How Tax Attributes (NOLs, Credits) Are Treated in a Sale

When business owners consider value in an acquisition, they typically focus on revenue, EBITDA, and growth potential. But in many transactions, some of the most consequential value (and risk) rests in something less visible: tax attributes. Net operating losses (NOLs), tax credits, and other carryforwards can materially affect the economics of a deal, yet sellers often misunderstand or overestimate them.

Handled correctly, tax attributes can enhance a transaction and strengthen a seller’s negotiating position. Handled poorly, they can become a source of disappointment, price reductions, or post-closing disputes. Understanding how these attributes are treated in a sale is essential for anyone preparing to exit a business.

What Are Tax Attributes?

Tax attributes are items generated under the tax code that may reduce future tax liability. The most common examples include NOLs, general business credits, research credits, capital loss carryforwards, and specific state tax attributes.

NOLs arise when a business’s allowable deductions exceed its taxable income in a given year. Rather than disappearing, these losses can generally be carried forward to offset taxable income in future years. Tax credits function differently. Instead of reducing taxable income, they directly reduce tax owed, dollar for dollar, subject to specific rules.

On paper, these attributes look highly valuable. In practice, their usefulness depends on timing, ownership, deal structure, and statutory limitations.

Why Buyers Care About Tax Attributes

From a buyer’s perspective, tax attributes represent potential future tax savings. If usable, they can increase after-tax cash flow and improve investment returns. Private equity buyers in particular model these attributes carefully as part of their return analysis.

At the same time, buyers approach tax attributes with caution. They are aware that attributes may be limited, expire unused, or be eliminated entirely by a change in ownership. As a result, buyers rarely assign full value to tax attributes unless their usability is clearly supported by documentation and modeling.

This difference in perception often creates tension during negotiations. Sellers may view NOLs or credits as a valuable asset. Buyers may view them as uncertain or as a discounted upside.

How Deal Structure Affects Tax Attributes

Whether tax attributes transfer to the buyer depends heavily on how the transaction is structured.

In a stock sale, the legal entity remains intact, and tax attributes generally stay with the company. This makes stock transactions the most straightforward way to preserve NOLs and credits, subject to statutory limitations.

In an asset sale, the buyer typically acquires assets but not the legal entity itself. In most cases, tax attributes do not transfer in an asset sale. The seller retains them, but they may have limited or no future use after the operating business is sold.

This structural distinction alone can influence negotiations. Sellers with significant tax attributes often prefer stock sales, while buyers may resist assigning value unless they are confident those attributes will survive the transaction and remain usable.

Section 382 and the Limits on NOLs

The single most important rule governing NOLs in an acquisition is Section 382 of the Internal Revenue Code. This provision limits the amount of taxable income that pre-acquisition NOLs can offset following an ownership change.

An ownership change generally occurs when more than 50% of a company’s stock changes hands within a defined testing period. When that happens, annual usage of NOLs is capped at the company’s value at the time of the change, multiplied by a federal long-term interest rate.

In practical terms, even large NOL balances may be usable only gradually over many years. In some cases, the limitation is so restrictive that NOLs expire unused. Buyers model this carefully, and sellers are often surprised by how little immediate value remains after Section 382 is applied.

State-level NOL rules add another layer of complexity. Some states do not conform to federal regulations. Others impose their own limitations, shorter carryforward periods, or outright disallowance following ownership changes.

Tax Credits: Valuable but Highly Specific

Tax credits can be even more complex than NOLs. Credits such as the research and development credit, energy credits, and certain state-level incentives may survive a transaction, but only if specific requirements are met.

Buyers evaluate credits based on several factors. They assess whether the credits were calculated correctly and supported, whether any recapture risk exists, and whether the buyer’s post-closing tax profile will allow the credits to be used. Some credits require taxable income. Others may be refundable or transferable only under narrow conditions.

Because of these nuances, buyers often discount credits heavily unless there is a clear path to monetization. Unsupported or aggressive credit positions can also increase audit risk, making buyers reluctant to rely on them in pricing discussions.

Valuation: Why Sellers Often Overestimate Attribute Value

It is common for sellers to assume that tax attributes add dollar-for-dollar value to the deal. In reality, buyers rarely agree. They evaluate attributes based on probability and timing, not nominal amounts.

An NOL that can be used slowly over 10 years is less valuable than one that can be used immediately. A credit that requires complex documentation or creates audit exposure may be valued at a steep discount or ignored entirely. Buyers also consider whether attributes align with their post-acquisition plans. If they expect losses in early years or plan to restructure operations, attributes may provide little benefit.

This gap in expectations often surfaces late in negotiations. Sellers who have not modeled attribute limitations in advance may be disappointed to see buyers assign minimal value to what appeared to be a major asset.

Tax Attributes as a Negotiation Tool

Although tax attributes rarely drive headline valuation, they can still function as a negotiating lever. In some deals, buyers may be willing to assign contingent value to attributes through earnouts, purchase price adjustments, or alternative deal structures.

For example, buyers may agree to share the benefit of usable NOLs only when they are realized. In other cases, buyers may concede on price or structure to preserve attribute usability, such as agreeing to a stock sale rather than an asset sale.

These negotiations are highly deal-specific and require advance preparation. Sellers who understand the real limitations of their tax attributes are better positioned to use them strategically rather than defensively. 

Documentation and Diligence Matter

No matter how attractive tax attributes appear, they only matter if they withstand scrutiny. Buyers and their advisors will review historical returns, supporting schedules, and prior-year workpapers to confirm the existence and accuracy of attributes.

Incomplete documentation, aggressive assumptions, or inconsistent filings quickly erode confidence. In some cases, buyers treat poorly supported attributes not as upside but as potential audit risk that requires indemnification.

Preparing a precise, well-documented analysis of tax attributes before going to market transforms the conversation. It allows sellers to explain what exists, what is limited, and what remains usable with credibility.

Planning Ahead Makes the Difference

The most effective use of tax attributes begins well before a sale is contemplated. Monitoring ownership changes, avoiding inadvertent Section 382 triggers, and aligning credit strategies with long-term plans can preserve value that would otherwise be lost.

When a sale is imminent, options narrow quickly. At that stage, understanding the tax attribute profile becomes the priority.

Final Thoughts

Tax attributes sit at the intersection of opportunity and limitation. NOLs and tax credits can enhance a transaction, but only when their constraints are understood and their value realistically assessed.

For sellers, preparation is key. Knowing how attributes will be treated, how they may be limited, and how buyers will view them prevents unpleasant surprises late in the process. For buyers, careful diligence ensures that projected tax benefits are achievable, not theoretical.

In an M&A transaction, tax attributes are rarely the headline. But when handled thoughtfully, they can still influence structure, negotiations, and ultimate after-tax outcomes in meaningful ways.