Linked to this site is the 2024 edition of A&M Senior Director Lee G. Zimet's paper entitled "Limitations on Corporate Tax Attributes: An Analysis of Section 382 and Related Provisions." The paper contains a comprehensive discussion of corporate tax attributes and the various limitation rules.
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.
These losses can result in the creation of tax attributes for the corporation that can be used as deductions against past or future profits (or credits against tax). 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 2024 edition include:
- BEAT – The base erosion and abuse tax (BEAT) was enacted in 2017 as part of the Tax Cuts and Jobs Act. BEAT provides for an alternative corporate minimum tax with a higher base (disallowance of deductions for payments to related foreign parties and certain credits) and a lower rate (generally 10%). The paper describes how corporate tax attributes (net operating losses and certain credits) can be impacted by BEAT. The BEAT rules are described on pages 19-31.
- 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 applies to large corporations starting in 2023. The paper describes how corporate tax attributes (book losses (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 31-47.
- Pillar Two – Starting in 2024, certain large multi-national enterprises can be subject to foreign taxes if they are not subject to a minimum tax of at least 15% in the United Sates (taking into account both federal, state, and local income taxes) on their US profits. This tax regime is referred to by many as Pillar Two. The paper describes how foreign taxes could be applied to tax undertaxed profits in the US. Such a tax would limit the efficacy of certain US tax attributes. The Pillar Two rules are described on pages 47-68.
- COD income – Cancellation of debt (COD) income can be excluded (partially or fully) from gross income if the taxpayer is insolvent or in bankruptcy. In such instance, certain tax attributes (losses, credits, and asset basis) of the taxpayer are required to be reduced by the amount of COD income that was excluded. The COD income attribute reduction rules are described on pages 86-91.
- 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 section 382 built-in gain or loss rules. These issues are discussed on page 209-10, 224-25, and 231-32.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.