Publish Date

Jun 15, 2021

Limitations on Corporate Tax Attributes: An Analysis Of Section 382 And Related Provisions

A&M Tax Advisor Weekly

As a result of the economic recession caused by the COVID-19 pandemic, many corporations find themselves with unprecedented losses from investments and operations. These losses can result in the creation of tax attributes for the corporation that can be used as deductions against past or future profits. Corporations with such attributes have to understand the rules that limit the use of these tax attributes.

Sections 382 of the Tax Code limits the use of net operating losses (NOLs), and certain other tax attributes, by corporations. These provisions apply after a corporation undergoes an ownership change (i.e., a greater than 50% increase in stock ownership over, generally, a three-year period). Corporations that have NOL carryforwards, or certain other tax attributes, are required by regulations to determine whether they have had an ownership change.

Attached is a detailed report on the section 382 rules on the limitation and use of tax attributes (carryforwards and built-in items) by corporations. The report also discusses the related rules under section 384 and the consolidated return limitations under the separate return limitation year (SRLY) rules.

This updated version of the report discusses at length the application to corporations (both foreign and domestic) of the so-called Tax Cuts and Jobs Act’s section 163(j) limitation on the deduction of business interest expense. Generally, section 163(j) limits the deduction of business interest expense to an amount equal to the sum of (i) 30% of taxable income (with adjustments) (50% for many taxpayers for 2019 and 2020), and (ii) the amount of business interest income. The amount in excess of the limit can be carried forward by the taxpayer for an indefinite period.
Many of the applicable regulations were either finalized or proposed in the last year. For many taxpayers, these regulations will first apply to the 2021 taxable year. For earlier taxable years, taxpayers will generally be able to apply the final regulations or the version that was issued in proposed form. These rules have added a great deal of complexity to the tax rules.

The carryforward of business interest that is disallowed by section 163(j) is an attribute that can be limited by section 382. As a result, if a corporation undergoes an ownership change, the section 163(j) carryforward amount will be subject to further limitation under section 382.
Below are some of the highlights of the section 163(j) regulations that are discussed at length in the attached report.

  • Section 382 can apply to both S corporations and foreign corporations (for GILTI purposes).
  • The definition of interest that is subject to the limitations of section 163(j) covers many items that are not considered to be interest for general tax purposes, but bear economic similarities to interest.
  • Related controlled foreign corporations are permitted to apply section 163(j) on a group basis for subpart F purposes (including GILTI)