If a company had the unfortunate experience of triggering Section 382 during the past 6 months, the historically low interest rates delivered an additional blow. In a low interest rate environment, it follows that the Section 382 Limitation is also very low. Stated another way, a company would not be able to utilize much of its available tax losses.
Here’s why: The Section 382 Limitation calculation is the product of a company’s value immediately before the ownership change multiplied by the applicable long-term tax-exempt rate.
As shown in the chart below, rates have dropped steadily over the past 6 months. Moreover, when comparing the first 6 months of 2019 to 2020, there is a sharp decline.
This begs the question: Should the Federal long-term tax-exempt rate described in Section 382(f) be subject to a floor? The rate for an ownership changes in July is 0.89%. How much lower can it go?