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Section 382

What is Section 382?

Section 382 is a provision in the U.S. Internal Revenue Code that limits a corporation's use of Net Operating Loss (NOL) carryforwards after an ownership change. It's designed to prevent "loss trafficking," where companies are bought for their unused tax losses.

Specifically, if a company has an "ownership change" — generally, a shift of more than 50 percentage points in ownership among "5% shareholders" over a three-year period — Section 382 limits the amount of taxable income in future years that can be offset by these NOLs. This can impact the value of startups, particularly those with significant NOLs due to large investments in growth. Founders and early investors need to be aware of Section 382 when planning financing and exit strategies, as it can significantly impact the after-tax return on investment.

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