Net operating losses and Section 382

A biotech's accumulated deficit is roughly matched by federal and state net operating loss carryforwards, which can offset future taxable income. Federal losses arising after 2017 carry forward indefinitely but can offset only 80 percent of taxable income in a given year. State rules vary.

Section 382 limits the use of those losses after an ownership change, defined as a more-than-50-percentage-point shift in ownership by 5 percent shareholders over a rolling three-year period. Venture financings, IPOs, and acquisitions all commonly trigger it. After a change, the annual amount of pre-change losses that can be used is capped at the company's equity value multiplied by the long-term tax-exempt rate, which for a small company can render most of the losses unusable within the carryforward period.

Companies track ownership changes with a Section 382 study, disclose the limitation in the tax footnote, and consider it in deal negotiations, because an acquirer's model of the tax attributes depends on it.