Introduction
Bristol Myers Squibb spent more than $20 billion in 2024 buying biotechnology companies, including Karuna Therapeutics, Mirati Therapeutics and RayzeBio, all of which had spent years losing money developing drugs. Those losses are worth something to a buyer: as net operating losses (NOLs), they can reduce taxable income in future years, and because Bristol Myers bought the companies' shares, the losses came with them. At the end of 2025 it held $1.3 billion of US federal NOLs from acquisitions. Its 2025 annual report notes that they generally never expire, but that Section 382 of the Internal Revenue Code limits how much of them it can use each year, because the companies changed hands.
Bristol Myers could not simply use the acquired losses against its own large taxable income, as a company can with net operating losses it generates itself. Congress has long restricted the trade in tax losses, to stop profitable companies from buying loss companies mainly for their tax attributes. Section 382 does not forbid the use of acquired losses; it rations it, and the ration decides what the losses are worth.
When the Limit Applies
The limit is triggered by an ownership change: an increase of more than 50 percentage points, over a rolling three-year testing period, in the percentage of a loss company's stock owned by one or more 5% shareholders. Shareholders owning less than 5% are grouped together and treated as a single 5% shareholder, so new share issues to the public can count as well as sales between large holders.
- Ownership change
Under Section 382, a shift in the ownership of a loss corporation in which the stock held by one or more 5% shareholders rises by more than 50 percentage points above the lowest percentage they held during the testing period, generally the previous three years. After an ownership change, the use of losses and certain other tax attributes from before the change is limited each year.
Buying a loss company outright for cash crosses the threshold, because the buyer goes from owning nothing to owning all of it; a purchase of assets instead leaves the losses with the seller, one of the trade-offs in stock deals vs asset deals. Ownership changes also occur without a sale: through a series of large stock issues, through a bankruptcy in which creditors receive the equity, or through investors gradually building stakes. Companies that rely on their losses often watch their shareholder registers for that reason, and some adopt shareholder rights plans that deter anyone from crossing 4.99%.
The limit covers more than net operating losses. Tax credit carryforwards are limited under the companion rule in Section 383, and interest deductions carried forward under the business interest limitation, described in interest deductibility limits under Section 163(j), are treated as pre-change losses too.
How the Annual Limit Is Calculated
The annual limit is the value of the loss company's stock immediately before the ownership change, multiplied by the long-term tax-exempt rate, a rate the Internal Revenue Service (IRS) publishes each month in its tables of applicable federal rates. The rate is the highest adjusted federal long-term rate of the three months ending with the month of the change, so the limit depends on when the change happens as well as on the price.
The logic is that the limit approximates the income the loss company could earn on its own value if it were invested in tax-exempt bonds. A larger company, in other words, can use more of its losses each year. The value used is normally the equity value implied by the deal, with adjustments to prevent manipulation: capital contributed in the two years before the change is generally excluded, and the value is reduced if a third or more of the company's assets are investment assets rather than operating ones.
Carryforwards and Built-In Gains
Any part of the limit not used in a year carries forward and adds to the next year's limit. Three further rules can change the result. If the loss company does not continue its business enterprise for two years after the change, the limit falls to zero. And if the company's assets were worth more than their tax basis at the change, gains recognized on those assets within five years (built-in gains) raise the limit; IRS Notice 2003-65 also lets such companies add a deemed amount for the depreciation they would have had if their assets had been stepped up, which can raise the limit materially. The rule works in reverse for assets worth less than their tax basis: built-in losses recognized within the five years, including the excess depreciation on those assets, are treated as pre-change losses and fall under the cap.
What the Limit Means for Value
The same pool of losses can be worth very different amounts depending on the size of the company that carries it. Compare two targets, each with $1,500 of losses that never expire, acquired at a 4% long-term tax-exempt rate:
| Line item | Large target | Small target |
|---|---|---|
| Equity value immediately before the ownership change | 5,000 | 200 |
| Long-term tax-exempt rate | 4% | 4% |
| Annual limit on pre-change losses | 200 | 8 |
| Net operating losses acquired | 1,500 | 1,500 |
| Years needed to use the losses | 7.5 | 187.5 |
| Tax saved each year at 21% | 42 | 1.7 |
| Present value of the tax savings at 8% | 230 | 21 |
Both targets carry the same 315 of undiscounted tax benefit. The cap spreads the small target's benefit over almost two centuries, so it is worth a fraction of its face value. Post-2017 losses can offset only 80% of taxable income in a year, which can slow use further.
For the large target, the cap barely matters: the buyer recovers most of the tax value in under eight years. For the small one, the losses are almost worthless. This is why a large pool of losses in a company bought cheaply rarely justifies much of a premium, and why companies emerging from bankruptcy, whose equity value is often small relative to their losses, frequently lose most of the economic value of their tax attributes.
Losses That Expire
Losses arising in tax years beginning before 2018 expire after twenty years, while later federal losses carry forward indefinitely but can offset only 80% of taxable income in any year, under the rules that followed the 2017 tax reform. When an annual limit is low and the losses are old, some will expire before the cap allows their use, and that part is lost entirely. The problem also arises at state level, where rules on ownership changes and carryforward periods vary.
How the Limit Shows Up in the Accounts
In an acquisition, the buyer records the target's losses as deferred tax assets in the purchase price allocation, at the tax rate times the losses the cap still allows it to use. Losses that will expire unused because of the Section 382 cap are not recognized at all, and a valuation allowance is recorded against the remainder if the combined group does not expect enough taxable income, the judgment described in deferred tax assets and valuation allowances. The resulting asset adds to the net assets acquired and therefore reduces goodwill, as covered in asset write-ups and the deferred taxes they create.
The limit also shapes the deal itself. A buyer that acquires assets rather than shares leaves the losses behind with the seller, which can use them to shelter the gain on the sale, while a share purchase brings them over subject to the cap. In bankruptcy, special rules apply: if the old shareholders and qualifying creditors own at least half of the reorganized company, the annual limit can be avoided altogether, at the cost of reducing the losses, and otherwise the value used for the limit reflects the company after its debt has been cancelled.
For bankers, the practical steps are the same in most deals: identify whether the target has had an ownership change before, apply the deal value and the current long-term tax-exempt rate to estimate the limit, check for built-in gains and expiring losses, and present the losses at their present value. The Valuation guide's treatment of non-operating assets explains how such items are added to enterprise value.
