Examining ownership change risks and preserving NOL value

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The client

A growing technology company sought guidance from BerryDunn’s Commercial Practice Group on how to navigate Internal Revenue Code (IRC) section 382 ownership change risks and preserve (NOL) net operating loss value.

The challenge

The technology company was undergoing multiple equity raises and had concerns about triggering an ownership change under IRC section 382—a situation that could severely limit the use of net NOL carryforwards. Without in-house expertise to assess the risk or quantify the financial impact, the company required specialized support to protect a valuable tax asset.

The solution

BerryDunn’s team conducted a comprehensive IRC section 382 ownership change study, which included analysis of the company’s:

Equity structure

Shareholder shifts

Convertible instruments

Following the analysis, BerryDunn looked at valuation to establish defensible fair market values for stock at key points in time, helping to maximize the section 382 limitation. The team also modeled various limitation scenarios using historical and projected taxable income and advised on optimal tax elections to enhance NOL preservation.

The outcome

BerryDunn confirmed an ownership change had occurred. However, the detailed analysis and valuation supported a higher-than-expected limitation, preserving the maximum value of the company’s NOLs. This enabled the company to:

Record deferred tax assets with confidence

Enhance the accuracy of its financial reporting

Implement governance protocols to monitor future ownership shifts

As a result, the company is now well-positioned to leverage its NOLs as a strategic asset in upcoming fundraising and merger and acquisition activities.

Learn more about BerryDunn’s team and services.