Key Takeaways:
- Section 382 planning is critical in capital raises and M&A to preserve net operating losses, R&D, and 174 tax attributes.
- Companies can reduce Section 382’s impact through real-time ownership tracking and proactive structuring.
- Capital market pressures are driving hybrid structures — tax should be integrated early into transaction planning.
—
The current capital markets environment is still marked by volatility, persistent inflationary pressure, and structurally higher interest rates. Companies are contending with less predictable financing windows, more expensive debt, and volatile equity valuations.
To keep flexibility and preserve runway, many issuers are turning to hybrid instruments like convertible debt, opportunistic equity raises, or converting maturing debt to equity when refinancing options are limited. These market conditions are also shaping a cautiously optimistic rebound in mergers and acquisitions (M&A) activity, with deal value increasing despite a slowdown in volume, driven in part by digital transformation and capability enhancement initiatives.
In this dynamic environment, tax considerations should be central to transaction planning. Key issues include the impact of Section 382 on valuable tax attributes, IRS treatment of termination fees, and new developments affecting the tax implications of recapitalizations and corporate reorganizations.
Section 382: Protecting Valuable Tax Attributes
Section 382 limits the use of net operating losses (NOLs), interest expense carryforwards under Section 163(j), R&D tax credits, and Section 174 amortizable expenses after an ownership change, defined as a cumulative 50% shift in 5% shareholder ownership over a rolling three-year period.
As capital raises and equity reshuffling continue, real-time monitoring of Section 382 exposure becomes critical. Companies can avoid or reduce the impact of limitations by:
- Timing or sizing transactions to avoid triggering a 50% shift
- Redeeming non-participating shareholders preemptively
- Implementing ownership restrictions or poison pill strategies
- Intentionally triggering an ownership change during high valuation periods to reset the clock
This is especially important as the One Big Beautiful Bill Act (OBBBA) raises questions around whether Section 174 amortized research costs may count as built-in losses, increasing the potential limitation under Section 382.
Planning Considerations
Section 382 planning should not be treated as a compliance issue. It is a strategic advantage. Timely analysis can:
- Preserve the value of key tax attributes in financings and M&A
- Avoid surprise limitations post-transaction
- Enable deal structuring that unlocks added value through built-in gain recognition
Tax departments must integrate real-time ownership tracking and 382 planning into broader capital strategy, especially with Section 174 changes in play.
Preserve Tax Value in a Volatile Market
MGO supports private companies and their tax departments in aligning tax planning with broader capital strategies. We provide real-time Section 382 monitoring, evaluate tax attribute usage during recapitalizations, and support transaction structuring to avoid costly surprises.
Whether you’re exploring an equity raise, M&A, or hybrid financing, our tax advisors help you understand the downstream tax implications and preserve valuable deductions, losses, and credits. Reach out today to align your tax planning with your financing, equity, and M&A goals.