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Taxtom
Taxtom, Accountant
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Experience:  25 Years in preparing Personal and Business Tax Retuns
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I work for a non public c corp (startup) if my company is

Customer Question

I work for a non public c corp (startup) if my company is acquired under what circumstances would the acquiring company be able to use my loss carryforward? How about a 51% purchase vs 100%
Submitted: 3 years ago.
Category: Finance
Expert:  Taxtom replied 3 years ago.

Taxtom :

Hello, This is very complicated issue. First here is the simple explanation:


A company buying another entity that has an NOL carryforward will certainly place a high value on the NOL carryforward, and may even buy the entity strictly in order to use its NOL carryforward. To curtail this type of behavior, the IRS has created the Section 382 limitation, under which there is a limitation on the use of an NOL carryforward if there is at least a 50% change in the ownership of an entity that has an unused NOL. The limitation is derived through a complex formula that essentially multiplies the acquired corporation’s stock times the long-term tax exempt bond rate. Now here is the IRS code on the issue http://www.irs.gov/irb/2003-40_IRB/ar17.html . Basically it saying that you would take in effect of gains that were incurred if the company is sold outright and you calculated the gains based on the sales price of the company and you would offset some of the on books NOL. I know this is confusing but there is not any easier way to explain. Thanks Tom

Customer :

50% change in ownership over what timeframe (the period of the NOL?) If Company x buys less than 50% how can they benefit in reduced taxes (I can see the P&L impact, but ont on the tax side. sounds like I need to consider if present / past investors used their proportional share in prior years?

Taxtom :

Hello, a loss from a C Corp would not have been passed on to individuals. If it was an S-corp in tha past than that loss has already passed through to the owners. Once a change in ownership reaches more than 50% than the rule kicks in. If Company X buys less than 50% and it is a C- corp that benefit doesn't pass to the new corporation. It is treated as an investment only. Thanks Tom

Expert:  Taxtom replied 3 years ago.
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Customer: replied 3 years ago.
One last clarification.... If a C Corp buys X% of my C corp. they can recognize a reduction in their taxes (x% of NOL) subject to the limitations you noted before?
Expert:  Taxtom replied 3 years ago.
Hello, It really is determined on how the sale is meant, if is an investment in the company than the NOL loss will not care through. I wish it was a direct number I could give you but it would vary dependig on each company. If you want to carry these items through a LLC corporation would better serve to pass through the losses directly. Thanks Tom
Customer: replied 3 years ago.
Sorry, I don't get what you're saying.... Forget the LLC. They're both C Corps and that's not going to change. If C Corp X were to buy 51% or 60% of my C Corp as a prospective first step towards buying 100%. Would they be able (subject to the limitations) to recognize a proportional 51% or 60% of my NOL even if we don't go through with the final 100% buyout? Under either the 51% or 60% scenario, they would assume management of my company. It's not a passive investment.
Expert:  Taxtom replied 3 years ago.
Hello, This will take me a little more research. I wih it was cut and dried but its not. I will be back. Thanks Tom
Expert:  Taxtom replied 3 years ago.
Sorry for the delay but the regulations are clear as mud. If the acquiring corporation has control over the subsidiary and consolidates its ownership interest into the aquiring corporations tax return then yes it can take its share of the NOL losses subject to the limitation I set forward previously. If the corporation treats it as an investment and does not consolidate then it can not take the NOL. Thank You Tom
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