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Can Trump’s lower corporate tax rate benefit or otherwise affect my business whose NOL carryforward anyway reduces taxable income to zero?

December 6, 2016

Can Trump’s lower corporate tax rate benefit or otherwise affect my business whose net operating loss (NOL) carryforward anyway reduces taxable income to zero?

 

Yes, it can. Although the tax bill itself isn’t reduced, a higher NOL base can come in handy for certain tax elections. Here are just three examples, ones that immediately came to mind.

  1. There is a tax election where COD income is excluded from gross income under IRC Section 108, the taxpayer's tax attributes must be reduced in a specific starting with NOL of the taxable year of the discharge next followed by NOL carryover to the taxable year of the discharge. Lower corporate tax rates will result in higher NOL available to offset such tax attribute reduction.

     

  2. IRC Section 382 restricts usage of NOL after a qualifying ownership change has occurred. Lower corporate tax rates will result in increased amount of restricted NOL since some of that NOL is no longer being used to reduce taxable income, now lowered by lowered rates.

     

  3. The unified loss rule in Reg. § 1.1502-36 and in particular the “attribute reduction rules” contained in Treas. Reg. § 1.1502-36(d), which are designed to prevent taxpayers from recognizing more than one tax loss with respect to a single economic loss, make NOL levels play a significant role.

     

    Background: say: “Seller” is the common parent of an affiliated group of corporations that have elected to file consolidated federal income tax returns (the “Seller Group”), “Target” is a member of the Seller Group and is 100% directly owned by Seller and “Buyer” is a corporation that is not affiliated with the Seller Group.

     

    In lieu of default attribute reduction rules, Seller can elect to reattribute all or any portion of Target’s Category A, B, and C attributes to the extent they would otherwise be reduced, with Category B involving a reduction of net operating loss carryovers. Thus, a bigger pot of available NOL carryforward makes possible a larger reattribution of NOL. Lower tax rates free up more NOL for such pot.

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