What happens to NOL carryforwards if there is a change in ownership?

When there is a change in ownership of a corporation, the treatment of Net Operating Loss (NOL) carryforwards is influenced by tax regulations, particularly Section 382 of the Internal Revenue Code. This section imposes limitations on the use of NOLs following an ownership change to prevent companies from acquiring others solely to utilize their tax attributes.

Under these rules, NOL carryforwards are indeed limited based on a formula that typically takes into account the market capitalization of the pre-change ownership, thus allowing only a certain percentage of the pre-change market cap to be utilized annually. This means that post-ownership change, the company cannot fully utilize its NOLs in the way it could have before the change, effectively capping the amount that can offset taxable income in future years.

This regulatory framework helps prevent abuses where companies could potentially buy another company just to take advantage of its tax losses, ensuring that the primary purpose of tax attributes like NOLs adheres to the original ownership's operational context.