What is section 382?

Section 382 in Plain English: A primer for founders and early-stage tech companies

What Founders Need to Know About Protecting Their Startup’s Tax Losses

by Jason J. Galek, Senior Tax Counsel, Mignano Law Group

Updated for 2026

If your startup has built up tax losses, a big enough change in who owns the company can sharply limit how much of those losses you’re allowed to use each year going forward. Most founders never think about this until a round or an acquisition is already in motion, and by then, the cap table is hard to change.

This overview explains what Section 382 is, why it tends to bite fast-growing tech companies specifically, what actually triggers it, the exceptions that can work in your favor, and where the rules stand in 2026. It is written for non-tax readers and is not tax or legal advice; it’s background to help you spot the issue early and ask the right questions before a deal closes.

This overview deliberately simplifies rules that are highly mechanical and regulation-driven; actual Section 382 studies depend on detailed cap-table data, instrument terms, attribution rules, public-group methodology, and valuation.

Start with the asset you’re protecting: your tax losses

Early-stage companies usually lose money for years. Those losses aren’t wasted. The Internal Revenue Code lets you carry them forward as net operating losses (NOLs) and use them to offset future taxable income, so that when you finally turn profitable for tax purposes, you pay less tax. For example, a startup that burns $30 million on its way to profitability builds a stockpile of NOLs that can be worth millions in future tax savings. Economically, NOLs can be a valuable tax attribute, even if their financial-statement value is reduced or fully reserved by a valuation allowance.

Section 382 is the rule that decides how much of that tax attribute can be used each year after the company undergoes a qualifying ownership change. NOLs are the focus, but related rules can affect other attributes. Section 383 applies similar limitations to certain capital loss carryforwards and excess credits. Section 384 can also matter in acquisitions by limiting the use of pre-acquisition losses to offset another corporation’s built-in gains.

If your company has deferred interest deductions because of the business-interest limitation rules, those carryforwards may also be treated as pre-change losses and limited after an ownership change.

Why 382 impacts startups in particular

Section 382 was enacted to stop “loss trafficking,” in which profitable companies buy loss-making shells solely to claim their NOLs. The problem for founders is that the rule doesn’t care about your intent. It triggers on a mechanical ownership-change test, and the normal life of a venture-backed company keeps tripping that test:

You accumulate large NOLs precisely because you’re spending ahead of revenue.
You sell equity repeatedly — seed, Series A, B, C — and each round hands a meaningful new percentage of the company to new investors.
Ownership is measured cumulatively over a rolling window, so several “normal” rounds can add up to a change even if no single round felt dramatic.

In other words, the exact behavior that makes a startup a startup is what puts its NOLs at risk. The good news is that the limitation is predictable enough that you can model it in advance, and there are exceptions that are designed for ordinary cash fundraising.

An “ownership change” is the trigger

Section 382 only applies when there is an ownership change. In plain terms, that means the investors who own big stakes have, together, increased their ownership by more than 50 percentage points compared with their lowest ownership over a rolling look-back period (generally the prior three years). A few features of this test surprise founders:

It’s measured by value, not share count. What matters is the value of the stock each big holder owns relative to the whole company, not how many shares or what percentage of the voting class.
Only “5-percent shareholders” are tracked individually. Large investors (think a lead VC) are counted on their own. Everyone holding less than 5% gets bundled together into a “public group” and treated as a single notional shareholder.
Only increases count. You add up how much the big holders went up; you don’t net that against holders who went down. That asymmetry is why cumulative dilution across rounds adds up so quickly.
It’s cumulative over the testing period. Each new financing is a fresh “testing date,” and the math looks back across the whole window. Cross the 50-point line at any testing date, and you’ve had an ownership change.

Rule of thumb:

If new and growing investors have acquired more than half of the company by value over roughly a three-year span, assume Section 382 is in play and model it. A sale of a majority stake will usually require Section 382 modeling and often result in an ownership change, but the outcome still depends on the tested ownership shifts and the applicable attribution and aggregation rules.

Exceptions that can work in your favor

The general test sounds unforgiving, but the regulations contain several relief valves that matter a lot for ordinary venture fundraising. Don’t self-diagnose using these; know they exist and ask about them:

Some limited preferred stock may be excluded. Certain limited-and-preferred stock described in Section 1504(a)(4) is generally excluded from “stock” for ownership-change testing, although it may still count in valuing the loss corporation. This rule should not be assumed to apply to typical venture preferred without analysis, especially where the preferred is convertible, participating, or otherwise economically equity-like.
Cash-issuance and small-issuance exceptions. In qualifying cash issuances, a portion of the issuance may be excused from the harsher “segregation” assumptions, which otherwise treat each new group of small investors as brand-new owners. These exceptions are specifically designed to keep routine capital-raising from over-counting your owner shift.
Better ownership information can reduce worst-case assumptions. The default rules may assume an adverse ownership picture. If you can document who owns what through shareholder questionnaires, SEC filings, or reliable cap-table records, you may be able to apply more favorable identification rules (sometimes called the “actual-knowledge” relief) and show a smaller ownership shift.

What happens after a change: the annual limitation

An ownership change doesn’t erase your NOLs. Instead, it puts an annual ceiling on how much of the pre-change losses you can use each year. The formula is mechanical:

Annual limit = Value of the company (just before the change) × the IRS long-term tax-exempt rate

The “long-term tax-exempt rate” is a figure the IRS publishes each month (in recent years it has hovered in the low single digits, running about 3.6% in mid-2026; the 3% used in the illustration below is a round number chosen for simplicity). The key driver you can influence is the company's value at the time of the change. Depending on when the losses arose and what type of attribute is involved, annual limits may defer use for many years, and some attributes may expire or lose practical value before they can be fully used.

The cruel irony for founders: the worst time to have an ownership change is in a down round or a distressed sale, because that’s when company value — and therefore your annual NOL limit — is lowest, even though that’s exactly when the losses are largest.

Illustration

Suppose your company has $30 million of NOLs and, just before a financing that causes an ownership change, the business is valued at $40 million. If the long-term tax-exempt rate is 3%:

    
            Amount
       
            Pre-change value
            $40,000,000
        
            Long-term tax-exempt rate
            3%
        
            Annual NOL usage limit
            $1,200,000 per year
        
            Years to fully use $30M of NOLs
            ~25 years

Here, the annual limit is $40,000,000 × 3% = $1,200,000 per year, so the full $30 million in NOLs would take roughly 25 years to use up. Many post-2017 federal NOLs carry forward indefinitely, but annual limitations can still make their value remote or impractical to realize.

Now run the same company through a down round at a $10 million valuation: the annual limit drops to $300,000, stretching the same $30 million of losses across a horizon long enough that much of the value may never be realized. The losses didn’t change; the valuation at the change date did. This example isolates the Section 382 limitation. Other rules, including the Section 172 limitation on post-2017 NOL usage, may further limit annual utilization.

Things that can quietly reduce the limit

Beyond the basic formula, a handful of rules can reduce the value used in the calculation or eliminate the limitation entirely. Founders don’t need the mechanics, just awareness that these exist:

Keep operating the business (continuity requirement). You generally must continue the company’s historic business for two years after the change. If an acquirer shuts down the business or strips it for parts, the limitation can drop to zero, rendering the NOLs worthless.
Don’t “stuff” the company right before a change. Pumping in cash or assets in the two years before an ownership change, mainly to inflate the value and boost the limit, is disregarded under an “anti-stuffing” rule. Ordinary operating capital and formation contributions are fine.
Large idle (non-business) assets reduce value. If a large portion of the company is tied up in investments unrelated to the business, that value can be excluded from the calculation.
Redemptions and buy-backs around the change reduce value. Cashing shareholders out in connection with the change lowers the value used in the formula.
Built-in gains and losses (NUBIG / NUBIL). If the company is sitting on appreciated assets as of the change date, it may be able to use more of its losses; if it’s sitting on unrealized losses, more of those can also be caught by the limit. This is worth a closer look in asset-heavy or IP-heavy companies.

A few special situations to flag

Multiple classes of stock (common + preferred). Because ownership is measured by value, swings in the relative value of preferred versus common can shift the math even when nobody buys or sells. There are accepted methods for handling this, but it’s a known trap in venture-backed cap tables with stacked preferred.
Convertibles, SAFEs, warrants, and options. These can be treated as stock for the test in some cases. A cap table full of convertible instruments needs a closer read before you rely on a clean answer.
Bankruptcy and restructuring. Special relief can preserve NOLs in a bankruptcy reorganization, but a second ownership change within two years can undo it and drop the limit to zero. Restructurings need their own analysis.
Acquisitions of a profitable company. If a loss company and a gain company combine, separate rules (Section 384) can stop pre-acquisition losses from sheltering the other side’s built-in gains.

Where the rules stand in 2026

The core machinery of Section 382, the 50-percentage-point ownership-change test, and the value × rate limitation has not changed. But two recent developments are worth knowing:

July 2025: the IRS withdrew proposed built-in gain/loss regulations. Treasury and the IRS withdrew the 2019 and 2020 proposed rules (under Section 382(h)) that would have made a single rigid method mandatory for computing built-in gains and losses. The practical effect is to remove the prospect of a mandatory single method and preserve the existing flexibility taxpayers have relied on.
For now, under Notice 2003-65, taxpayers may generally apply either the “1374 approach” or the “338 approach,” subject to the requirements of that guidance. The area remains unsettled because the Treasury and the IRS withdrew the proposed regulations but indicated that they continue to study the issue and may issue revised guidance.
Since 2020: interest carryforwards are coordinated with Section 382. Current law treats carryovers of disallowed business interest under Section 163(j)(2) as pre-change losses for Section 382 purposes, so deferred interest should be included in the company’s post-change attribute inventory.

The takeaway on “recent changes”

Nobody rewrote the ownership-change formula. The key points are (1) existing flexibility under Notice 2003-65 remains in place for now on built-in gains/losses after the 2025 withdrawal, and (2) a broader set of attributes, including Section 163(j) interest carryforwards, is now caught by the same Section 382 limit.

Practical takeaways for founders

Treat your loss and credit carryforwards as assets and track them. Know roughly how large your NOLs and any deferred interest are; they may affect valuation, diligence, or tax planning in a future financing or sale.
Model Section 382 before — not after — a big round or a sale. The cap table is the input. Once a deal is signed, your flexibility is mostly gone.
Watch the cumulative three-year picture, not just the next round. A Series C can be the round that pushes you over 50 points because of what the A and B already did.
Ask about the cash-issuance and actual-knowledge reliefs. If you’re raising a clean, cash-for-equity round, there may be room to keep the measured owner shift smaller than the top-line numbers suggest.
Keep good ownership records. Loss companies should track their 5-percent shareholders and file the required information statement with their return for the year in which an ownership change occurs. Clean cap-table records also power the actual-knowledge relief and make the whole analysis cheaper and more defensible.
Loop in a tax advisor at the term-sheet stage. Especially for down rounds, recaps, secondaries, restructurings, or any change of control. Small structuring choices can meaningfully change how much of your carryforwards survive.

When to Contact an Advisor

Call your tax advisor before signing if any of these are on the table: a priced round that meaningfully dilutes founders, a down round, a recapitalization, a large secondary sale, a change of control/acquisition, or any restructuring or bankruptcy. These are the moments when Section 382 is decided.