Limitations on Corporate Tax Attributes: An Analysis of Section 382 and Related Provisions

As a result of the recent upheaval in the markets (e.g., inflation, increased interest rates, bank failures), many corporations find themselves with unprecedented losses from investments and operations. Many economically profitable businesses also find themselves with tax losses due to the availability of deducting the full costs of equipment under the bonus depreciation rules prior to 2023.

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.

This paper discusses the rules on the limitation and use of tax attributes (carryforwards and built-in items) by corporations. The bulk of the paper discusses the limitation rules of section 382 of the Internal Revenue Code, of 1986, as amended (the “Code”), which limit the use of tax attributes after an ownership change. The paper also discusses the other rules that can apply to limit a corporation’s use of its tax attributes.

Sections 382 and 383 together limit 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). The limitation is generally based upon the value of the stock of the corporation before the ownership change multiplied by the long-term tax-exempt rate, a rate published monthly by the Internal Revenue Service (IRS).

Section 384, a provision that shares many concepts with sections 382 and 383, limits the use of NOLs (and certain other tax attributes) by corporations. This provision applies where a corporation acquires the stock or assets of another corporation.

The separate return limitation year (SRLY) limitation rules limit the use of NOLs (and certain other tax attributes) by a consolidated group. The SRLY rules also share concepts with sections 382 and 383. These provisions apply if a new member joins (or an existing member departs) a consolidated group.

Highlights of the 2023 edition include:

• Book Income AMT – A new corporate alternative minimum tax (CAMT) based on book income was enacted as part of the Inflation Reduction Act of 2022. This new CAMT will generally apply to large corporations starting in 2023. The paper describes how corporate tax attributes (including book losses of controlled foreign corporations, foreign tax credits, general business tax credits) can be applied against the CAMT and the potential limitation on their use. The CAMT rules are described on pages 22-28.
• Section 174 Capitalization Rules – Starting in 2022, research and experimental expenditures and software development costs are no longer currently deductible. Instead these costs are amortized over five years (fifteen years, in the case of foreign research). The paper describes the potential issues relating to the treatment of section 174 capitalized costs under the foregone amortization provisions of the section 338 approach. These issues are discussed on page 181.

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