Overview of NOLs in Mergers and Acquisitions
NOLs may now be carried forward indefinitely until the loss is fully recovered, but they are limited to 80% of the taxable income in any one tax period. In taxable acquisitions in which the acquired net assets are stepped-up for tax purposes, the target’s NOLs may generally be used immediately by the acquirer to offset the gain on the actual or deemed asset sale. Any remaining NOLs of the target do not survive the transaction and are lost. The utilization of NOL after a merger or acquisition of corporations is complex. There are several restrictions by law.
Section 382 and its Impact on NOL Usage
You’ll learn how the Section 382 limitations on Net Operating Loss (NOL) usage affect M&A deals. Section 382 of the U.S. tax code states that an Acquirer in an M&A deal structured as a Stock Purchase may use only a limited amount of the Target’s Net Operating Losses (NOLs) to reduce its Taxable Income each year. The U.S. tax code is complicated, and Section 382 sometimes affects merger models.
Rules and Limitations Surrounding NOLs
The waiver should not be made for the 2018 NOLs of $18 million, as these will never expire. Since the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), NOLs generally could not be carried back but could be carried forward indefinitely. Further, the TCJA limited NOL absorption to 80% of taxable income.
C corporations are under US law taxed separately from owners. If you are acquiring a company with NOLs, annual utilization of that company’s NOLs is generally limited.