Section 382
AccountingThe US rule capping how much of an acquired company's tax losses may be used each year after an ownership change.
Also written: IRC Section 382, s382
This is US federal tax law and has no direct European equivalent, but it is worth knowing because you will meet American targets, cross border structures and interviewers trained on US material who assume it is universal.
The trigger is an ownership change, broadly a shift of more than fifty percentage points among substantial shareholders measured over a testing period. It is a cumulative test, so a series of ordinary share issues can trip it without any acquisition happening at all.
Once triggered, the annual use of the pre change losses is capped at the target's equity value at the change date multiplied by a published long term tax exempt rate. The design intent is that a buyer gets no more relief than the loss making company could have earned on its own value, and the effect is severe.
It is also perverse where it bites hardest. A distressed company has the largest losses and, by definition, the smallest equity value, so the cap is smallest exactly where the losses are biggest. European systems attack the same problem differently, generally by testing whether the same business continued rather than by applying a formula.
Worked example
A target has 300 of losses and an equity value of 100 at the ownership change, at an illustrative published rate of 4%.
The annual cap is 100 multiplied by 4%, so 4 a year. Using 300 of losses at 4 a year would take seventy five years, and most of the balance will expire unused.
That is why a US target's loss balance is frequently written down to close to nothing in a deal model, while the accounting balance sheet still shows a deferred tax asset.