the two preceding months. As of March 2026, the rate is 3.58%.5Internal Revenue Service. Revenue Ruling 2026-6
Suppose a corporation valued at $50 million undergoes an ownership change in early 2026. At 3.58%, the annual limitation is $1,790,000. If the corporation had $20 million in pre-change NOLs, it would take over 11 years to use them all, even in high-income years. For a $5 million corporation, the annual cap drops to $179,000, which makes a large NOL stockpile essentially unusable at any reasonable pace.
Unused Cap Rolls Forward
If taxable income in a post-change year is less than the limitation, the unused portion increases the cap for the following year. An annual limit of $1,790,000 against only $500,000 of taxable income leaves $1,290,000 to roll forward, making next year’s cap $3,080,000.1Office of the Law Revision Counsel. 26 USC 382: Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
Short and Successive Years
When an ownership change happens mid-year, the post-change portion is shorter than a full year, and the limitation is prorated. A 200-day post-change period gets 200/365 of the annual cap.6eCFR. 26 CFR 1.382-5 – Section 382 Limitation
A corporation can experience more than one ownership change. Losses from before the earlier change stay subject to both the old and new limitations, and a second ownership change can produce a lower cap on those original losses but never a higher one.7eCFR. 26 CFR 1.382-5 – Section 382 Limitation
Built-In Gains and Losses Adjust the Cap
Section 382 also looks at unrealized gains and losses embedded in the corporation’s assets at the change date. Assets collectively worth more than their tax basis produce a net unrealized built-in gain (NUBIG); assets worth less produce a net unrealized built-in loss (NUBIL). These affect the limitation in opposite ways during the five-year recognition period after the change.8Internal Revenue Service. Notice 2003-65: Built-In Gains and Losses Under Section 382(h)
A NUBIG helps the loss corporation. When the company recognizes a built-in gain during the recognition period, that gain increases the Section 382 cap for that year, letting the company use more pre-change NOLs to offset the income. A NUBIL runs the other direction: built-in losses recognized during the recognition period get treated as additional pre-change losses and become subject to the same annual cap.
A de minimis rule spares smaller companies. If the total NUBIG or NUBIL doesn’t exceed the lesser of $10 million or 15% of the fair market value of the corporation’s assets immediately before the ownership change, it’s treated as zero.
The Continuity of Business Trap
The annual limitation isn’t automatic. The corporation must continue its historic business, or use a significant portion of its historic business assets in a business, for at least two years after the ownership change. Failing this “continuity of business enterprise” test drops the Section 382 limitation to zero, wiping out the ability to use any pre-change NOLs.
There is a narrow floor. Even when a corporation fails the continuity test, the cap can’t be reduced below any increase attributable to recognized built-in gains or gains from a Section 338 election. For companies that shut down operations or radically pivot right after an acquisition, though, the NOLs become worthless. This is the provision that most directly punishes shell-company acquisitions.
Anti-Stuffing: Capital Injected Before the Change
Because the cap depends on stock value, there’s an obvious incentive to inflate that value before the change. The statute anticipates this. Any capital contribution made within the two years before the change date is presumed to be part of a plan to increase the Section 382 limitation and is excluded from the corporation’s value.
The rule also works in reverse. If a corporation redeems stock or distributes assets in connection with an ownership change, the stock value used in the formula is reduced to reflect that contraction.9Office of the Law Revision Counsel. 26 USC 382: Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change
Bankruptcy Exceptions
Companies in bankruptcy have access to two special rules. The more favorable one eliminates the annual cap entirely if the old loss corporation was under a court’s jurisdiction in a bankruptcy or similar case immediately before the ownership change, and the pre-change shareholders and creditors end up owning at least 50% of the reorganized company’s stock. For creditors to count toward that threshold, their debt must have been held for at least 18 months before the bankruptcy filing, or it must have arisen in the ordinary course of the company’s business.
When a bankrupt company doesn’t meet the 50% ownership requirement, a second option adjusts the valuation rather than removing the cap. Under this alternative, the corporation’s stock value for the limitation formula reflects any increase resulting from the cancellation of creditor claims, which raises the annual cap on NOL usage.
The paths involve trade-offs. The full exemption comes with a separate cost: the corporation must reduce its NOLs by interest deducted on the converted debt during certain prior years. The alternative valuation avoids that reduction but still imposes an annual cap.
Other Attributes Are Capped Too
NOLs get the most attention, but an ownership change also limits other pre-change tax attributes under the related Section 383. These include unused general business credits, unused minimum tax credits, net capital loss carryforwards, and excess foreign tax credits.10Office of the Law Revision Counsel. 26 USC 383: Special Limitations on Certain Excess Credits, Etc.
Credit limitations work slightly differently. Rather than capping the dollar amount of credits directly, Section 383 limits credits to the tax liability attributable to taxable income that falls within the Section 382 limitation, after applying the NOL cap first. Net capital losses used in a post-change year also reduce the Section 382 cap available for NOLs in that same year, so there is a direct trade-off between using capital loss carryforwards and using NOLs.
What Loss Corporations Must File
Any corporation that qualifies as a loss corporation must include a statement with its federal income tax return for each year in which an owner shift, equity structure shift, or related transaction occurs. The statement identifies the dates of the shifts, any dates on which an ownership change occurred, and the amount of tax attributes that gave the corporation its loss-corporation status.11eCFR. 26 CFR 1.382-11 – Reporting Requirements
The corporation must also keep records identifying every 5-percent shareholder, each shareholder’s ownership percentage, and whether the Section 382 limitation applies. These records must be kept for as long as they could be relevant to any tax examination.
Corporations can make certain elections on the Section 382 statement, including an election to close the corporation’s books as of the change date for splitting income and losses between the pre-change and post-change periods. The allocation matters because only the pre-change portion of the year’s loss becomes subject to the limitation.