Section 382: What an Ownership Change Does to Your NOLs
A net operating loss carryforward looks like a straightforward asset until an ownership change happens, a new investor crossing a specific threshold, and the amount you can actually use each year afterward gets capped, sometimes low enough that a large NOL balance becomes nearly worthless in practice.
Here's a worked example showing how that annual limitation actually gets calculated, and why the timing of a financing round matters as much as its size.
What actually counts as an ownership change
An ownership change happens when shareholders who each own five percent or more of the company collectively increase their ownership by more than fifty percentage points, compared to their lowest ownership percentage at any point in a rolling testing period that generally spans three years. This isn't limited to a single large transaction: a series of smaller financing rounds and secondary transfers over that testing period can add up to crossing the threshold even if no single round looks dramatic on its own, which is why tracking cumulative ownership shifts matters, not just the size of your current round.
How the annual limitation is actually calculated
Once an ownership change happens, the amount of pre-change NOL you can use in any future year is capped at the value of the loss corporation immediately before the change, multiplied by a published rate the IRS updates monthly, known as the long-term tax-exempt rate. Say your company was valued at ten million dollars immediately before an ownership change, and the applicable rate that month was a small single-digit percentage; multiply the two together and that dollar figure becomes your annual limitation, the maximum pre-change NOL you can use against income in any single future year, going forward indefinitely, unless a carryforward expiration or the built-in gain rules change the picture.
Why timing the round matters as much as the size
Because the limitation locks in the company's value at the moment of the ownership change, a down round or a distressed financing can permanently cap NOL usage at a low annual amount, effectively stranding a large loss carryforward for years even after the business recovers and starts generating real taxable income. The same NOL balance, carried through an ownership change that happens at a much higher valuation instead, produces a correspondingly higher annual limitation. This is one of the reasons a company sitting on a large NOL balance sometimes structures a financing round deliberately to avoid crossing the fifty-percentage-point threshold in a single transaction, spreading it out or adjusting the instrument used.
For example, imagine two companies with identical NOL balances that each take the same investment. One closes at a healthy valuation and the other during a distressed round. The rate is the same that month, but the limitation is value times rate, so the distressed company's annual cap is far lower and stays that low even after the business recovers. A common mistake is negotiating a round on price and dilution alone. The fix is to have your tax advisor run the limitation math on each proposed structure before signing, so you can see how much loss usage the timing costs or preserves.
Built-in gains and losses can adjust the math for a few years
If the loss corporation has a net unrealized built-in gain at the time of the ownership change, meaning its assets are worth more than their tax basis, recognizing some of that gain within five years after the change can increase the annual limitation for those years. The reverse is also true: a net unrealized built-in loss can further restrict how losses recognized in that same window get treated. Whether either of these applies requires a specific calculation at the time of the change, not an assumption either way, so it's worth running before finalizing the limitation number.
What to model before a large financing round closes
Before a new investor's round is finalized, model whether the round, combined with any other ownership shifts in the trailing three-year window, crosses the fifty-percentage-point threshold. If it does, calculate the company's pre-change value and the current long-term tax-exempt rate to see what the resulting annual limitation would actually be, and compare that to your NOL balance and your realistic future taxable income. A limitation that's higher than you'd ever plausibly use in a single year means the ownership change barely matters practically; a limitation far below what you'd need to fully use the NOL within its remaining life means real value is at stake in how the round is structured.
Model the limitation before the round closes:
- Add the new round to any other ownership shifts in the trailing three-year window and test whether five-percent shareholders move by more than fifty percentage points.
- If the threshold is crossed, estimate the company's value immediately before the change.
- Multiply that value by the current long-term tax-exempt rate to get the annual limitation.
- Compare the limitation with your NOL balance and realistic future taxable income to see whether it binds in practice.
- Check for a net unrealized built-in gain or loss, which can adjust the limitation for a defined window after the change.
What Good Looks Like
Cumulative ownership shifts are tracked against the rolling three-year testing period before any financing round closes, so the Section 382 impact is known in advance, not discovered after the round is final.
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Frequently Asked Questions
Does every financing round trigger the Section 382 limitation?
Only if it results in an ownership change, meaning five-percent-or-greater shareholders collectively shift by more than fifty percentage points within the rolling testing period. A round that keeps ownership shifts below that threshold, on its own or combined with other shifts in the window, doesn't trigger the limitation.
How is the annual NOL limitation actually calculated?
It's the value of the company immediately before the ownership change, multiplied by the IRS's published long-term tax-exempt rate for that month. That dollar figure becomes the maximum amount of pre-change NOL you can use against income in any single future year, so a lower valuation at the time of the change means a lower limitation going forward.
Can a down round really strand a large NOL balance?
Yes. Because the limitation locks in based on the company's value at the moment of the ownership change, a change that happens during a distressed or down round caps future NOL usage at a low annual amount, even if the business later recovers and generates substantial taxable income.
Do built-in gains change the limitation calculation?
They can, for a defined window after the ownership change. A net unrealized built-in gain recognized within that window can increase the annual limitation for those years, while a net unrealized built-in loss can further restrict it, so this is worth calculating specifically rather than assuming it doesn't apply.
About the numbers
This guide doesn't quote a sourced benchmark. Figures in it are estimates or general guidance, so check them against your own numbers.
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