As a business owner, you may see Net Operating Losses (“NOLs”) as an unwelcome sign of financial hardship. However, with strategic planning and expert guidance, these losses can be turned into a valuable tax asset. Here’s where the expertise of a seasoned tax attorney comes into play.
NOLs, as defined under Section 172 of the Internal Revenue Code (“IRC”), occur when a business’s allowable tax deductions exceed its taxable income within a tax year. While no business aspires to operate at a loss, if it happens, the silver lining is that these losses can be used strategically to offset future taxable income. However, monetizing NOLs isn’t straightforward and requires the navigation of complex tax laws.
Maximizing the Value of NOLs through Mergers and Acquisitions
A prevalent strategy to extract value from NOLs is through merger or acquisition transactions. Essentially, a profitable company can acquire a company with significant NOLs and use those losses to offset future taxable income. This strategy effectively ‘monetizes’ the NOLs, transforming them from a symbol of past hardship into a catalyst for future financial gain.
However, such transactions are subject to stringent regulations to prevent ‘trafficking’ in NOLs, primarily regulated by IRC Section 382. This section limits the amount of income that can be offset with the NOLs of a target corporation following a change in control, calculated by multiplying the value of the company’s stock at the time of the ownership change by the long-term tax-exempt rate.
The Role of a Tax Attorney in NOL Monetization
An experienced tax attorney is instrumental in guiding businesses through these complex transactions, ensuring they comply with the intricate regulations under Section 382 and other relevant IRC sections. With their deep understanding of tax law, they can structure the transaction to preserve and maximize the value of NOLs.
Moreover, a tax attorney can also advise on other ways to extract value from NOLs, such as through corporate restructuring or strategic tax attribute preservation planning.
In the realm of tax law, NOLs can be transformed from a fiscal burden into an opportunity for tax savings with the right strategies and expert guidance. Businesses with significant NOLs should consult a seasoned tax attorney to explore their options and chart the most beneficial path forward.
Remember, the potential advantages are compelling, but the path to monetizing NOLs involves navigating intricate tax strategies and potential pitfalls. A knowledgeable tax attorney can guide you through this complexity, providing expert counsel tailored to your unique circumstances.
Please note, this blog post provides general information and does not constitute legal advice from any of the attorneys at Burrell Law, P.C.
Always consult with a professional advisor before making any decision, and feel free to contact us to inquire about how we could help you.